Open Access Renewable Resources, Industrial Pollution, and International Trade:

Connecting Heterogeneity in Demand Conditions to Welfare Implications

Gökhan Güven 1

Abstract
This paper examines trade between a resource-scarce country and a resource-abundant country in
a two-sector dynamic setting in which the harvesting and manufacturing sectors exert interrelated
damaging pressures on the nationally-owned renewable resource stock in a South-South trade
model, given the relative demand levels. Depending on the relative difference in the effective
pollution intensity parameters, countries can be divided into two groups: a country where the
open-access problem dominates the industrial pollution and another where the opposite is true.
The relative strength of world demand yields striking results, contrary to expectations in two
cases. In what I refer to as the conventional case, although the resource-scarce country exports
pollution-producing goods, it experiences welfare gains and an improvement in the resource
stock when the world relative demand for “dirtier” goods is low. In the conventional case, trade
cannot worsen the resource conservation problem, even when exporting its respective “dirtier”
goods. Strikingly, however, in the original case in which the world relative demand for polluter
goods is high, even if the resource-scarce country exports the “cleaner” goods, it can suffer a loss
in welfare and environmental degradation at the diversified steady-state equilibrium. In the
original case, trade cannot rebuild the national resource stock despite exporting “cleaner” goods.
It is also argued that when two different South-South type countries trade, trade liberalization can
worsen at least one country’s resource conservation and welfare conditions based on the
magnitude of the relative demand curve. Therefore, this model provides a theoretical basis for
“protectionism” by supporting the trade-induced degradation hypothesis in the presence of a high
enough world relative demand for pollution-producing goods.
Keywords: International Trade, Renewable Resources, Pollution, Demand and Supply, Gains
from Trade
JEL Classification: Q21, Q27, F18, H23

1. Introduction

1
Corresponding Author: Gökhan Güven, Faculty of Political Sciences, Department of Economics, Sakarya
University, Turkey; e-mail: gokhan.guven@ogr.sakarya.edu.tr. Orcid Number: 0000-0003-2604-301X.
The environmental and welfare consequences of trade openness are a source of ongoing
discussion among economic researchers, policy-makers and the public (Copeland & Taylor,
2004; Bustos, 2011; Cherniwchan, 2017; Cherniwchan & Taylor, 2022; Wu et al., 2022). In
developing countries, where trade openness is currently experiencing significant growth, it is
essential to identify the environmental effects of international trade in order to establish and plan
strategies. However, there has been little research conducted on the environmental effects of trade
openness, particularly in developing countries (Van Tran, 2020). Furthermore, theoretical trade
models may provide a basis for a positive or negative impact on the environment; their outcomes
can be unclear and inconclusive (Abman & Lundberg, 2020). Advocates argue that countries that
export cleaner goods necessarily experience an improvement in their steady-state welfare by
opening up to trade because free trade leads to the rebuilding of its national resource stock and
consequently increases productivity in the resource-intensive sector. That is, they believe that
trade openness can promote resource conservation and environmental quality (Ahmed et al.,
2016; Xue et al., 2021).
However, protectionists propound that trade openness can lead to a loss of utility in the country
exporting "polluter" goods, as trade incentivizes this country to increase the production of
relatively more resource-damaging goods for the sake of economic growth, resulting in
environmental degradation and a decrease in productivity in the harvesting industry (Lee et al.,
2016; Wang et al., 2022). Therefore, it is typically expected that free trade would bring similar
results in trade between emerging or developing countries (to see empirical studies that support
the possible benefits of trade between emerging countries, readers can refer to Mol, 2011;
Hochstetler, 2013; Bloomfield, 2020). This popular view is considered the "canonical wisdom" in
analytical discussions in many forums. On the other hand, the focus of almost all of these
discussions on understanding the direction of the impact of trade liberalization on the
environment has been the supply-side movement in the existing literature. Managi et al. (2009)
and Shahbaz et al. (2017) found that the effects of trade openness on the environmental stock
could be positive or negative, depending on a country's comparative advantage, environmental
awareness, and polluter parameters. However, the demand side is more likely to dominate all
these determinants and change the nature of the theoretical analysis.
Furthermore, many studies have focused on the relations between North-South trade and
environmental sustainability; however, theoretical resources exploring South-South trade and its
implications for environmental protection are still in their infancy. 2 Moreover, these previous
studies have looked at each environmental externality (such as an open-access problem or
industrial pollution) separately. A few scholars have demonstrated that excessive harvesting and
pollution problems need to be considered simultaneously (Rus, 2016; Li & Yanase, 2022). Thus,

2
In this context, South-South trade refers to a type of trade between developing industrial countries with resource-
scarce (where pollution is the main source of renewable resource degradation) and less-developed resource-abundant
countries (in which excessive use of natural resources is the primary factor leading to deterioration of natural
resources). A vast amount of literature focuses on the consequences of international trade's on the environment (for
discussions, see, e.g., Tsurumi & Managi, 2014; Erhardt, 2018; Wan et al., 2018; Abman & Lundberg, 2020;
Benchekroun et al., 2020; Abman et al., 2021; Eisenbarth, 2022). Generally, these types of research paper cover a
similar setting and conclude that environmental regulations must be implemented to reduce environmental
deterioration caused by trade liberalization, and thus lead to resource stock rebuilding.
most theoretical studies have failed to capture the empirical results of the trade-environment
nexus in a broader and more realistic framework because they have not examined these twin
pressures in the same setting. All these gaps in the existing literature motivate us to construct a
new theoretical foundation to understand the impacts of trade on national resources that are
exposed to the two interrelated pressures in emerging countries.
This paper is the first to fill the cited research gap and contribute to the literature by using a two-
country (South-South), two-sector dynamic general equilibrium setup that includes resource
exploitation and industrial pollution problems that may negatively impact the national
environmental stock, given different levels of world relative demand. 3 In other words, this is the
first in-depth study of preferences and demand level in the international resource/manufacturing
goods trade and the findings confirm the importance of different demand conditions as a
determinant of post-trade welfare gains and/or losses and environmental conservation. To
examine the trade-environmental protection, I build a model in which two developing nations are
assumed to have similar, nationally-owned (not crossing borders) resource endowments but
different effective pollution intensity parameters to make the paper’s arguments as simple as
feasible. The resource-scarce country (domestic) has a higher effective pollution intensity
parameter than that in the resource-abundant country (foreign), which means that manufacturing
(harvesting) deteriorates the nationally confined resource stock relatively more in the domestic
(foreign) country. This categorization changes the nature of the long-term production possibilities
frontier (PPF) and generates sharply different trade and welfare patterns. In this setting, the
environmentally friendly sector can be thought of as a resource-good sector that can harm the
resource stock via excessive harvesting. The other economic activity can be interpreted as the
manufacturing industry, which also yields environmental externality as a form of pollution but is
not affected by resource stock changes. In doing so, the present model constructs an
establishment (i) that formulates the cross-country heterogeneity in terms of the relative
magnitude of environmental externalities (ii) categorizes the countries into two types: a country
where the resource extraction problem dominates industrial pollution and a country in which the
pollution is more resource-depleting than excessive harvesting, and (iii) analyzes the impact of
the strength of world relative demand on resource deterioration and welfare changes.
This model investigates two different cases, referred to as “conventional” and “original”
according to the heterogeneity in demand conditions. The conventional case is established given
the condition that the relative demand for the pollution-producing good is low enough, and the
opposite is true for the original case. Apart from exogenous differences in the pollution flows,
both countries are assumed to be similar. Therefore, this model also includes the graphical
diagrams to make the study’s implications as clear as possible.

