Bilateral trade agreements appear to be shaping the future. The interim trade agreement between the European Union and Mercosur (Argentina, Brazil, Paraguay, and Uruguay), which has been applied provisionally since May 2026, may set standards for a new wave of deals. Mercosur is already pursuing trade talks with Canada, Japan, and others, while the EU is conducting negotiations with Malaysia and Thailand, and advancing agreements with Australia, India, and Indonesia.
In an age of economic fragmentation and geopolitical rivalry, the potential such agreements hold must not be underestimated—and not just to exploit gains from trade. Conservation of the environment, not least tropical forests, is among the most important, universally shared imperatives the world faces, and market access is one of the few carrots available in international politics. So, how can bilateral trade agreements be used to advance environmental conservation?
The answer is not straightforward. The two objectives are often viewed as being at odds with each other. For example, studies show a significant increase in deforestation following the signing of regional trade agreements. It is not hard to see why. When Brazil, for example, obtains access to a larger market, developing new land for agriculture becomes more profitable.
Past efforts to avoid such destruction have had limited success. The Trade and Sustainable Development (TSD) provisions that the EU includes in its trade deals have suffered from ineffective design and weak enforcement. Threats to suspend deals if forests are cleared for agriculture would not be credible, because the gains from trade are, if anything, larger when agricultural production increases.
A more robust solution might be to establish pre-negotiated tariffs that are contingent on deforestation levels. If a beef exporter is subjected to higher tariffs after its land development, it might have to reduce prices, thereby improving the importer’s terms of trade. Better terms of trade are the classic rationalisation for tariffs, and the reason why importers would want deforestation-linked tariffs to remain in place for a longer period. This would strengthen the credibility of the tariff threat. When deforestation triggers a lasting tariff, any beef exporter that wants to maintain favourable terms of trade will be motivated to avoid it.
To be sure, there are limits to what this type of contingent trade agreement (CTA) can deliver. Since neither side would benefit from very high tariffs, there is an upper boundary for tariff levels, even in the event of deforestation. Moreover, other countries might offer lower tariffs or ignore environmental imperatives, further diluting the CTA’s impact.
Nevertheless, a well-designed CTA, which includes carefully calibrated and renegotiation-proof tariffs, can strengthen the incentive for conservation, resulting in lower deforestation levels than would have emerged under conventional trade agreements or without trade liberalisation. Published research, which uses a dynamic framework to derive the effects of CTAs, supports this conclusion.
My new research provides a quantitative analysis for the case of Mercosur. Simulations suggest that if the EU, the United States, and China all liberalise trade with Mercosur, the bloc’s agricultural area might increase by 2–9%, causing deforestation. If just one of the three large economies incorporates deforestation into a CTA, however, this expansion can be avoided. If two of them—say, the EU and the US—offer CTAs, they could produce reforestation, with the total agricultural area potentially declining by 1–8% relative to its current level.
Of course, these figures are estimates, and predictions based on economic models should be interpreted with caution. But the simulations do suggest that CTAs can create synergies between free trade and environmental conservation. With the right contingency, we obtain more of both.
Under traditional trade agreements, it is typically not desirable for parties to eliminate tariffs altogether, especially when deforestation is a concern. With CTAs, however, zero tariffs can be used to reward exporters for preserving the resource stock, leading to more environmental conservation and more gains from trade.
Implementing CTAs would not be technically difficult. Several trade deals, including agreements to which the EU is a party, establish timelines for how fast tariffs should decline after ratification. In other words, tariff levels are contingent on something measurable (time). Such a deal could easily be modified to require the clock to be restarted, and tariffs returned to their original levels, if deforestation increased.
European policymakers have already discussed similar ideas. In 2020, when both the Mercosur deal and the Amazon rainforest were under fire, France and the Netherlands proposed a “staged implementation of tariff reduction linked to the effective implementation of TSD provisions … including the possibility of withdrawal of those specific tariff lines in the event of a breach of those provisions.”
Retrofitting the EU-Mercosur deal might be politically difficult, even though all parties would benefit from the combination of lower tariffs and less deforestation. But for trade deals that are still under negotiation, the barriers to implementing CTAs would be much lower. Failure to do so would mean missing a major opportunity.
The writer is Professor of Business and Sustainability and Professor of Political Economy at Stanford Graduate School of Business. ©Project Syndicate
