Three essays on trade policy, commodity trade and deforestation

Abstract

This dissertation examines the complex relationship between environmental regulation incorporating trade restriction policy, agricultural expansion, including deforestation, and transport infrastructure. It is composed of three essays that investigate these dynamics using the combination of structural and reduced form approaches. The first chapter, "Costly Regulation, Minimal Results: The EU's Deforestation Regulation Effect on Global Soy Trade", analyzes the impact of the European Union Deforestation Regulation (EUDR). The EUDR aims to reduce deforestation by restricting market access to soy products that are deforestation-embodied in the EU market. The primary concern is that such restrictions could shift the soy trade to unregulated markets. To shed light on this issue, we employ a gravity model, treating the EUDR compliance costs as additional trade costs for exports to the EU. We find that stricter compliance costs reallocate soy exports from South America toward non-EU markets, mainly China, and divert the EU imports towards North America. Under the counterfactual scenario in which South America does not comply with the regulation, EU consumers face even larger price increases, while South American countries experience minimal terms-of-trade losses. Our analysis suggests that trade reallocation to an unregulated market could potentially dilute the impact of the EUDR, making it less effective in directly reducing deforestation linked to soy production. The second chapter, "Exports and Deforestation: A Commodity-Level Analysis", quantifies the extent to which international demand for agricultural commodities drives deforestation. Using panel data for 138 countries and 18 commodity groups during 2001--2022, we estimate commodity-specific elasticities of deforestation with respect to exports. To address the potential endogeneity between exports and supply-driven deforestation, we instrument exports with an export share-weighted average of destination-market import demands, constructed from a gravity model of bilateral trade. We find that a 10% increase in exports of agricultural commodities increases commodities-associated deforestation by 2.96%. We also find heterogeneous effects across commodities and regions, with the largest effects for perennial and tree crops, livestock, soybeans, and sugar crops. Back-of-the-envelope calculations suggest that increases in international demand account for approximately 53 million hectares of agricultural expansion into forests between 2001 and 2022, corresponding to 49% of the observed forest-to-agriculture conversion. The third chapter, "Domestic Market Access and Cropland Expansion in Brazil", examines how improvements in domestic market access shape agricultural production and land use across Brazilian municipalities over 2015 to 2023. We construct a measure of domestic market access from Dijkstra least-cost routing on Brazil's road, rail, and waterway networks. We find that a 10% improvement in domestic market access raises production value by 0.6 to 0.8% and expands the area under temporary crops by about 0.5%. By contrast, we find no robust long-run change in land productivity, measured as value per harvested hectare. The pattern points to an extensive-margin response in which a better transport network expands the cultivated area. We find heterogeneous effects across municipalities. In the North, greater market access is associated with declining value per hectare alongside area expansion, consistent with cultivation moving onto marginal frontier land, while in the Cerrado biome, it raises production value and harvested area.