NAFTA - Managerial Economics - Essay Example

INDUSTRIAL POLLUTION IN MEXICO UNDER THE NAFTA REGIME The NAFTA The Small Business Encyclopedia s that the North American Free Trade Agreement (NAFTA) is a treaty that was signed on August 12, 1991 by the United States, Canada, and Mexico, and which went into effect on January 1, 1994. It broadened the free trade arrangement that had been in existence between the United States and Canada since 1989. It was intended to eliminate tariff barriers to agricultural, manufacturing, and services trade, remove investment restrictions, and protect intellectual property rights, all the while addressing environmental and labour concerns.

In addition to labor concerns, opposition to NAFTA was strong among environmental groups, who contended that the treatys anti-pollution provisions were inadequate. To ease concerns that Mexicos low wage structure would cause U.S. companies to shift production to that country, and to ensure that Mexicos increasing industrialization under the Treaty would not create environmental pollution to a harmful degree, special side agreements were included in NAFTA. Under those agreements, the tri-national grouping agreed to establish appropriate commissions to handle labor and environmental issues.

The commissions had the power to impose steep fines against any of the member governments that failed to consistently impose its laws. There have been criticisms regarding NAFTAs implementation of environmental protection provisions. Mexico, together with Canada, has been repeatedly cited for environmental malfeasance. Also, many observers have charged that the three governments have been lax in ensuring environmental safeguards since the agreement went into effect (Wikipedia).The Role of Government in the Marketplace.

The NAFTA members are autonomous states that have yielded some of their sovereignty to establish and effectuate a treaty that would economically benefit some 365 million people in the region, but they have retained their power to determine their principal economic and social policies. In other words, the free trade arrangement does not include a supranational government that would enforce policies from the center. Consequently, each state is free to determine its policies, subject only to agreements it has committed itself to implement.

The Kyoto Protocol An important consideration in this analysis is the fact that Mexico, unlike the United States (and Australia), is a signatory to the Kyoto Protocol to the United Nations Framework on Climate Change (UNFCCC) which aims to limit greenhouse gas emissions (GHG). The Kyoto protocol is concerned with the reduction of global pollution but requires less than 5 per cent reduction in greenhouse gas emissions of industrialized countries and is therefore deemed by many observers as inadequate in stabilizing atmospheric GHG concentrations to mitigate the threat of global warming.

The North American Commission for Environmental Cooperation (CEC), the environmental organ of NAFTA, was established in order, among other things, to inventory GHG emissions among the three member countries. A proposal was advanced in March 2005 (Regional governance of climate change 2005) to establish an emissions trading system at the regional level involving the three countries but apparently the idea has not seen the light of day. The Commission for Environmental Cooperation (CEC) is an international organization created under the North American Agreement on Environmental Cooperation (NAAEC) to address regional environmental concerns, help prevent potential trade and environmental conflicts, and to promote the effective enforcement of environmental law (CEC Website).

Market failure and externality The problem of pollution in Mexico caused by the movement of many U.S. manufacturing facilities there to take advantage of cheap Mexican labor sits at the core of the issue of market failure, when economist Adam Smith’s invisible hand has failed to work. One possible cause of market failure is negative externality, defined as the harmful impact of production processes on those third parties who are not part of production or consumption process for the good (Bayes, 2000).

The harm created would affect the sectors or populace in Mexico or perhaps across the border to the United States. The impact of the gas emissions in a global context, however, would pale in comparison with those created by China and India, whose records since the signing of the Kyoto Protocol have not been very commendable.Suggested Action Plan Be that as it may, it is still important for Mexico to deal with its gas emission problem as elsewhere in the world where industrialization is taking place at a rapid pace, for the purpose of protecting the environment which all of mankind share.

What Mexico can do is to continue to comply faithfully with its commitments under the provisions of the Kyoto Protocol. In the Mexican context, according to the operational plan of NAFTAs CEC, there is need for practical means to increase compliance with national environmental protection requirements by enhancing the ability of the federal and local governments to work cooperatively with federal/state counterparts, companies, non-governmental organizations (NGOs), communities and others in effecting improved environmental management (CEC Website).

This writer believes that, in addition, Mexico could support an emissions trading scheme at the national and NAFTA level – one similar to the emission trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act of the United States. Companies in Mexico as well as in the United States and Canada, could be required to obtain pollution permits under the authority of the CEC, but perhaps partly delegated to state level for easier administration. Such trading permits can be traded across industries intra-company, among its divisions, with other manufacturing companies within a defined geographic area, and with the other two member countries.

Under the scheme, the governing/regulatory authority can impose a joint reduction of, say, 50 per cent in pollution levels, by allowing the component entities to purchase the pollution permits. Any division/company/member country whose pollution levels have been reduced more drastically (say, to 20 per cent) by more efficient pollution-reducing methods or technology, may sell the permit it no longer needs to another party which may have found it too costly to effect a reduction of its pollution level to 50 per cent, or it could be sold to new entrants.

However, this solution may fail to address the problem of adversely affected residents near the location of the company that opted to purchase pollution permits instead of complying with the 50 per cent reduction. This specific negative externality will always exist where pollution permits are allowed to be traded.BIBLIOGRAPHYBaumol, WJ & Blinder, AS 1997, Microeconomics: Principles and policy,7th edn, The Dryden Press: Orlando, FLBayes, MR 2000, Managerial Economics and Business Strategy, 6th edn, McGrawHill: New YorkSamuelson, WF & Mark, SG.

1995, Managerial economics, 2nd edn, The Dryden Press: Orlando, FL:CEC Website, Operational Plans, n.d. Viewed July 22, 2008,http://www.cec.org/pubs_docs/documents/index.cfm?varlan=english&ID=1967NAFTA Definition, n.d. Viewed July 22, 2008,http://www.answers.com/NAFTA%20Regional governance of global climate change: Emissions trading and the North American Commission for Environmental Cooperation, n.d. FAO Research All Academic, Inc. Viewed July 22, 2008,http://www.allacademic.com//meta/p_mla_apa_research_citation/0/6/9/5/9/pages69596/p69596-1.php