Environmental conservation is one of the most important and common imperatives facing the world, and market access is one of the carrots available in international politics. By linking tariffs to deforestation, the EU and others can create trade agreements that offer more conservation and more benefits from trade.
STANFORD-A bilateral trade agreement looks set to shape the future. The interim trade agreement between the European Union and Mercosur (Argentina, Brazil, Paraguay, and Uruguay), which has been provisionally applied since May 2026, could set the standard for a new wave of offers. Mercosur has been pursuing trade talks with Canada, Japan, and others, while the European Union is conducting talks with Malaysia and Thailand, and continuing agreements with Australia, India, and Indonesia.
In an age of economic fragmentation and geopolitical rivalry, the potential of such agreements should not be underestimated—and not just to exploit the benefits of trade. Conservation of the environment, not least tropical forests, is among the most important, universal imperatives facing the world, and market access is one of the few carrots available in international politics. So how can bilateral trade agreements be used to promote environmental conservation?
The answer is not straightforward. These two goals are often seen as conflicting with each other. For example, studies have shown a significant increase in deforestation after the signing of a regional trade agreement. It’s not hard to see why. As Brazil, for example, gained access to larger markets, developing new land for agriculture became more profitable.
Past attempts to avoid such damage have met with limited success. The Trade and Sustainable Development (TSD) provisions that the EU includes in trade deals have suffered from ineffective design and weak enforcement. Threats to delay the deal if forests are cleared for agriculture are not credible, because the benefits of trade, if any, are greater when agricultural production increases.
A stronger solution might be to establish a negotiated tariff that depends on the level of deforestation. If beef exporters face higher tariffs after land development, they may have to lower prices, thereby improving importers’ terms of trade. Better trade terms are the classic rationalization for tariffs, and the reason why importers want tariffs linked to deforestation to remain in place for longer. This will strengthen the credibility of the tariff threat. When deforestation leads to permanent tariffs, any beef exporter who wants to maintain favorable terms of trade will be motivated to prevent it.
Of course, there are limits to the types of contingent trade agreements (CTAs) that can be delivered. Since neither party benefits from a very high tariff, there is an upper limit to the tariff level, even if there is deforestation. In addition, other states may offer lower rates or ignore environmental mandates, further diluting the CTA’s impact.
However, a well-designed CTA, which includes carefully calibrated tariffs and evidence of renegotiation, can strengthen incentives for conservation, resulting in lower deforestation rates than would appear under conventional trade agreements or without trade liberalization. Published research, which uses a dynamic framework to derive the effects of CTA, supports this conclusion.
My recent research provides a quantitative analysis for the case of Mercosur. Simulations suggest that if the European Union, the United States, and China all liberalize trade with Mercosur, the bloc’s agricultural area could increase by 2-9%, causing deforestation. If only one of the three big economies had incorporated deforestation into the CTA, this expansion could have been avoided. If both of them – say, the EU and the US – offer CTA, it can produce reforestry, with the total potential agricultural area reducedby 1-8% relative to the current level.
Of course, these numbers are estimates, and predictions based on economic models should be interpreted with caution. But the simulations show that CTA can create synergies between free trade and environmental conservation. With the right contingency, we get more than two.
In traditional trade agreements, it is not usually desirable for the parties to eliminate tariffs altogether, especially when deforestation is an issue. However, with CTA, zero tariffs can be used to reward exporters for maintaining resource stocks, leading to more environmental conservation and more benefits from trade.
Implementing a CTA will not be technically difficult. Some trade agreements, including those to which the European Union is a party, establish timelines for how tariffs should drop after ratification. In other words, the rate depends on something that can be measured (time). The deal could easily be amended to require that the clock be restarted, and the rate returned to its original rate, if deforestation increases.
European policy makers have discussed similar ideas. In 2020, when the Mercosur agreement and the Amazon rainforest are on fire, France and the Netherlands are proposing “the gradual implementation of tariff reductions linked to the effective implementation of TSD provisions…
Retrofitting the EU-Mercosur deal could be politically difficult, although all parties would benefit from a combination of lower tariffs and less deforestation. But for trade deals still under negotiation, the hurdles to implementing the CTA will be lower. Failure to do so means missing out on a great opportunity.