On trade and sustainable fishery with cross-sectoral production externalities

We explore the relationships between trade, the stock of a renewable natural resource and pollution in a two-country, two-sector model with cross-industry and transboundary externalities. Polluting emissions from a dirty industry lower the environmental carrying capacity in both countries, affecting the natural resource dynamics. We characterize the production possibilities, trade patterns, and consequences on fish stocks and welfare in terms of the model's parameters. We start with the small open economy case, and then explore the situation with endogenous transboundary pollution (two small countries), and finally the two-large-countries case with endogenous prices. Gains from trade for a small country with a comparative advantage in the resource sector depend upon the post-trade steady-state stock of resource; there is a threshold in its own pollution intensity above which the economy gains from renouncing to produce domestically the polluting goods (a bene t from spatial separation between incompatible industries) ; transboundary pollution paradoxically makes this outcome more likely. Finally, with large countries, trade and production patterns are determined not only as a function of the relative demand for the resource, but also of pollution. In particular, we show that the pattern of specialization may be Ricardian (with at most one economy producing the two commodities) or typical of a factor-proportion model (with both economies being diversified) depending on pollution intensity and transboundary pollution parameters. Welfare comparisons suggest that both countries may bene t from the preservation of the stock in the resource-exporting country.