IT is clear from the argument of protectionists in Congress that many are pessimistic about the future of U.S. manufacturing. But recent events suggest prudent optimism, if not unconstrained joy.

While not all good things go together, some do. Economic understanding can help us find such unions.

Environmental leaders show this improved understanding of economics. They are becoming aware that prosperity and environmental quality are complements, not competitors. The anti-business, anti-market, pro-regulatory rhetoric that marked the environmental movement in the 1970s and '80s is being replaced with an acceptance of markets and an appreciation of the advantages of decentralized decision-making.

Only a few years ago, many environmental leaders held up the centralized and socialized economies of Eastern Europe as environmentally superior to the market economies of the West. After all, some had constitutional guarantees of environmental quality.

But after the revolutions of 1989, the truth seeped out. Chernobyl was only the most graphic example. Even the most committed collectivists had to admit that the systems they championed were economically inefficient, environmentally destructive and thoroughly corrupting.

Further, there is increased understanding that only with international trade can nations and regions realize their comparative advantages and increase prosperity through efficiency. This is especially true of poor nations: They have the most to gain from free-trade. The North American Free Trade Agreement (NAFTA) is such a step toward Mexican prosperity. The argument that NAFTA will harm Mexico's environment discounts an important fact. That is, as poor nations become wealthy their health and environmental standards rise. This holds across time and cultures: richer is cleaner, safer and more environmentally sensitive.

Looking across the Mexican border, we simply cannot expect Third World nations to have the standards of first world nations. They have different priorities: food, shelter, clothing. We see horrifying examples of environmental health and safety violations. What would be truly extraordinary would be the absence of this difference. In my judgment, if NAFTA is passed, both the Mexican and U.S. economies will become more productive and Mexican environmental standards will rise toward ours. NAFTA will ultimately "level" both the environmental and wage playing fields with Mexico.

And most importantly, American manufacturers are moving up the learning curve in efficiently dealing with environmental regulations. The Amoco Corporation recently conducted a major research project, cosponsored by EPA, at their Yorktown refinery. It was a thorough effort to investigate the costs and effectiveness of current pollution-control structures.

The costs of pollution control are significant. That is why we see battles in Congress every time there is an attempt to raise environmental standards. A green world costs money. Our government should do its best to minimize these costs, but the Yorktown project shows that this is not the case.

Yorktown was the first systematic attempt to assess all refinery emissions: air, water, soil - and to put a price tag on their control. Historically, EPA has monitored emissions only from selected points, like smoke stacks and containment pools. The Yorktown project found that these are not necessarily the areas which should be controlled. For example, large emissions came from the loading dock, a place EPA has never before checked.

The bottom line: Amoco could achieve greater pollution reduction for about $11 million than it is getting for the $41 million in controls specified by EPA. When pollution control is inexpensive, we want a lot of it. When we must give up a lot to get it, we want less. Environmentalists are learning to favor efficient control because in the end it will mean less pollution.

This "second battle of Yorktown" has revolutionary potential. It clearly demonstrates that the regulatory command-and-control approach employed to control industrial pollution is seriously flawed. Political incentives make government management costly and inefficient. Agencies should simply set goals and monitor results rather than specify process. The Yorktown Project shows that this is likely to save money and result in lower pollution levels - just as economics predicts.

Although it would take a replication of the Yorktown work at many sites to obtain good estimates of potential national savings, the findings of Yorktown seem typical of manufacturing in general. In other words, American manufacturing has potential of meeting high environmental standards at a very substantial discount from today's costs.

The lesson here is that while much of American industry can do well in the global marketplace, current government regulations are obsolete. If we are truly concerned about international competitiveness and losing jobs to low-cost foreign competitors, we should seek efficiency wherever possible - even in our environmental regulations. Fortunately, it seems we can do this without sacrificing our health and environmental standards. Amoco and EPA have shown us a beginning.