In 2005, Mexico's President Vicente Fox jumped the gun on his country's NAFTA commitments and eliminated trade restrictions on 10-15 year-old used cars and trucks. The results were dramatic. More than a million used cars a year flooded in from the United States. In March 2008, Mexico reversed the policy, responding to complaints of unfair competition from domestic auto-dealers who also declared that the country was being converted "into the world's biggest automotive garbage dump."
According to economists Lucas W. Davis and Matthew E. Kahn, in their NBER working paper, "International Trade in Used Durable Goods: The Environmental Consequences of NAFTA," the actual data doesn't quite support the position of the Mexican auto-dealers. Sales of new cars in Mexico were about the same before and after trade liberalization, and even though the influx of used cars included no shortage of pollution-spewing clunkers, by American standards, when compared to the existing Mexican automotive fleet they represented an improvement, on average. (Thanks to the Globalization and the Environment blog for the tip.)
But even though trade in used cars resulted in a decrease in the average amount of emissions released per car in both the U.S. and Mexico, the total amount of emissions released in both countries combined rose. The reason: Mexicans wait much longer before retiring their vehicles permanently than do Americans, so the export of used cars from the U.S. that would otherwise have been sent to the junkyard resulted in a significant increase in the overall number of cars on the road.
Increased trade, then, is neither unambiguously good or bad for the environment at least insofar as viewed through the used car prism. But the most interesting aspect of the paper comes when the authors consider the likely impact of different government policies aimed at reducing greenhouse gas emissions.
Given that the transportation sector is a major producer of carbon dioxide emissions, the Congress continues to wrestle with raising fuel economy (CAFE) standards or raising gasoline taxes. Our results speak directly to the differential implications of these two policies. If CAFE standards increase sharply, exports of used vehicles to Mexico will decline. As articulated by Gruenspecht, new vehicle regulations increase the cost of new vehicles, causing households to delay new car purchases. This would increase demand for used cars in the United States, bidding up the price, and leading fewer used cars to be shipped to Mexico.
In contrast, increasing the gasoline tax would increase exports of used vehicles to Mexico. A gasoline tax in the United States would make large, fuel inefficient vehicles relatively more desirable in Mexico. We have shown that it was already the case that many of the vehicles exported to Mexico between 2005 and 2008 were trucks, minivans, and SUVs. This pattern would almost certainly be exacerbated by an increase in the gasoline tax, causing further decreases in emissions in the United States and further increases in emissions in Mexico. Thus, the broader conclusion of our analysis is that the composition of trade can change sharply as U.S incentives change.
Of course, both of these scenarios are moot as long as Mexico continues to ban the import of older used cars. But the authors argue that the basic principles outlined in their paper will hold for trade in any used durable good along the North/South axis. So any legislation aimed at fighting climate change, will inevitably ripple through all kinds of trade markets.