SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper analyses the impacts of trade and trade policy on tropical deforestation. Distinctions are made between the different costs and benefits pertaining to forest use, their distribution and natural vis-à-vis industrial forest features. It is emphasized that forest management is determined by the incentives that confront the relevant actors, and their interdependent behavior. International trade is not a major cause of deforestation, and barriers to log exports worsen the situation. While trade liberalization and consumer action are argued to have a potential for favorable impacts through pressure for institutional reform, a socially optimal management of the tropical forests requires that presently non-commercial values be taken into account. As producer countries face considerable difficulties in exploiting biological diversity, compensation for absorption of CO2, e.g., in a market for tradable carbon rights, stands out as the best opportunity to narrow the gap between private and social benefits. While problems such as those associated with moral hazard would have to be overcome, such a scheme should seek to correct the present policy and market failures spurring deforestation and favoring industrial rather than natural forest features.

Keywords: Deforestation and trade policy; forest management and industrial vs.natural forest features; tropical timber trade; economic benefits of biological diversity; CO2-emission and absorption rights

JEL-codes: F13; Q23; Q25; Q28

39 pages, First version: August 26, 1997. Revised: November 1, 1997.

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