The analysis of trade liberalization on open-access shared renewable resources with pollution: A small open economy case

Trade liberalization is discussed to likely result in resource depletion and utility losses, indirectly diminishing productivity levels via the cross-border impact of economic activities. However, existing studies generally focus on nationally-owned domestic resource stocks, failing to assess the cross-border influence of internationally shared renewable resources under the condition that harvesting and manufacturing industries yield environ-mental pressures detrimentally impacting the common stock. This paper intends to study the impacts of trade liberalization on welfare grounds, resource protection, and labor allocation in a two-country, two-good small open-economy model when two countries share a common renewable resource stock. Depending on the different levels of harvesting technology, the countries can be divided into two groups: a country where the open-access problem dominates the industrial pollution, and the opposite applies for the other country. The results indicate that trade may cause welfare gains for both countries when they show full specialization in manufacturing goods of a comparative advantage, even if the shared resource stocks are severely depleted. Furthermore, based on the common resource stock assumption, we demonstrate that it cannot be optimal for a country to specialize in its respective cleaner goods from a welfare perspective. The reason is that only one country's specialization in its respective dirtier goods can be sufficient to reverse the welfare and conservation results in both countries adversely. Strikingly, the findings recommend that international cooperation is likely to happen if both countries specialize in resource goods rather than in pollution-producing goods.

Automated summary

Trade liberalization may lead to resource depletion and utility losses, indirectly affecting productivity levels through the cross-border impact of economic activities. This study aims to examine the impacts of trade liberalization on welfare, resource protection, and labor allocation in a two-country, two-good small open-economy model where two countries share a common renewable resource stock. The findings suggest that trade can bring welfare gains for both countries, even if the shared resource stocks are severely depleted, when they specialize in manufacturing goods of comparative advantage.