Potential environmental impact of a trade agreement: the case of EU-MERCOSUR

Trade policies have been extensively scrutinized with respect to their welfare implications as well as their effect on employment and their potential to reduce poverty in developing countries facing tariff barriers. However, sustainable development cannot be achieved if economic and social developments are not accompanied by environmental stewardship. Indeed, expansion of some export sectors in a trade partner country can lead to negative externalities if some environmental safeguards are not in place. We provide an illustration of this problem by focusing on a possible trade agreement between MERCOSUR and the European Union. We take a climate change perspective and investigate the potential consequences of such agreement on emissions from the agricultural activities and land use change. We base our analysis on a combination of two economic models: a computable general equilibrium model, MIRAGE, is used to study the impact of change in tariff on trade flows at a detailed level, in particular agricultural goods. We then look at the land reallocation patterns resulting from trade changes using a bottom-up partial equilibrium model, GLOBIOM. We distinguish different intensification assumptions associated to the trade agreement and compare cost of emissions with expected economic benefits for the two blocks of countries.