3
This study is interested in the South-South trade between less developed nations because it more than quadrupled
from 2000 to 2021 to $5.3 trillion. Besides increasing in volume, developing countries’ trade outperformed that of
developed countries in 2021, indicating that the South-South trade growth will be higher than the global average in
2021, according to the Global Trade report issued by the United Nations. Moreover, UNCTAD (2015) and the
United Nations Development Program (2019) also noted that emerging economies are participating in global trade at
a higher rate and confirmed that the South-South trade volume is on the rise.
The originality of this paper lies in the fact that it establishes a model in which different positions
of the relative demand curve generate different frameworks to investigate the heterogeneity in
relative dominance of the damaging economic activities on resource stocks. This heterogeneity
generates significantly different consequences when developing countries open up to trade.
Having set up the model, a crucial class of cases is obtained in which the "canonical" wisdom is
overturned. Of the results obtained in this paper, three main results are as follows:
(i) In the conventional case, the resource-scarce country has a comparative advantage in
the "polluter" goods and exports it on the condition that this country imports the
resource-good, in accordance with the canonical wisdom. However, it can reach a
diversified production bundle in the long-run PPF in which the resource-scarce
country can produce fewer of its respective more resource-depleting goods, which
contrasts with the results reported in previous studies to a certain extent. The reason is
that a low level of world demand requires the polluter-good exporting country to shift
its labor force to environmentally friendly economic activities to satisfy the market-
clearing condition, which implies that this country experiences steady state gains and
national resource improvement at the post-trade diversified production. The key
intuition behind this result is that a relatively low world demand for polluter goods -
that is more harmful in the domestic- leads to a contraction in the production of
pollution-producing goods in each country, implying that free trade contributes to
replacing the "polluter" industries with the "cleaner" ones in the resource-scarce
country (Al-Mulali et al., 2015; Ding et al., 2021).

(ii) The other possibility is the "original case," in which a high enough world demand for
polluter goods is assumed. In this case, a resource-scarce country exporting its
respective "cleaner" goods may find itself in a post-trade situation where trade leads to
welfare losses and hinders environmental quality. Here, trade liberalization impacts
the shift of production from the less damaging industry to the more damaging industry
in the resource-scarce country, even if it ends up exporting the "cleaner" goods after
the trade. This contrasting result is induced by the appropriate and high-enough
demand, as discussed in the present study. Specifically, free trade appears to be "bad"
for environmental quality and provides a sound basis for the trade-induced
degradation hypothesis (Zhang, 2018).

(iii) Lastly, advocates of trade openness have believed that trade can cause welfare
improvement, especially in countries with a comparative advantage in less resource-
damaging goods (Shim & Jeong, 2016; Kim et al., 2016; Keho, 2017; Leveson-
Gower, 2020; Anderson, 2020). However, this model suggests an interestingly
striking result that South-South trade may worsen utility outcomes for at least one
trading partner, implying a "win-lose" situation, although free trade has been
portrayed as a "win-win" policy where all trading countries benefit from better
 welfare results.4 To the best of my knowledge, previous theoretical models have not
produced such results.
The paper’s analytical results are consistent with the empirical findings. Focusing on China, a
resource-scarce country with a quasi-stringent environmental policy on industrial pollution,
Abbes (2009; 43) reported that if the country exports the polluting good, trade openness can yield
opposite effects in which the technique impact dominates the scale and composition impacts,
indicating a decrease in industrial pollution and an improvement in environmental quality
(conventional case). Due to lower world demand, trade openness appears to have a positive effect
on environmental conservation. Moreover, Abbes (2009) also documented that in Brazil (a
resource-abundant country with a less stringent environmental policy on resource-good
industries), trade openness leads to more production of its relative “cleaner” goods, but also an
increase in industrial pollution (note that the open-access problem dominates the industrial
pollution in resource-abundant countries in its detrimental impacts, which will be discussed in
further sections). A positive effect on the quality of the environment is observed if the scale and
composition impacts outweigh the technique effect. As a consequence, Brazil is incentivized to
produce more pollution-producing goods and less of its respective cleaner goods (original case).
Furthermore, Zugravu-Soilita (2018) documented that polluting firms in resource-scarce
countries, mainly importers of environmental goods, are more likely to experience an increase in
their pollution-abatement technologies, which diminishes the amount of polluters’ emissions.
This reduction motivates governments of resource-scarce countries to enforce stringent
environmental regulations and rule out non-compliant firms, implying a reduction in pollution-
producing goods, as discussed in the conventional case. Consequently, trade openness induces an
increase in environmental stocks for resource-scarce countries.
Two key assumptions play a crucial role in this setting. The first is that the effective pollution
intensity parameter distinguishes the country types and categorizes them into two distinct
extreme points based on their different levels of environmental awareness about externalities. It is
assumed that the resource-scarce country will implement laxer environmental management
standards in the manufacturing industry, while the resource-abundant country will exert less
stringent monitoring regimes on the resource-good industry. This, in turn, guarantees that
countries will give different responses when opening up to trade. A second fundamental premise
is that the relative world demand curve can easily dominate the effect of relative supply curves in
determining trade patterns. In fact, it is assumed that when the relative world demand is large
enough, the world price can be higher than the price level at the intersection of the relative supply
curves in autarky.
The fundamental basis of trade openness is a dynamic setting of the Ricardian trade model
(Brander and Taylor, 1997a). Brander and Taylor (1997b, 1998) have extended the Ricardian
static version by incorporating the concept of renewable resources.5 The model developed by

4
To observe a triple-win scenario (trade, the environment, and development), I refer readers to Yu (2007).
5
The Brander-Taylor model has been examined in various papers and extended in different novel studies. Focusing
on more recent studies, Takarada et al. (2013) incorporated the common resource stock assumption, which rules out
the full spatial separation of dirty and clean industries. Chen (2017) introduced the environmental property right
notion and studied the exploitation of the resource stock under different regimes. Chen (2018), also included private
Copeland and Taylor (1999) examines the effect of trade on the resource stock that is adversely
affected by the pollution externality emitted from the smokestack industry. They showed that
trade liberalization could improve the welfare levels of both countries by providing complete
spatial separation between incompatible industries.
Rus (2016) studied the effect of international trade on the environment and utility in the presence
of two types of pressures, but assuming no heterogeneity in the world’s relative demand in the
case of small open economy. Li and Yanase (2022) presented a hybrid model of Brander and
Taylor (1997b) and Copeland and Taylor (1999) and aimed to provide new insights into
understanding the effect of South-South trade on the environment and utility. Li and Yanase
(2022) claimed that both countries unambiguously gain from trade if they exported relatively
“cleaner” goods to each other, given the condition that they were of different types. However, the
present study indicates that a country exporting its respective cleaner goods to a trading partner
may lose from trade, which is the exact opposite implication compared to the findings in Li and
Yanase (2022). This is because trade-induced specialization towards cleaner goods with
comparative advantage may result in less production in the environmentally sensitive industry,
which depletes resources and consequently worsens the economic wellbeing of the related
country. This paper builds on these studies by incorporating institutional failures in both
economic activities and differences in world relative demand to illustrate the welfare and
resource conservation results of trade openness in the presence of renewable resource stock.
In the literature, the potential for transboundary pollution has been discussed. Transboundary
pollution rules out the condition that industrial pollution's occurrence and sphere of influence
remain within national borders. Unteroberdoerster (2001) and Benarroch and Thille (2001)
separately developed a model in which transboundary pollution results in a country that is fully
specialized in relatively cleaner goods experiencing welfare losses under free trade due to the
negative impact of transboundary pollution flowing from the trading partner. The mechanisms
stimulating their findings unambiguously differ from ours, although the results seem similar to
some extent. In their model, the key mechanism is the existence of transboundary pollution to
emphasize the cross-border industrial pollution externality. However, in this model, the
fundamental motive behind utility gains or losses in each country is the different levels of world
demand for manufacturing goods and the position of relative world price in comparison with the
price level determined by the coincidence of the relative supply curves in autarky. Suga (2007)
extended Benarroch and Thille's model by generalizing the functional forms and considering all
parameter values.
The remaining structure of the paper is characterized as follows: the model's essential
components are defined and a basic understanding of autarkic economies is provided in the next
section. This section also includes the derivation of different types of countries and the definition
of relative supply and demand curves. Section 3 considers the two-country open-economy case
with different types of countries, resource-scarce and resource-abundant, under two different

