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RESEARCH AND ANALYSIS: WORKING PAPERS

Trade and Deforestation: A Literature Review

Forest plays a significant role in the overall balance of carbon in the atmosphere. Forest carbon sequestration can potentially reduce the accumulation of greenhouse gases in the atmosphere. However, when deforestation takes place, carbon is released to the atmosphere again. Globally, it has been estimated that about 11% to 39% of all carbon emissions from human origin come from the forest sector (Hao et al. 1990). Regarding global warming, the balance between forest conservation and deforestation can change forest sector activities from a solution to a problem and vice versa.

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Meanwhile, trade has significantly increased across the world. Total world trade has been increasing since 2000 at an average rate of 12% (WTOb 2009), and is expected to continue to grow in the following years due to new agreements. Will these trade trends have an effect on forest cover and deforestation? Which countries are more likely to be affected? What will be the trade effects on welfare on resource abundant countries? Will trade have an effect on conservation efforts? All these questions have been the focus of abundant economic research in the last two decades.

Will trade increase deforestation?

We find that deforestation is affected by agricultural output prices. Therefore, when trade affects these prices, it will also affect deforestation rates. When a country enters international markets, local prices get closer to international prices. So, if trade liberalization brings local agricultural prices upwards, deforestation will increase. But if trade liberalization leads to local agricultural price reductions, deforestation will decrease. This implies that trade can potentially increase or decrease deforestation depending on the effects on local prices and other characteristics of the country. Those countries that have comparative advantage producing agricultural good and timber goods are the ones that will potentially be more affected by increases in trade.

Forest access also plays a key role into the analysis. Even for those countries where agricultural and timber production will increase, access might limit the effects on deforestation. In countries where forestland is inaccessible, specialization and/or transitions from other non-forest activities to the activity where the country has advantage might take place, having little impact on forest stocks. Also in accessible areas, the abundance of other resources such as labor and capital are also necessary to increase deforestation. However, empirical evidence reveals that across the globe there are many countries with these characteristics. Increases in agricultural and timber prices have lead to increases in deforestation in Mexico, Tanzania, Thailand, Brazil, Costa Rica, Australia and Brazil to name a few.

The literature is divided on the effects of timber extraction as a consequence of trade on deforestation. Researchers have found that for some countries, increase in prices of timber will lead to increases in deforestation as mentioned before. However, others have argued that the effect depends on different conditions. Other drivers of deforestation should be jointly relevant. This is because timber extraction reduces the costs of land use change. It thins the forests. But logging might not necessarily cause a change forest to non-forest activities. Additionally, some researchers argue that high prices of timber might actually lead to increases in forest plantations as investment efforts.

Trade, institutions and welfare

Also, it is agreed that opening for trade may not increase welfare. Trade can increase the depletion of the resource, which in the long run could lead to lower welfare. Also, institutions can affect welfare through their effect on trade. If institutions are not functioning correctly it is likely that trade will reduce welfare. Property rights, corruption and resource management regimes are deeply studied within the role of trade. Few empirical works try to address the magnitudes of the effects in resource extraction but certainly more empirical research in this direction is needed.

What are the effects of trade on conservation efforts?

The literature is also consistent when concluding that conservation policies might be, to some extent, offset through trade by deforestation in other regions or countries. Some divergence in the magnitudes is found but agreement exists on the direction especially across regions and across countries. This is especially important for international agreements. Negotiations that only focus on countries with high deforestation rates, might not be effective as trade might generate deforestation in countries that are not part of the negotiations (low deforestation rate countries).

Can trade regulations be used to create incentives for conservation?

Researchers are still discussing whether trade sanctions can be used for environmental purposes. Some argue that this can help global environmental efforts but other say that this can generate perverse incentives by reducing the value of the stock of the resource, which could lead to depletion. Certainly, the amount of environmental clauses has increased significantly in trade agreements.
 

Policy Recommendations

After reviewing the economic literature, there are important aspects that can be considered when designing trade policies and/or conservation policies in an opening world:

  • Trade can increase deforestation and reduce welfare in resource abundant countries. Conservation efforts in accessible forest areas, stronger institutions and long term sustainability policies might reduce these negative impacts.

  • Conservation efforts in one country might be offset by increase in deforestation in other country. When considering global efforts such as carbon sequestration, conservation policies need to be designed globally.

  • Trade policies oriented to create conservation efforts might not always work. Policies such as certification and labeling that reduce the incentives of indiscriminate short term extraction but create long term value of the natural resource could be an option.

  

No: ERSD-2010-04

Authors:
Juan Robalino — Research Fellow at the Environment for Development Initiative, CATIE, and Deputy Director of the Latin American and Caribbean Environmental Economics Program, CATIE
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Luis Diego Herrera — Research Fellow at the Environment for Development Initiative, CATIE

Manuscript date: December 2009

 
  

Disclaimer  back to top

This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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