Renewable Resources as a Factor of Production in International Trade

Abstract

This work provides an extensive review of the literature on trade and environmental issues that has been growing since the early 1990s. The gaps in this literature are identified and generalizations are provided from results that are scattered. Next, we contribute to this literature by studying a Ricardian model of trade, in which one of the sectors uses a renewable resource as a factor of production. The contribution lies in the study of trade and welfare through the full horizon of the welfare maximization problem, not relying in equilibrium analysis. This study is divided into small country case and a 2 country - 2 factor model. In the first case, we show how trade prevents extinction, and if the assumption of full open access environmental externality is relaxed the welfare expected results change substantially. In the 2 x 2 model we show that equilibrium is actually not possible invalidating many such analyses existing in the literature. This lack of equilibrium may lead the country that is free from environmental externalities to actually lose with trade vis-à-vis autarky.