Potential exposure and vulnerability to broader climate-related trade regulations: an illustration for LAC countries

Analyzing the effects on Latin American and Caribbean (LAC) countries of recently proposed European Union (EU) and United States (US) carbon border adjustment mechanisms (CBAs) and bans on the import of non-deforestation-free products (DFPs), we ask: What share of LAC exports could be affected? What would be the consequences of the EU and US broadening these regulations to other commodities, or of other countries adopting similar regulations? How vulnerable are LAC countries, in terms of emissions intensity, deforestation risk, and export concentration risks? What policies could they adopt in response? Using data from the World Integrated Trade Solutions, we find that, as the region’s productive profile is agricultural rather than industrial, CBAs have a milder effect than DFPs. Less than 0.5% of LAC exports are exposed under the EU-CBA, compared to 17% under the EU-DFP and around 6% under the US-DFP. A broader EU-CBA would impact up to 14% of LAC country exports, while expanding the consequences of the EU-DFP would be marginal. The impact of other countries adopting CBA plans would also be small, because the EU and US are the main LAC export destinations. LAC products are vulnerable for several reasons, from having higher embedded emissions—and therefore costs—than European producers’, to having regional competitors with lower emissions intensity or deforestation risk, and lacking alternative export markets. The LAC private sector could adapt its strategies to accommodate these risks, and there is also room for public action.