Renewable Resources, Pollution and Trade in a Small Open Economy

Industrial pollution often exerts negative spillovers on resource-based productive sectors. International trade creates conditions for the overexploitation of an open-access renewable resource, but also provides opportunities for separating the productive sectors spatially. The existing literature suggests that a diversified exporter of the renewable resource good tends to lose from trade due to over-depletion, while the exporter of the non-resource good gains. This paper shows that, depending on the relative damage inflicted by the two industries on the environment, it is possible that the production externality will persist and that specialization in the manufacturing/dirty good may not be the optimal choice from a welfare perspective. In addition, the resource exporter does not necessarily have to lose from trade even when specializing incompletely, due to the partially offsetting external effects.