ownership and investigated the endogenous urbanization differences in forest degradation by assuming resource
goods as intermediate goods to be used in the production of the manufacturing good. Takarada et al. (2020) modeled
technology standards, which restrict harvesting technology. They considered the resource management regime and
concluded that both countries could gain from trade if multilateral resource management is properly carried out.
cases: conventional and original. In this section, the model examines the welfare, resource
conservation, and labor allocations when each country opens up to trade under different cases
based on the strength of the world’s relative demand. Section 4 involves concluding remarks and
discussions about possible future studies.

2. The Basic Model

I will first define basic structure of the renewable resource model, then proceed to a Ricardian
general equilibrium analysis. It is sufficient to identify the economic environment of one country
in order to specify the common elements of both countries in a closed economy. 6 I will assume a
model with two goods: resource (harvest) referred to as H and a manufacturing good referred to
as M , and two countries, called domestic and foreign. In both countries, it is assumed that
renewable resources, such as forests or fisheries, are a common property under an open-access
framework. That is, well-defined property rights or environmental regulatory regimes that
prohibit unrestricted access resource stocks do not exist.7 Furthermore, each country has a
nationally confined renewable resource stock, S, which can only be accessed by their own
residents. This assumption ensures that the generation and incidence of damaging impacts arising
from economic activities are only influential within national borders. In addition to the available
stock, the harvesting sector also considers labor, L H , as an additional input factor. The
manufacturing good, M , represents the average of some other goods and uses labor, L M as an
input factor with constant returns to scale, α . This parameter denotes the productivity of the
manufacturing industry. Therefore, the production functions can be written as follows:
H S =qA ( S ) L H , and M S =α L M
(1)
in which the subscript S stands for supply and q refers to the harvesting technology level. A( S)
represents the productivity of the resource-good industry, which satisfies A' ( S )> 0.8 Therefore, the
productivity of the resource-good sector is determined by both available resource stocks and the
harvesting technology. It is assumed that all markets are treated under the perfect competition
assumption. The full employment condition guarantees that L H + L M =L, referring to the total
labor endowment. Letting β ≡ LH / L imply the share of labor allocated to the resource-good
industry, and the production functions in each sector can be rewritten as follows: H S =qA ( S ) βL
and M S =α (1−β) L.
The price of the H -good is taken 1, as a numeraire. With the assumption of free labor movement
across industries and competitive labor markets, it follows that the price of the M -good, denoted
by p, must be equal to the labor’s value of the marginal product, meaning p=w , where w stands
for the wage rate. The objective of firms in both countries is to maximize their profits under free

6
Asterisks are used denote the variables for a foreign country.
7
This condition incorporates the South-South trade model as trade opens up, as it will imply trade patterns between
countries with incomplete property rights.
8
The resource-good production function is generally identified as the Schaefer type harvest function.
 qA ( S )
entry conditions. Furthermore, the labor market implies w= = p by equalizing the wage
α
rates within the country with the assumption of perfect competition. This relative price
relationship is necessary for both industries to be active in autarky. It is also worth noting that the
relative price of the manufacturing good displays a positive relationship with the environmental
resource stock and the productivity term in the harvesting sector.9
The model also embeds industrial pollution as a harmful activity that generates an environmental
burden on the resource stock. Industrial pollution is assumed to stem from manufacturing activity
and refers to Z , which is generated at a fixed rate of z , where z >0. z is the positive pollution
intensity parameter and measures the magnitude of dirtiness per unit of manufacturing activity
produced by polluter firms, which negatively impacts the productivity in the harvesting industry,
and then
Z=zM=zα L M (2)
which is the industrial pollution in a given country, regardless of the existing stock level. For
simplicity, zα =γ are adopted, and referred to as the effective pollution intensity parameter in the
rest of this paper.10 It should be noted that the environmental variables are identical in both
countries, except for the effective pollution intensity parameter. For a foreign country, this
parameter is denoted by γ ¿, which reflects the differences in the environmental awareness and
resource management regimes between the two countries. In other words, the countries are
located at two different extremes of the management regime scale based on the differences in the
pollution intensity parameters.
2.1 Features of a Renewable Resource Model
Before identifying the environmental stock evolution equation, note that the renewable resource's
biological structure is considered the same in each country. For a particular country, the current
stock level at any time t is stated as S ( t ) . The natural growth rate, denoted by G , is unidentified in
a specific functional form and relies on the available resource stock. I designate a maximum
carrying capacity, referred to as K , and assume that K satisfies the conditions, G ( K )=0 , and
G ' ( K )< 0 for a non-negative level of K . Therefore, both economic activities (harvesting and
manufacturing) simultaneously yield environmental pressures on the renewable resource stock.
That is, the environmentally sensitive sector may lead to over-harvesting due to the open-access
problem, and the manufacturing industry generates a flow of pollution, which can be evaluated as
another externality. Both activities can deplete the existing resource stock, meaning that the net

9
It is essential to explain that delaying harvesting or saving the resources is not rational, as any other harvester may
use the available resource stock as long as there is a positive profit in the environment.
10
The reader may question why the equation, zα =γ , is assumed in the model. It is known that productivity (here,
denoted by α ) has to be understood differently from the term efficiency. In this context, productivity refers to the
production of the right kind of products of the right quality (Abad and Ravelojaona, 2022). Therefore, the point of γ
being equal to the product of two other parameters: α and z is that an increase in productivity not only can boost
economic growth, but also may lead to degradation of natural resources by exacerbating the industrial pollution
problem if improved productivity is not an environmentally friendly enhancement or part of a green transformation
(Hao et al., 2022; Wang et al., 2022).
change in the current renewable resource level at that time t is identified by the natural growth of
the resource, G [ S ( t ) ] minus the harvest rate and industrial pollution, [ H ( t ) + Z ], which is the total
level of the negative externalities, and then
dS
=Ś=G ( S )−[ H ( t )+ Z ] =G ( S )−D , and where D= [ H ( t )+ Z ] (3)
dt
D , the total damaging influence of economic activities, depends on the production patterns of
each sector. The harmful pressure on the renewable resource stock per unit of labor in the
environmentally sensitive sector is qA ( S ) , while in the manufacturing industry, it is γ . The
relative magnitude of these two factors (i.e. their relative dominance over each other in terms of
depleting activity) is critically important in determining the features of a closed economy,
production and trade patterns when opening up to trade. Here, a definition is proposed as follows.
Definition 1. The environmentally sensitive sector becomes more resource-depleting as the
effective pollution intensity parameter is lower than the threshold level; [ γ <qA ( S ) ] ; conversely,
manufacturing is more environmentally damaging when the parameter is high enough [ γ >qA ( S ) ].

