Contingent Trade Agreements: Linking Free Trade and Environmental Conservation

There appears to be a tension between trade proponents and environmental activists. This paper shows, however, how Contingent Trade Agreements (CTAs) can motivate conservation. I first analyse a standard trade model where trade-specific investments (e.g., deforestation) cause environmental damage and traditional trade agreements, including free trade, increase deforestation. Next, I define and analyse CTAs, where default tariffs vary with production capacity (e.g., forest cover). In equilibrium, countries conserve to maintain favourable terms of trade. The quantitative model shows that trade liberalisation can dramatically expand Brazil’s agricultural area, but this expansion is avoidable if the EU or US offers a CTA.