Contingent Trade Agreements

There are often conflicts between proponents of trade and environmental activists. This paper shows, however, how trade agreements can be designed so as to motivate environmental conservation. I first analyze a standard trade model, where resource exploitation (e.g., deforestation) is a trade-specific investment that causes environmental damage. In this model, traditional trade agreements will cause more exploitation. Next, I investigate the extent to which conservation can be motivated by a contingent trade agreement (CTA), where default tariffs can vary with changes in the resource stock (e.g., the forest cover). 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.