This implies that the harvesting industry is “cleaner” if the pollution intensity parameter is taken
at a value above the threshold level. Conversely, if the given effective pollution intensity
parameter is below the critical value, the manufacturing sector is distinguished as “cleaner” in
such an environmental framework. Based on the condition of whether the open-access problem
dominates industrial pollution concerning the damaging impacts, countries can be categorized
into polar extremes, which will be discussed in further sections. The relative magnitude of
economic activities over each other particularly determines cross-country differences.

2.2 Demand, Utility and Consumption Patterns and Supply Side

A representative economic agent in each country is assumed to have identical preferences defined
by the Cobb-Douglas instantaneous utility function, and
ψ 1−ψ
u=h m (4)
in which h and m represent the individual demand for resources and manufacturing goods,
respectively, noting that ψ is the share of income spent on the resource good. The nominal price
of the M good is identified as p and the price of the resource good is assumed as a numeraire,
thus p also reflects the relative price of the M -good. Taking the relative price, p, and wage rate,
w , as levels determined exogenously, the budget constraint for a representative consumer can be
written as,
w=h+ pm (5)
Recall that the only endogenous variable to be saved or invested throughout the model is assumed
to be a resource stock, which is the changes the result of differences in its natural growth rate and
total detrimental activity. Here, ψ is also considered the taste parameter for the H -good, and then
the utility function is maximized subject to the budget constraint, yielding individual demand
functions as follows:
w
h=wψ ; and m= ( 1−ψ ) (6)
p
The total labor force is assumed to be equal to the total population in the economy, and then the
total demand functions for both goods, H and M , are given by,
w
H D=hL=wψL ; and M D= ( 1−ψ ) L
p
(7)
where the subscript D refers to demand. Both goods are indispensable and must be produced in
the steady-state equilibrium in autarky. The relative price conditions for both sectors to be active
in the autarkic equilibrium are w=qA (S)=α p , and the share of labor in the resource-good sector
in autarky is β=ψ .
The short-run equilibrium outputs are found by examining consumption levels and relative price
conditions for both sectors to be active in the autarkic equilibrium,
H=qA ( S ) βL, and M =α ( 1−β ) L
(8)
Even though the model provides us with a type of temporary equilibrium, temporary production
bundles do not guarantee the stability for the resource stock and may not ensure its feasibility in
the long term. In the long run, the renewable resource stock is not assumed to remain constant
over time, leading us to the long-run analysis and determining the steady-state equilibrium.

2.3 Properties of the Steady-State Equilibrium and Determining Country Types

Before deriving a steady-state equilibrium, it is important to recall that renewable resource stocks
are not internationally shared, implying that the two countries have resources accessible only by
their own residents. Thus, local economic activities potentially determine the steady-state
resource stock level. By referring to expression (3), the following can be obtained at the steady
state, given the labor allocation, β , and then
G ( S )=L [ qA ( S ) β+ γ ( 1−β ) ] . (9)

The solution(s) to this corresponding steady-state environmental stock equation can be denoted
by S∞ ( β ), which satisfy the following stability condition:

G ' ( S )< A ' ( S ) L [ qβ ] (10)

This is a stability requirement because the natural growth of the resource stock [ G ( S ) ] must
intersect the total depleting impacts of economic activities, D , from above. It is easily observed
by supposing the specific functional form of G ( S ) such as the logistic form, G ( S )=rS ( 1−S / K ) ,
which is one of the common forms, especially used in the fisheries literature. This type of
specific functional form displays the feature that there would be no steady-state equilibria for an
upward-sloping part where G ( S ) does not intersect the economic usage of the environment from
above.11
It appears that the closed functional form of G ( S ) is being considered for more general solutions.
The following assumptions should be put forward to rule out the possibility of empty, multi-
valued and discontinuous renewable resource stocks related to the possible labor allocation, β ,
and to identify well-behaved S∞ ( β ) , and then,

Assumption 1. S∞ ( . ) must satisfy the properties of positive-valued and continuous function in the
interval [ 0,1 ] .
This assumption presents a set of possible renewable resource stocks for each labor allocation, β .
Taking the total differential of (9) with respect to β , produces the following equation:

d S∞( β ) L [ qA ( S∞ ( β ) )−γ ]
=S'∞ ( β )= '
dβ G S∞ ( β )− A ( S ∞ ( β ) ) L [ qβ ]
'

(11)
Based on the stability condition expressed in Eq. (10), the denominator of Eq. (11) must be
negative, which implies that the sign of Eq (11) is determined by the opposite sign of the
numerator, L [ qA ( S ∞ ( β ) ) −γ ]. Definition 1 identifies the condition in which the relative magnitude
of the two different economic activities dominates each other. If the pollution intensity parameter
is above the critical level, γ >qA ( S ), then manufacturing is the more resource-depleting activity in
the domestic country. On the other hand, if the effective pollution intensity parameter in the
foreign is low enough, then excessive harvesting is the more resource-degrading activity
¿
compared to manufacturing, characterized by γ < qA ( S ) . A marginal increase in β in the domestic
country leads to the rebuilding of the steady-state resource stock, while it brings about
degradation in the steady-state stock levels in the foreign. Therefore, it results in S'∞ ( β ) >0, and
S∞ ( β ) <0 for the domestic and foreign countries, respectively, and it is identified as follows:
' ¿

Lemma 1. In the domestic (foreign) country with an effective pollution intensity parameter above
(below) its threshold value, S'∞ ( β ) >0 [ S'∞ ( β ¿ ) < 0 ] holds for all β , β є [ 0,1 ], implying that the
¿

domestic country is resource-scarce country, while the foreign country is resource-abundant.

