With the increased integration of the global economy, there has been a rising concern over the effects of trade policy on the environment. Recent research has shown that trade liberalisation can act as a ‘magnifier’ of governance problems in the forest sector if the regulatory and institutional capacity is weak. Recognising this risk, the US-Peru free trade agreement includes a binding Forest Annex, which specifies numerous measures to strengthen the legal and institutional framework of Peru’s forest sector. The Forest Annex also outlines an innovative rule-based, bi-national verification system, which may be of wider relevance in the debate about verification systems design. This paper explores the challenges of this innovative environmental addition to trade policy, and considers implications for forest governance in Peru.