Renewable Resources, Pollution and Trade

• Date: 01 May 2016
• DOI: http://doi.org/10.1111/roie.12217
• Author: Horatiu A. Rus
• Published date: 01 May 2016

Renewable Resources, Pollution and Trade

Horatiu A. Rus*

Abstract

Detrimental spillovers from industrial activity onto resource-based productive sectors arevery common, yet

their effects remain understudied. While international trade often creates conditions for the over-

exploitation of open-access renewable resources, it also provides opportunities for separating different pro-

ductive sectors spatially. The existing literature suggests that a diversified exporter of the renewable

resource good tends tolose from trade in both welfare and conservationterms as a result of over-depletion,

while the exporter of the non-resource good gains. However, the resource stock externality of harvesting

and the inter-industry pollution externality often coexist in reality. In a small open economy framework,

this paper shows that acknowledging their interaction changes the nature of the autarkic equilibrium and

enriches the set of resource conservation and welfare outcomes from trade.Depending on the relative dam-

age inflicted by the two industries on the environment, which in turn are functions of the pollution intensity

and bioeconomic parameters, it is possible that the inter-sectoral pollution externality persists and speciali-

zation in manufacturing is not optimalfrom a welfare perspective.

1. Introduction

Renewable resources can be under two kinds of pressures: excessive harvesting, when

no effective management is in place, and pollution from other sectors. Understanding

the effects of international trade on such an environment is of immediate and obvious

policy interest. The effects of the BP Deepwater Horizon oil spill of April 2010 on a

host of natural resources in the Gulf of Mexico—among which some severely depleted

stocks—from birds, to sea turtles, to coral reefs and several species of fish is a stark

reminder of the industrial pollution effects on renewable natural resources and on the

industries that rely on them. Such externalities are not limited to ecological disasters,

but are unfortunately quite common. Around the world, open-access fishing areas are

often located in the proximity of polluting manufacturing facilities. According to a UN

study (see Sale et al., 2008, p. 16), up to 80% of the ocean pollution is derived from

industrial or residential land-based activities, in the form of “excess nutrients (fertil-

izers, sewage, other nitrogenous compounds), persistent organic pollutants (POPs)

(halogenated hydrocarbons, polychlorinated biphenyls, and dioxins), radioactive sub-

stances.” Other high profile examples of pollution–resource exploitation interaction

issues range from the North Atlantic salmon fishery,

1

to the lobster fishery in the

North Pacific, the collapsed walleye fishery in the Tittabawassee River in Michigan,

the Baia Mare, Romania cyanide pollution of the rivers adjacent to gold mines and

countless similar, albeit less publicized cases in the developing world. This paper inves-

tigates the effects of international trade when an open-access renewable resource is

subject to the two interacting problems: over-harvesting and pollution. These have

* Rus: Economics and Political Science, University of Waterloo, 200 University Avenue W, Waterloo,

ON, Canada N2L 3G1. Tel.: 11-519-888-4567 (ext. 38338); E-mail: hrus@uwaterloo.ca. I am indebted to

Brian Copeland, Werner Antweiler, Sumeet Gulati and Edward Barbier for very useful suggestions. I

also thank Soham Baksi, the editor of this publication and two anonymous referees for comments. All

remaining errors are mine.

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Review of International Economics, 24(2), 364–391, 2016

DOI:10.1111/roie.12217

been identified as two of the leading factors that effect synergistically the potential

unprecedented mass collapse of marine species forecasted in a report of the Interna-

tional Programme on the State of the Ocean (IPSO).

2

Previous works have looked at each of the twin pressures of excessive harvesting

and pollution damage separately. Brander and Taylor (1997) show that a small open

economy that exports an open-access resource will suffer resource depletion and may

incur a long-run real income loss, whereas a country that exports the alternative non-

resource good will gain from trade, as pressure is lifted off the resource. Copeland and

Taylor (1999) show that with a cross-sectoral pollution externality, trade tends to cause

small economies to specialize and that severe resource depletion may occur. In their

model, a resource exporting country still gains from trade because specialization leads

to a contraction of the polluting sector. In reality however, many renewable resources

are concomitantly subject to both types of pressures. Are these results still valid? The

present work builds—for comparability—on the baseline Brander and Taylor (1997)

model and the subsequent Brander and Taylor (1998a) model and resembles the two

in that it deals with an open-access natural resource and the impact of international

trade on its stock. It departs from their framework in that it also assumes the existence

of production externalities, such as in Copeland and Taylor (1999). However, unlike

the latter model, where the production in the clean sector is only a function of the

“environmental capital” stock,

3

in the present paper the production of the “clean”

good consists of harvesting, thus it necessarily also depletes the resource stock. The

paper models a scenario in which a manufacturing sector pollutes the resource

grounds, thus hurting the harvesting sector. The assumption that both sectors exert a

differentiated pressure on the stock of the resource is not only more realistic, but

also—as it turns out—important in establishing results that depart from the ones in

the existing studies.

As documented in numerous biological studies, the nursery grounds for many spe-

cies of fish are located along coastal areas, which are also the more polluted areas,

owing to the industrial waste spilled directly into the sea and carried by rivers from

inland. Partly because of weak regulation or poor resource management, many devel-

oping countries experience an accelerated depletion of their resources after opening

up to international trade. Indeed, it is not surprising that under a quasi-open-access

resource exploitation regime, expanding the size of the potential market leads to

increased over-exploitation in a resource-based economy. The welfare effects of this

form of tragedy of the commons amplified by trade are potentially very significant in

poor, small, developing economies, where the shares of the resource sectors in both

exports and gross domestic product (GDP) are substantial. At the same time, the phe-

nomenon of dirty-industry migration from North to South—as a foreseeable effect of

tightening up of standards in the developed world

4

—may result in increased industrial

pollution of the environment in the developing world: the “pollution haven” effect.

5

Increasing trade and investment openness makes both over-depletion and pollution

haven scenarios theoretically plausible.

To preview the main findings, the autarkic equilibrium in this economy is ineffi-

cient. Besides the open-access problem, whose magnitude is a function of demand

parameters, there is the uninternalized effect of pollution. For some values of the bio-

economic parameters, the production possibilities frontier is convex–concave and the

supply of the manufacturing good (M) is non-monotonic. Opening up to trade allows

the economy to potentially do better in welfare terms in the long run. Non-traditional

gains from trade occur from spatially separating the conflicting sectors by focusing

production on the area of comparative advantage. While the canonical results are

RENEWABLE RESOURCES, POLLUTION AND TRADE 365

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