Open‐access renewable resources and pollution: Trade and policy implications in a two‐country model

• Published date: 01 November 2023
• Author: Gökhan Güven,Selim İnançlı
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/rode.13001

REGULAR ARTICLE

Open-access renewable resources and pollution:

Trade and policy implications in a two-country

model

Gökhan Güven | Selim _

Inançlı

Faculty of Political Sciences, Department

of Economics, Sakarya University,

Sakarya, Turkey

Correspondence

Gökhan Güven, Faculty of Political

Sciences, Department of Economics,

Sakarya University, Sakarya, Turkey.

Email: gokhan.guven@ogr.sakarya.edu.tr

Abstract

We examine the interaction between the relative inter-

industry pollution externality and resource stock exter-

nality of harvesting in deciding trade patterns and

welfare gains from trade in a two-country model (less-

developed countries) with renewable resources in the

absence of resource management. This paper focuses

on the impacts of trade policies on resource conserva-

tion and welfare outcomes in two countries with differ-

ent environmental management regimes. Differences

in pollution management standards between both

countries determine the direction of trade flow and

gains from trade in a diversified production case. The

country with a lower pollution intensity parameter, an

exporter of resource goods, certainly experiences wel-

fare loss in the post-trade steady-state and may also suf-

fer a decline in utility throughout the transition path.

However, a country with higher pollution intensity and

importers of resource goods tend to gain from trade.

Under national open-access resources, given that pollu-

tion is regulated up to a certain point in both countries,

this study finds that implementing better restrictions

on only one externality factor is not optimal from a

post-trade welfare perspective. Lastly, from the point of

view of policy suggestion, this paper offers an optimal

trade policy that the economic and environmental

effects of enforcing import tax on resource goods are

Received: 31 October 2022 Revised: 10 February 2023 Accepted: 20 April 2023

DOI: 10.1111/rode.13001

Rev Dev Econ. 2023;27:2583–2617. wileyonlinelibrary.com/journal/rode © 2023 John Wiley & Sons Ltd. 2583

likely to be Pareto-improving consequences compared

to the implications of using an export tax.

KEYWORDS

foreign trade policies, international trade, open access

renewable resource, pollution

JEL CLASSIFICATION

D62, F18, Q28, Q56, Q57

1|INTRODUCTION

Recently, many studies have discussed the depletion of renewable resources derived from the

open-access problem. The literature also argues that free trade has deteriorated resource stock

levels in countries in which no effective resource management has been enforced. However, it

is more convenient to assume that renewable resources can suffer from more than one external-

ity problem in the real world. For this reason, at least two crucial pressures negatively influence

renewable resources; over-exploitation of natural resources in the presence of weakly defined

property rights and industrial pollution generated by manufacturing facilities adjacent to

renewable resources. The interaction between these two externalities can change autarkic equi-

librium features, stock conservation levels, and post-trade welfare results.

The question in this paper is how the trade patterns and trade gains and/or losses are

ascertained in the existence of import tariffs or export taxes in the two-country model when the

open-access renewable resource is contingent upon two interrelating externalities in the

absence of resource management: excessive harvesting and pollution. We investigate the ques-

tion with a two less-developed country and sector general equilibrium model in which the rela-

tive price of resource goods will be endogenized. We assume the trading countries are different

with regards to relative resource abundance. Our model assumes that neither country has

appropriately defined property rights; however, pollution externality is partially controlled.

From this point, our model can be considered as a South–South trade model in which the pollu-

tion problem is regulated to a certain extent.