In this stage, it is logical to ask whether a change in labor allocation, β and β ¿, has an impact on
changing the relative magnitude of economic activities. That is, the reader may be concerned that
a possible increase or decrease in the labor devoted to both economic activities could also make
the dirtier sector become cleaner at any stage of the transition process. Here, the model implicitly
assumes that the type of cleaner (dirtier) remains at each steady-state equilibrium. However, a

11
Here, I refer the reader to Li and Yanase (2022) for further discussion.
similar type of question is discussed in detail in the papers written by Rus (2016) and Li and
Yanase (2022, Lemma 1), and so I refer the readers to these two studies for further information.12

2.4 Long-run Production Possibilities Frontier and Relative Supply and Demand Curves
The paper presents the solutions of steady-state analysis, in which the steady-state concept is
considered a stationary situation of the renewable resource stock. This section begins by deriving
the long-run production possibilities frontier (PPF) and obtaining the relative supply and demand
structure that is generally used in the trade liberalization literature. 13 Thus, such a relative
framework is adopted to compare the trade results of both countries in a simple and static way.
The PPF, in the long term, incorporates all feasible bundles of production patterns. Two
interrelated environmental burdens coexist to detrimentally affect the resource stock, and they
may lead to perverse supply behaviors with respect to relative price changes at some points on
the long-run PPF curve. Therefore, it can be a useful tool to examine the differences between
both countries and provide post-trade welfare results. The long-run PPF is constructed under the
condition that the resource stock can change over time, and it can be identified by taking the
production functions (8) into account with the full employment condition at the steady state S∞ ( β )
. M -good production function can be arranged as, β=1−M /αL, and so by plugging S∞ ( β ) into
the resource good production function in Eq. (8), the long-run PPF can be found as follows:

[
H =J ∞ ( M ) ≡qLA S ∞ 1− ( M
αL )][ 1− αLM ]= A [ S ( 1− αLM ,)] q ( L− Mα )
∞

(12)
which states the relationship between labor allocation, β , and renewable resource stock, S∞ ( β ),
and demonstrates all possible feasible production allocations at a certain steady state. To avoid
tedious mathematical complexity, the long-run PPF is characterized by positioning the short-run
12
Lemma 1 in Li and Yanase (2022) eliminates the possibility that economic activity may be dirtier at some
equilibria but cleaner at others. They examine this question and conclude that the relative dirtiness of any sector
remains unchanged at all steady-state equilibria. Moreover, it should be noted that the determination of the relative
dirtiness of any sector is determined by the supply-side expressions, not by consumer preferences or demand-side
functional forms.
13
Returning to the supply functions and the overall labor supply constraint in the economy, L H + L M =L , for a
given resource stock level, S, the short-run supply curve can be adopted using the following expression (1), and then,
qA ( S ) M
H=qA ( S ) L− , displaying temporary linear function properties, is obtained. The MRT (marginal rate of
α
qA ( S )
transformation) shows the slope of this straight line and is identified as follows: MRT = . Similar to previous
α
papers, the short-run features illustrate the properties. of the Ricardian economy.
marginal rate of transformation SMRT (the slope of the short-run PPF) and MRT (the slope of
the long-run PPF). Note that the SMRT differs from the MRT owing to cost amount considering
the negative effect of both interacting economic activities on the existing resource stock. That is
to say, unlike the SMRT, the MRT takes into account the impact of the environmental burden on
resource stock, depending on the fact that the resource stock does not remain unchanged in the
long term. That is, it can take various values based on possible labor allocations, β . Then, it is
defined as follows:
−dJ ( M ) β q
SMRT = = A ' [ S∞ ( β ) ] S '∞ ( β ) q + A [ S∞ ( β ) ]
dM α α
(13)
−∂ J ( M ; S ) q
in which MRT = =A [ S ∞ ( β ) ] and rewriting the above expression by using the open
∂M α
form of the MRT, and it yields
−dJ ( M ) β
SMRT = = A ' [ S∞ ( β ) ] S '∞ ( β ) q + MRT
dM α
(14)

It is well known that A' ( . ) always takes positive values, and also S∞ ( β ) >0 [ S ∞ ( β ) <0 ] holds for
' ' ¿

domestic and foreign economies, respectively, based on Lemma 1. Using the short-run
production possibilities frontier - the straight line passing through ( L , 0 )- which also denotes a
specified bundle on the PPF drawn for the long term, it corresponds to the consumption set on the
short-run PPF coinciding with the steady-state renewable resource stock. Therefore, a feasible
equilibrium can be identified for an autarkic economy. Proposition 1 reveals the properties of the
long-run PPF more accurately.
Proposition 1. The long-run PPF in the M-H output space for the domestic country is strictly
convex around the M axis; a linear line connecting, ( L , 0 ), implies that the MRT is less than the
SMRT for all values of M >0. By contrast, the long-run PPF in the M-H commodity space for the
foreign country tends to be strictly concave around the M ¿axis; a linear line connecting ( L , 0 )
implies that the MRT is greater than the SMRT for all values of M ¿ >0 .
Proof. See the Appendix.
The intuition behind creating the figures can be explained as follows: Figure 1 indicates that
transferring extra labor from the resource industry to the manufacturing sector in the domestic
increases the production cost per unit of labor because more resource-depleting activity
(manufacturing) detrimentally impacts the productivity in the resource sector. The reason is that
the negative effect of industrial pollution undoubtedly dominates the resource extraction problem
concerning its harmful pressure on renewable resource stocks in the domestic, thus lowering the
price level necessary for firms in the M - good industry.14 However, the opposite relation is valid
14
This interrelated coexistence of two kinds of pressures has been commonly analyzed in several trade models,
including different returns to scale in the two production industries (Panagariya, 1981; Ethier, 1982; Rus, 2016; Li
and Yanase, 2022). Note also that the production patterns of the trading partners do not affect the steady-state
for the foreign country case. Based on Lemma 1, it is obvious that industrial pollution itself has a
less harmful impact on the productivity level in the resource industry than an open-access
problem itself in the foreign, meaning that an extra worker shifted from H to M in the foreign
increases the opportunity cost to produce more manufacturing goods, and consequently elevates
the price level. When considering the relative price level occurring at the steady state, it is clear
that it is not monotonic and constantly changes depending on the relative production patterns
between H and M goods.

(a) Domestic Country (b) Foreign Country

Figure 1: The long-run PPF in each country

To determine the relative demand and supply constructions, the long-run PPF diagram in Figure 1
can be referenced, which highlights different approaches to resource management standards
based on the effective pollution intensity parameter. The relative demand of the manufacturing
good to the resource good is determined using Eq. (7) as follows:
w
(1−β ) L
MD
HD
=RD=
p
wβL
=
( 1−β )
pβ [ ]
(15)
The relative demand function is directly connected to the relative value of the price, not taking
the nominal income level and labor endowment into consideration. The reason is that the
preferences are homothetic, implying that both countries will have the same and identical relative
demand curve. Lastly, this relative demand curve characterizes the demand conditions both in
steady state and out of steady state.
Now, the model will return to the derivation of the relative supply curves for both trading
partners. Following expression for the evolution of the resource stock, the steady-state
equilibrium only holds for if it is identified:

resource stock levels and yielding functions due to the condition of the nationally confined resource stock.
 H S =G [ S ] −γ ( 1− β ) L
(16)
This equation establishes the steady-state equality of resource harvesting, industrial pollution and
growth by keeping Eq. (9) in mind. Manufacturing output is solely determined by labor input.
The full employment condition is rewritten as L H + L M =L, and remembering from Eq. (1) that
HS
M S =α L M , the overall labor supply constraint implies that M S =α L M =L−L H =L− ,
qA ( S )
L HS
simplifying the expression to M S = − . Plugging Eq. (16) into the last equation shows
α αqA ( S )
that

L [ G [ S ]−γ ( 1−β ) L ]
M S= −
α αqA ( S )
(17)
Dividing Eq. (17) by Eq. (16) leads to the steady-state relative supply of the manufacturing
output in terms of the resource good. This is expressed as a function of the steady-state resource
stock, S, and

