Trade Liberalization and the Environment in the Pacific Basin: Coordinated Approaches to Mexican Trade and Environment Policy John Beghin, David Roland-Holst, and Dominique van der Mensbrugghe In this paper we analyze the environmental im- plications of growth and opening up of trade in Mexico based on an empirical economywide model. In particular, we study how tradeoffs between growth and environmental objectives can be minimized by using targeted policies on pollution emissions in coordination with out- ward-oriented trade strategies. Most economy- wide studies of trade and environment linkages rely on effluent intensities associated with out- put and do not allow for substitution between nonpolluting factors (labor and capital) and polluting intermediate consumption such as chemicals or energy (Lee and Roland-Holst). By contrast, pollution emissions in the present model are linked to using polluting inputs rather than directly to output levels. We also embed this analysis in a dynamic framework to take account of exogenous components of fac- tor supply and productivity growth over the twenty-year period 1990 to 2010. The analysis is presented in three stages. First, pollution abatement policies are consid- ered alone and their effects on growth, sectoral allocation, and trade are evaluated. The next step is to consider trade liberalization alone. Trade distortions in place before the NAFTA J. Beghin is associate professor at North Carolina State University. D. Roland-Holst is senior economist and head of program, and D. van der Mensbrugghe is an economist, both at the OF=CD-D~velop- ment Centre, Paris, France. Senior authorship is not assigned. The views expressed in this paper are those of the authors and should not be attributed to their affiliated institutions. This study is part of the OECD Development Centre research program on Sus- tainable Development: Environment, Resource Use, Technology, and Trade. The results presented here represent one of six develop- ing country case studies now under way (Chile, China, Costa Rica, Indonesia, Mexico, and Vietnam). The authors thank Maurizio Bussolo and S› Dessus for excellent research assistance. and Uruguay Round accords ate removed pro- gressively over time, and results calibrate the expansionary effects of trade liberalization as well as its environmental implications. These include "win-win" cases such as in the fertilizer sector, as well as intensified environmental degradation arising from the transportation sec- tor. In a third and last scenario, we combine en- vironmental and trade policies and show how they interact. These results indicate that the combination of policies generally can mitigate the undesirable effects of each set of policies alone, such as trade-induced pollution growth and the real contractionary effects of environ- mental policy. Thus, it appears that more liberal and outward-oriented trade policy can coexist with more rigorous attention to environmental values. The trade and environment debate has evolved considerably in recent years. 1 First, pressures to use trade instruments for environ- mental ends were debunked asa blunt and inef- ficient approach to environmental policy (Anderson and Blackhurst). Environmental degradation is increasingly recognized asa leading policy issue, however, and its links to economic policies are now being addressed more directly. Coordination of trade liberaliza- tion with the introduction of targeted environ- mental policies is being supported by analytical investigations of trade and environment link- ages (Copeland; Beghin, Roland-Holst, and van der Mensbrugghe 1994b). In this paper we pro- vide empirical evidence to substantiate recom- mendation for policy coordination. See Beghin, Roland-Holst, and van der Mensbrugghe (1994a) for an up-to-date survey. Amer. J. Agr. Econ. 77 (August 1995): 778-785 Copyright 1995 American Agricultural Economics Association