Costly Regulation, Minimal Results: The EU Deforestation Regulation Effect on Global Soy Trade

The European Union Deforestation Regulation (EUDR) seeks to reduce deforestation in tropical countries by restricting imports of soy products. The main concern is that trade restrictions can shift deforestation-embodied trade to unregulated markets. To shed light on this issue, we employ a standard gravity model focused on the soy sector, treating the EUDR compliance costs as trade costs for exports to the EU. Our findings reveal that the stricter trade restrictions on tropical soy producers lead to a significant reallocation of trade flows toward China and other Asian countries. If tropical countries do not comply with the EUDR, the EU consumer prices rise even more, while tropical countries see minimal terms-of-trade losses. Our analysis indicates that the EUDR is likely to be ineffective in reducing deforestation directly linked to soy production.