MS
=
[ L [ G [ S ]−γ ( 1−β ) L ]
α
−
αqA ( S ) ]
HS [ G [ S ] −γ ( 1−β ) L ]
(18)
The relative supply curve has not yet been defined as a function of the relative price of the
manufacturing good at this stage. Before continuing with further calculations, it should be noted
that the model will focus on the diversified production case in the steady-state equilibrium.
Although the full specialization case may have some significant consequences, this study is
convinced that they are less compatible with empirical observations in explaining South-South
trade patterns. Additionally, the simultaneous examination of complete specialization and
diversified production patterns can be considered to be highly taxonomic and complex, and thus,
this study will be interested in a condition where resources and manufacturing goods are
produced simultaneously. Moreover, this model essentially requires a diversified production
[G [ S ] −γ ( 1−β ) L ] =L H S ( β ) H S( β )
because, L> and <1 is known, implying that
qA ( S ) H S ( β=1 ) H S ( β=1 )
manufacturing production cannot be zero. The reasoning is that a sufficiently large labor force
ensures that it is not necessary to be fully specialized in certain goods to satisfy domestic or
world relative demand. If the labor is transferred to the manufacturing (resource) good for the
domestic (foreign) economy, the renewable resource stock could be at the risk of being depleted.
Furthermore, the relative supply curve must be described as a function of the price of the
manufacturing good as per the following proposition15
15
The model here is not interested in the open form of the relative supply curve as a function of the price of the
manufacturing good because the relationship between these variables is high enough to figure out the post-trade
Proposition 2. The domestic (foreign) country’s relative supply of the manufacturing good to the

resource good is downward (upward) sloping. For prices p ≤

qA [ S ∞ ( β=0 ) ]
α
p≤ [
qA [ S ∞ ( β=1 ) ]
α
,
]
the relative supply M/H is zero, whereas for any finite price,

p>
qA [ S∞ ( β=0 ) ]
α [p>
qA [ S ∞ ( β=1 ) ]
α ]
, the relative supply M / H takes positive values.

Proof. See the Appendix.

These results can be demonstrated by drawing the long-run Production Possibilities Frontier
(PPF) curve and the deriving of the relative supply of the manufacturing good M , to the resource
good H as a function of the relative price of the manufacturing good. Figure 2 visualizes
Proposition 2 for the domestic country by showing how the relative supply curve [ RS ( p ) ] is
derived using the long-run PPF.

(a) Long-run PPF (b) Relative supply curve

Figure 2: Relative supply curve [ RS ( p ) ] for domestic

Proposition 1 reveals that the price of manufacturing goods falls when the resource stock
decreases. Moreover, as the resource stock approaches zero, the supply price of the M -good also
approaches zero, depending on the relative price conditions under diversified production.
Additionally, Eq. (16) implies that the production of resource good converges to zero level when
the resource stock approaches zero. To understand the economic logic of the downward sloping
supply curve in the domestic economy, assume an economy is in one possible autarkic
equilibrium, denoted by E1.16 Moving from E1 to the new steady-state diversified production, E2,

changes and compare autarkic and post-trade economies in terms of their production patterns, welfare grounds and
resource conservation levels.
16
E1 corresponds to the β 1 resource labor allocation that is higher than the labor allocated for the harvesting in, E2 ,
denoted by β 2.
indicates that more labor is allocated to the manufacturing industry, implying a higher relative
supply curve of M -good. This leads to less efficient harvesting and directly reduces the resource
stock. Therefore, since the manufacturing industry is a relatively more resource-depleting
economic activity in the domestic, it brings about a lower relative price level of M -good due to
the increase in the unit labor cost of the production of resource goods. Furthermore, the economy
is at an autarkic equilibrium, E1, and the taste parameter for M -good increases, denoted by
shifting out of the relative demand curve as RD 2. In this situation, the economy moves to the new
autarkic equilibrium point, E2 , along the downward-sloping relative supply curve and the relative
price of the manufacturing good decreases. This is because the relative supply curve
demonstrates an inverse relationship with respect to price changes in the manufacturing good.17
Assuming also that the taste parameter for the manufacturing good is determined by RD 1, if the
rate of natural resources, G [ S ( t ) ], decreases or if the amount of labor force (total population)
increases, and then the relative supply curve of the M -good would be shifted out, as
demonstrated by the dashed line, RS2. As a result, the economy’s autarkic equilibrium occurs at
F 1.

Let us now focus on the specific features of the relative supply curve of the foreign country. As
mentioned before, the main characteristic of the foreign country is that the resource extraction
associated with the open-access problem is more dominant than the industrial pollution problem,
implying that the harvest sector is more resource-damaging. Unlike the domestic country, the
foreign one has an upward-sloping relative supply curve of M - good. Figure 3 shows the usual
autarkic steady-state conditions for the foreign nation as follows:

(a) Long-run PPF (b) Relative supply curve

Figure 3: Relative supply curve [ RS ( p ) ] for foreign

¿ ¿

17
I refer the readers to Rus (2016; footnote 35) in which the steady-state equilibrium in the convex curved long-run
PPF was discussed and why relative price changes demonstrate perverse responses to the increase in the production
of the manufacturing good was reported in detail.
 ¿ ¿
An increase in M S /H S leads to the allocation of labor to less resource-damaging activities in the
foreign and enhances the renewable resource stock. The relative price level of manufactured
¿
goods increases with this improvement in S in autarky because harvesting turns out to be more
efficient due to the fact that the harvesting cost of H - good is less when the stock is abundant. In
other words, industrial pollution in the foreign has a lower damaging effect on the productivity of
the resource-good sector than the resource extraction itself. As the labor force is more devoted to
manufacturing than harvesting, the resource stock becomes relatively high, and the relative price
level of manufacturing goods increases, as indicated in the part (b) of Figure 3. This can also be
q¿ A [ S∞ ( β ¿ ) ]
seen from the relative price equation, p¿ = , for the foreign.
α¿
Moreover, the comparative steady-state impacts can be assessed with the change in exogenous
parameters. Eq. (18) shows that a decrease in the natural growth rate, or an increase in the total
population, shifts the relative supply curve of the M -good inwards, as depicted in Figure 3.
Strictly speaking, this study can easily provide the mathematical solutions for the autarkic
relative price and renewable resource stock levels by using the relative demand curve established
by Eq. (15) and the foreign relative supply curve provided by Eq. (18). However, these solutions
are not necessary for the subsequent steps of this analysis, so they are omitted without explicitly
expressing these formulas for both countries here.

3. International Trade between Domestic and Foreign Countries

The model analyzes different responses of domestic and foreign countries to opening up to trade
and investigates the welfare results by using the long-run PPF in a two-country framework. The
relative demand curve is identified as the same in both countries, implying that the world relative
demand can be considered the same. In this model, the world demand will differ in relative terms,
depending on the different values of the taste parameter of the resource good. 18 Therefore, each
country's trade patterns and welfare grounds are determined by the difference between the
relative supply curves and the common relative demand curve. It is worth noting that two
different possibilities can be observed based on the total detrimental amount of economic
activities. In other words, if the domestic country’s total negative impact on the resource stock is
higher than the foreign’s one, [ D> D¿ ], the relative demand curve intersects both relative supply
curves at prices below p E where p E represents the price level at which both relative supply curves