1

The difference in the pollution intensity parame-

ter between the two countries governs trade patterns and gains from trade in this model. We

show that the country with a lower pollution intensity parameter experiences post-trade steady-

state utility losses, providing that it remains diversified both in post-trade steady-state and

throughout the transition process reaching, up to the post-trade equilibrium. The main reason

why welfare losses appear is that the country has a better pollution management regime

(referred to by the lower pollution intensity parameter in our model) and has a comparative

advantage in resource good—a more damaging activity on a renewable resource- so it leads to

degradation of resource stock and loss of productivity. However, poor resource country in autar-

chy (because of a higher pollution intensity parameter) can increase their utility level when the

trade opens. The basic intuition underlying this result is that as trade begins, the country with a

higher pollution intensity parameter is incentivized to export manufacturing goods that are rel-

atively less harmful to renewable resources. It then causes resource stock rebuilding and pro-

ductivity improvement.

2584 GÜVEN and _

INANÇLI

The primary motivation to conduct this study is that the nature of optimal trade policies in

the South–South trade between less-developed countries with different environmental manage-

ment regimes needs to be understood to explain appropriately post-trade welfare results and

environmental protection in the long run. Accordingly, we construct a model (1) to analyze the

asymmetries among trading partners regarding resource abundance owing to different pollution

management awareness under open access conditions, (2) to focus on welfare grounds and

environmental conservation when trade policy measures are implemented, and (3) to suggest

potential policy implications related to the environmental conservation and post-trade welfare

consequences. Of the results found in the present model, the followings are of special interest:

First, enforcing relatively well-defined regulations only a singular externality (on open-access

externality in our model) cannot be welfare-improving and thus leads to stock depletion for the

resource exporter country. Therefore, this study suggests that resource-exporting economies

should take concurrent and synchronous environmental measures on both economic activities

generating environmental burdens at the same time. Thereby, the relative detrimental harm

inflicted by such externalities on the resource stock can be decreased, and then the economy

may gain from trade. Second, in contrast to the previous literature, this study demonstrates that

implementing relatively poor environmental management regulations rather than that in the

trading partners may generate post-trade welfare gains and resource rebuilding for resource

importer countries, which is an undesired result because trade liberalization rewards the coun-

try placing a less emphasis on environmental policies and resource protection. This outcome

can strengthen the hand of myopic and short-sighted policymakers who prioritize economic

growth rather than the preservation of natural resource stocks in the short term. Finally, the

import taxation policy enforced by resource-importing countries can be Pareto-improving com-

pared to the export tariffs imposed by resource-exporting countries. The reason is that import

tariffs lead to additional government revenue, which may compensate for the negative impact

of trade policy on resource stocks. This follows that resource-importing countries may experi-

ence better welfare results, albeit severe degradation in nationally owned natural resources.

Simultaneously, the resource-exporting country, which is subject to import tariffs can also gain

from this trade policy because import tariffs cause the resource-exporting country to shift its

labor force from relatively dirtier industries to relatively cleaner industries, implying that a

decrease in pressures on the environmental stock, and consequently increases productivity in

the resource-good industry and welfare outcomes. These results are also policy-relevant. Specifi-

cally, the import tariff policy challenges the open-trade paradigm by indicating improved wel-

fare outcomes in both countries for nationally constrained natural resources within the general

equilibrium framework. Therefore, policy advisors and trade policy organizations should favor

an increase in import tariffs without concern about the loss of comparative advantage as a

result of retaliation by the trading partner.

Our basic structure (utility functions, stock evolution equation, production function of both

goods, etc.) shares various premises in the analysis of trade and renewable resources such as

Brander and Taylor (1997a,1997b,1998), Emami and Johnston (2000), Jinji (2007), Rus (2012),

Takarada et al. (2013), Rus (2016) and Takarada et al. (2020). Three papers by Brander and

Taylor (1997a,1997b,1998) deserved to be examined more closely to understand the main

results the literature built on. These papers are based on a simple general Ricardian equilibrium

model in which renewable resources are contingent upon the open-access problem. Brander

and Taylor (1997a) show that a resource exporter country suffers losses from a welfare perspec-

tive, provided that this country experiences a post-trade diversified production pattern. Brander

and Taylor's (1997b,1998) studies are extended two-country versions of the previous article. In

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