This project analyzes how international trade agreements and institutions can improve environmental quality and environmental policy. Within the context of the North American Free Trade Agreement, the project explores how to improve water quality and public health along the U.S.-Mexico border through trade incentives and environmental policy instruments. The analysis may be applied to other settings throughout the world where countries share the costs and benefits of trade and transboundary pollution. The research will determine the optimal strategies for managing water quality in a border waterway 1) when trade is liberalized and waste is used as an input to produce a traded good and 2) when there are trade barriers and other policy instruments are needed. The research will also examine the effects on water quality and economic welfare of the two countries coordinating water pollution control versus acting independently. The first step of the research plan is to develop an economic model that analyzes the effects of alternative environmental policies, as well as the corresponding effects of alternative trade policies. A dynamic game framework will be used to model countries making decisions over time that affect one another. The model helps characterize changes in pollution and economic activities over time under either independent or cooperative action in pollution control and trade. The second step is to develop empirical measures of the costs of pollution, based on public health and environmental effects, and of the costs of reducing it. By correlating water pollution levels to public health and environmental effects as well as production it is possible to explore how different trade patterns and institutions enhance or degrade the environment. The third step is to simulate the effects of alternative environmental and trade policies under the two scenarios of cooperation and noncooperation on international competitiveness, environmental pollution loads, and on consumers and producers of agricultural goods in both countries. The goal of the research is to derive solutions that are useful for multinational and national policy strategies to control pollution. Data from the Rio Grande watershed for values of costs, water quality measures, public health damages, trade flows, and pollution abatement systems will be used. The analytical framework to be developed is transferable to other settings and policies. The research is a significant step in advancing empirical study of trade and environment within a dynamic and spatial context.
