After more than five years of negotiations ratification of a EU-Mercosur trade agreement may finally be at hand. It’s far from a done deal.
In Europe, several countries want to push for a rapid ratification of the trade deal between the two parties, even though some countries, including France, are still attempting to block the treaty.
On the Mercosur side, they are objecting because of the EU’s new and strict deforestation laws.
But the best route forward is neither to ratify the EU-Mercosur trade deal as it is, nor abandon it.
If the EU-Mercosur trade deal is ratified in its current form, then the larger market can lead to agricultural expansion, with associated deforestation in the Brazilian Amazon.
If the deal is not ratified, the Mercosur countries might turn their export to other partners, instead, with weaker or no environmental provisions.
But a better alternative is available. With minor modifications, the trade deal can be used as a carrot that motivates tropical forest conservation instead of deforestation.
Both the EU and the Mercosur countries would like to commit to reduced deforestation in the future.
By making the terms of trade contingent on the forest cover, the parties can connect an environmentally sustainable trajectory to the terms of trade that are favoured by the Mercosur countries.
According to the trade deal on the table, the tariff lines for the different products are contingent on a timeline that stipulates how the tariffs will be gradually eliminated, year by year, over a 10-year period.
Because of this existing contingency, it is possible to add a request for the clock to be restarted as soon as deforestation rates increase above, for example, the 2023 level.
With such a contingency, which is relatively straightforward to add, products from Mercosur will face higher tariffs for a larger number of years if deforestation increases.
Forest conservation, in contrast, brings with it the reward that the tariffs on exports from Mercosur will decline faster. Thus, the Mercosur countries will be incentivised to conserve tropical forests because of this contingency.
The contingency is credible, and not an empty threat, because forest cover is accurately measured by satellites, and because certain EU member countries would be more than happy to impose increased tariffs on Mercosur beef, for example, whenever the deal permits such an increase.
Relative to the deal currently on the table, the EU benefits because of the conservation incentives that come along with the contingency. Mercosur member countries benefit if tariffs are reduced faster because of the contingency to conservation. In addition, each government benefits by tying the hands of its successor.
After all, with such a contingent trade agreement, forest conservation will be beneficial for future governments even if these do not share current Brazilian president Luiz Inacio Lula da Silva's willingness to conserve forests.
Designing the appropriate contingency is not rocket science.
On the contrary – even a simple economist, such as myself, can shed light on how it can work in practice. In a pair of recent research articles, I show how contingency can benefit all parties and motivate forest conservation without being an “empty threat” that lacks credibility.
In fact, even if Mercosur proceeds by liberalising trade with Asia — and Asia doubles its demand for beef and soy — contingency can help.
Free trade, in this situation, would raise the amount of agricultural land by 27 percent, according to the estimates, but this number drops to 14 percent if the EU offers a contingent trade agreement.
The figure is close to zero if the US joins the EU in offering a contingent trade agreement — even if Asia does not.
The good news from this line of research is that trade and environmental conservation can go hand-in-hand if the terms of the trade deal are contingent on environmental performance.
The bad news is that if the parties push for ratification prematurely, they throw away a great opportunity to combine free trade with environmental conservation.
Bard Harstad is the David S. Lobel professor in business and sustainability and a professor of political economy at Stanford University, California. He has won several awards for his research and has taught environmental economics at Harvard, MIT, Toulouse, Oslo, and at Stanford. He is also an editor of Review of Economic Studies — one of the top-five journals in economics.
Bard Harstad is the David S. Lobel professor in business and sustainability and a professor of political economy at Stanford University, California. He has won several awards for his research and has taught environmental economics at Harvard, MIT, Toulouse, Oslo, and at Stanford. He is also an editor of Review of Economic Studies — one of the top-five journals in economics.