18
Intuitively, the world relative demand refers to the total demand of two countries, as the relative demand is the
same in each country. People were willing to spend less (or more) on the resource good than on the manufactured
good, which could be denoted by lower (or higher) levels of the taste parameter of the H -good [lower (or higher)
β ¿, resulting in a relatively higher (or lower) world demand for the manufactured good, according to Eq. (15). When
compared to the higher levels of the taste parameter of the resource good, the former relative demand lies outside
that of the latter case, as seen in Figures 4 and 6. Therefore, the world relative demand would not remain constant
among different trade scenarios, and directly affects the post-trade production patterns and welfare results. This
provides an understanding of how the world relative demand can be changed in two different cases: conventional and
original.
intersect in the autarkic economy. This situation is denoted as the “conventional case” because it
¿
is absolutely compatible with the starting assumption referring γ > γ . However, the second
scenario can occur when the foreign country’s total externality effect is higher than the domestic
country’s total environmental burden on the resource stock, meaning that [ D< D¿ ]. This case can
exist if and only if the labor force in the foreign, L¿, is higher than the total population in the
domestic, L.19 Here, the world relative demand curve intersects both countries’ relative supply
curves at price levels higher than the p E. Accordingly, this situation is referred to as the “original
case.”
The post-trade welfare changes in the two-country open-economy case will first be analyzed by
focusing on the short-run effect. Then, the changes in welfare grounds will also be examined by
taking the change in the renewable resource stock in the long run into consideration. As the
renewable resource stock is accessible only to its own residents of the corresponding country, it is
qA ( S )
evident that each country faces a nationally confined resource stock level, given p= . In
α
this condition, the difference in the effective pollution intensity parameter and the labor force
determines the relative price of the manufacturing good in an autarkic steady-state and reveals the
comparative advantage in a way that compares the MRT with the world price. In the
conventional case, as mentioned before, the total harmful impact of economic activities in the
domestic exceeds the foreign’s one, which certainly leads to the autarkic steady-state resource
stock in the domestic being lower than the foreign country’s stock level at the steady-state.
According to the relative price of manufacturing, it specifies p< p¿ in the autarkic steady-state
equilibrium. Consequently, the domestic country has a comparative advantage in the
manufacturing good as trade occurs between these trading partners, while the foreign enjoys a
relative cost advantage in the resource goods in the “conventional case.” The original case
indicates an opposite relationship compared to the conventional case, which will be discussed in a
further subsection.
Before moving on to the detailed analysis of the possible alternatives, the post-trade utility level
is specified at the steady state by referring to U T . In a steady-state equilibrium pre and post-trade,
diversified production is the steady state production pattern for both countries. First, the demand
functions for the diversified equilibrium when 0< β , β ¿ <1 are established as follows:
qA [ S ∞ ( β ) ]
w= pw = , so H D=qA [ S ∞ ( β ) ] βL= p w bL and M D =α (1−β ) L. Therefore, the post-trade
α
welfare is identified with a monotonic transformation as follows:
U T =V +lnL+ ( 1−β ) lnα + βlnq+ βlnA [ S ∞ ( β ) ] (19)

19
The total economic usage generating negative economic pressures on the renewable resource stock is defined in
Eq. (3) as D= [ H ( t )+ Z ] =L [ qA ( S ) β +γ ( 1−β ) ]. Throughout this paper, it is assumed that the only difference
between countries arises from the change in the effective pollution intensity parameter. When diversifying the labor
force, two different cases must be taken into consideration. The first possibility is that the simultaneous satisfaction
¿ ¿ ¿
of γ > γ and L> L leads to the situation referred to as the “conventional case.” However, since γ > γ is still valid,
the assumption of L< L can be observed, which may result in [ D< D ]. Here, the traditional analysis is ruled out,
¿ ¿

generating the originality of the present paper.

in which V ≡blnb + ( 1−b ) ln (1−b ) . The implication here is that the post-trade utility changes in a
nationally confined resource stock framework can be applied by comparing the autarkic and post-
trade welfare results at the steady-state equilibrium points.
3.1. Conventional Case
Figure 4 demonstrates the conventional case. The model refers to the autarky price of the
manufacturing good in the domestic country as, p, as indicated, and it occurs at the intersection
point where the relative world demand and relative supply curves coincide. With a similar
reasoning, the autarky price, p¿, in the foreign country can be located and referred to it as p¿.
Figure 4 visualizes that the domestic country has a lower relative price for the manufacturing
good as p< p¿. Furthermore, the domestic country has a comparative advantage in the
manufacturing good. Since these countries are trading partners, and then if free trade
liberalization between them occurs, the world equilibrium price, pw takes a value between the
two relative autarkic prices, as shown in the figure given below.

Figure 4: Conventional case

At this post-trade equilibrium, the foreign country demands more manufacturing good than it can
produce, which must be imported from the trading partner (domestic). Simultaneously, the
foreign country allocates its labor force to the resource industry in which it produces more
harvest goods than it can consume, implying that the foreign must export the resource good to the
domestic. Here, the post-trade diversified production moves from E¿ to X in which the foreign
devotes more labor force to the production of resource goods, which is a more resource-depleting
economic activity, as identified in Lemma 1. Therefore, the post-trade resource stock at a steady
state falls with trade in the foreign country. The XY distance demonstrates the relative difference
between foreign demand and supply in relative terms. However, the domestic country
experiences the following case: it produces more manufacturing good than it can consume, and
thus exports M -good in return for importing H -good, indicated by the distance ZY in relative
form. The originality observed in this case, compared to previous studies, is that even if the
domestic country exports the manufacturing good, it does not necessarily allocate more of its
labor force to the production of M -good. In contrast, the domestic country’s diversified
production bundle moves along the relative supply curve from the E' to Z where the ratio of
M / H declines. Depending on Lemma 1, the relatively less damaging activity in the domestic is
resource extraction, and the post-trade diversified production ensures that the resource stock
starts to rebuild in the domestic. To my best knowledge, this has not been covered in the previous
papers.
It is notable that a comparative advantage in M - good for the domestic country does not
necessarily lead to an expansion of the production of the manufacturing good when opening up to
trade, which significantly changes the nature of the post-trade results, particularly for the resource
conversation. One reason for the contraction in the production of M - good is that the total relative
demand in each country can be lower than the post-trade total demand for the manufacturing
good, meaning that the domestic country may satisfy the necessary consumption demand by
producing less M - good compared to the autarkic diversified case. Another explanation for the
conventional case in the domestic country is that a higher equilibrium world price may bring the
country’s terms of trade benefits to sufficient levels, and so the country may not need to produce
more manufacturing goods to increase its welfare or nominal income.
In the conventional case, the post-trade welfare implications of free trade differ considerably
between countries. In this model, welfare results come from two sources: changes in terms of
trade in relative prices, denoted by the TOT effect, and changes in the environmental stock level
determining the change in the productivity of the H -good industry, denominated the
environmental effect.20 In a two-country world, both welfare effects have dynamic features,

20
The model presented here borrows the welfare effects from the article by Li and Yanase (2022) to some extent. Let
us suppose that in the domestic country ( M S , H S ) is the production (consumption) bundle at the autarkic steady-
A A

state equilibrium, and β T is the post-trade labor allocation in this country. Then, ( M S , H S ) and ( M D , H D ) can be
T T T T

defined as the consumption and production sets in the post-trade steady-state equilibrium, and therefore:
The TOT effect can be simply defined as the difference between post-trade consumption and post-trade income
calculated in the form of autarkic prices.
∆ TOT = [ p A M TD + H TD ] −[ p A M TS + H TS ]=( pw −p A ) ( M TS −M TD )
where this simplification ensures the derivation of the second equality above by utilizing the market clearing
condition. The environmental impact on welfare implications is calculated by subtracting autarkic income from post-
trade income in terms of autarkic prices, and then:
T T A A
[ ]
∆ ENV =[ p A M S + H S ]−[ p A M S + H S ] =q A [ S ∞ ( β T ) ]− A [ S ∞ ( β ) ] β T L
qA [ S ∞ ( β ) ]
in which pA= ,
A
M S =α ( 1−β ) L, H SA =qA [ S ∞ ( β ) ] βL, M TS =α ( 1− βT ) L , and
α
H S =qA [ S ∞ ( βT ) ] βT L . The environmental effect takes the productivity change in the harvesting activity into
T

account, moving from A [ S∞ ( β ) ] to A [ S∞ ( β T ) ].

