DP20037 Contingent Trade Agreements
There appears to be a tension between proponents of trade and environmental activists. This paper shows, however, how trade can motivate environmental conservation. I first analyze a standard trade model, where trade-specific investments (e.g., deforestation) causes environmental damage. In this model, a traditional trade agreements will cause more thus deforestation. Next, I investigate the extent to which a contingent trade agreement (CTA), where default tariffs can vary with changes in the production capacity (e.g., forest cover), can motivate conservation. The model permits many products, countries, and collaborators. A numerical example suggests that growth and liberalization can cause Brazil's agricultural area to expand by 27%, but this expansion can be avoided if the EU and the US offer a CTA.
