Macroeconomic Drivers of Localized Pollution: Evidence from U.S. Agricultural Trade Policy

This paper examines the unintended environmental consequences of managed agricultural trade by studying the 2014 U.S.–Mexico Sugar Suspension Agreement. The agreement incentivized sugarcane expansion and fertilizer runoff in sugarcane producing regions. Using panel data on surface water quality from monitoring stations across Louisiana and neighboring state – Mississippi, from 2008/09 to 2019/20, we apply a spatial difference-in-differences framework to estimate the policy’s impact on downstream nutrient pollution. Treatment status is defined based on historical sugarcane cultivation within upstream catchments of monitoring sites, exploiting the hydrological connectivity between sugarcane-growing areas and downstream water quality monitoring stations to isolate the causal effect of the trade shock from confounding watershed characteristics. Results show that after 2014, nitrate-nitrogen concentrations increased by about 1.171 mg/L in waters downstream of sugarcane areas relative to unaffected sites following trade shock. This represents a 79.5 percent increase compared to the pre-treatment average, with the effect emerging within one to two years of the policy and persisting for nearly three years. Robustness checks with alternative model specification and restricted sample yield consistent results. These findings highlight that managed trade policies can generate significant and lasting environmental externalities, with implications for the joint design of trade and environmental regulation.