Costly regulation, minimal results: The EU’s deforestation regulation effect on global soy trade

Abstract The European Union Deforestation Regulation (EUDR) seeks to reduce deforestation by restricting market access to deforestation-embodied soy products in the EU market. The main concern is that such restrictions could shift the soy trade to unregulated non-EU 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, divert the EU imports toward North America, and increase the prices of soy faced by EU soy users. 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.