The total welfare effect is the sum of two impact sources, and is referred to as ∆ ∑ ¿=∆ +∆ =[ p M +H ]−[ p M + H ] ¿.
TOT ENV A
T
D
T
D A
A
S
A
S

This demonstrates the difference between post-trade and autarkic consumption, calculated using the autarkic prices.
meaning that they can take either positive or negative values depending on the post-trade
patterns. Figure 5 allows us to identify the individual welfare changes of each country.

(a) Domestic country (b) Foreign country

Figure 5: The welfare changes in the conventional case

The contraction of the “cleaner” M -good production, even if the domestic country still exports
the manufacturing good, gradually rebuilds the environmental resource, raising the productivity
in the harvest good industry. Consequently, a positive environmental impact is observed, as
shown in Panel (a) of Fig.5.21 Moreover, the TOT effect is simply rewritten as,
∆ TOT = ( p w − p ) ( M S −M D )=( p w − p ) ( Z −Y ), implying a positive TOT effect on the resource stock.
T T

Thus, the domestic country unambiguously enjoys a positive total welfare effect, as the ability to
trade at the relative world price for the domestic, which is higher than autarky prices, yields
standard welfare gains with trade. However, the foreign experiences a fall in the post-trade
welfare levels due to the fact that the negative environmental effect dominates the positive TOT
effect on the environmental stock. It is true that trade stimulates the expansion of the “dirtier”
resource sector, degrading the resource stock and harming productivity in the resource-good
sector. Therefore, it results in a negative environmental impact, as shown by an inward shift of
the autarkic budget line to the parallel dashed line in Panel (b). Simultaneously, the TOT effect
¿ ¿
becomes positive because ∆ TOT = ( p w − p ) ( X−Y ) in which ( p w −p ) < 0 and ( X −Y ) <0.
21
Remember that, in the conventional case, preferences are in favor of resource good, which would shift the relative
demand curve inward and ultimately resulting in higher levels of β . In the post-trade equilibrium, a lower level of β
also implies that the domestic country shifts its labor force from more damaging to less damaging economic activity,
and the opposite is true for the foreign country. Therefore, higher levels of β are consistent with a positive (negative)
environmental effect for the domestic (foreign) country, as explained in the conventional case.
Nevertheless, the effect of lower resource stock certainly dominates the terms of the trade effect,
¿ ¿
thus the steady state welfare in the foreign country decreases, U T < U .
As a result, the domestic country can establish the following proposition to summarize the post-
trade steady state results in the conventional case.
Proposition 3. In the conventional case, the domestic country has a lower relative price for the
manufacturing good in a closed economy, exports the manufacturing (dirtier) good when
opening up to trade, rebuilds its environmental stock, and obtains welfare gains in the post-trade
diversified steady-state owing to an expansion of the relatively “cleaner” sector. On the other
hand, the foreign country exports the resource good at a higher relative price, diminishing its
own resource stock due to the expansion of a relatively “dirtier” industry in free trade, and thus
loses from trade.
Proof. See the Appendix.

3.2. Original Case

The original case is drawn in Fig. 6. Assuming that the total damage inflicted by the two
industries on the renewable resource stock in the foreign country is greater than that in the
domestic, [ D< D¿ ], given the condition that γ > γ . This occurs with the assumption that L > L.
¿ ¿

When the foreign resource stock exceeds the domestic’s, these assumptions clearly show that the
autarky price in the domestic country, p, is higher than that in the foreign country, p¿,
correspondingly, p> p¿. If these two countries are trading partners and are allowed to trade, the
relative world price of the M -good, pw , must lie between the countries’ autarkic prices, as
visualized in Figure 6. The world price is also a market clearing price that must be higher than p E
where the relative supply curves intersect in autarky. At pw , the supply of the manufacturing
good in the foreign country exceeds the amount it demands, so it will export the manufacturing
good in the post-trade diversified steady-state. The distance ZY in the figure represents the
difference between production and consumption in relative terms. It is worth emphasizing that
the export of the manufacturing good is also accompanied by an increase in the relative
production of the M - good, which is denoted by a movement from E¿ to Z .
 Figure 6: Original case

For the domestic country, the demand for manufacturing goods exceeds its production, and it
imports the M -good and exports the resource good, which is given by the distance YX . An
interesting feature of this case is that the domestic country exports the resource good even though
it produces less of that product compared to the autarkic steady-state diversified equilibrium. This
is illustrated by the movement of the new diversified production bundle, X , from the autarkic
production set, E' , along the relative domestic supply curve. At pw , the domestic country
experiences a depletion in the resource conservation, as it moves labor to the resource-damaging
sector, M .
In contrast, at the post-trade diversification pattern at Z , the foreign country rebuilds its resource
stock because it shifts the labor force from sector H to sector M , which is less harmful to the
resource stock. This leads to the novel result: in the presence of a relatively higher demand
(shown by shifting out of the demand curve compared to the conventional case, as represented by
lower, β )the country exporting relatively “cleaner” goods may be in a position in which it
produces more “dirtier” goods instead of expanding the exported good production. In other
words, an increase in the post-trade relative price of the resource good causes the domestic
country to export the resource good, while providing a sufficient increase in nominal income
despite the low demand, resulting in more production of the relatively dirtier goods.
The welfare impacts of trade in the original case are of great importance. The domestic country
loses from trade due to a significant deterioration in the resource stock, as illustrated by an
inward shift of the autarkic budget line to the parallel dashed line in Panel (a) of Figure 7. Even
though the TOT effect becomes positive ∆ TOT = ( p w − p ) ( M S −M D )=( p w − p ) ( X −Y ) where
T T
( pw −p ) <0 and ( X −Y ) <0, the negative environmental effect can dominate the TOT effect,
resulting in a welfare loss for the domestic country.22
However, Panel (b) presents a diagram analysis for the foreign country. The foreign country
gains from trade because a contraction in the resource-depleting industry after trade enhances the
environmental stock, implying a positive environmental effect (as demonstrated by an outward
shift of p¿ to the parallel dashed line in Panel (b) of Figure 7). Moreover, the TOT effect also
¿ ¿
becomes positive, as follows: ∆ TOT = ( p w − p ) ( Z−Y ) in which ( p w −p ) > 0 and ( Z−Y ) >0.
Combining these two effects, it follows that the foreign country certainly reaches a higher welfare
result in the diversified trading steady-state.

(a) Domestic country (b) Foreign country

Figure 7: The welfare changes in original case

Consequently, it has been found that a country exporting relatively environmentally sensitive
goods may experience welfare losses and its resource stock may decrease due to producing more
“dirtier” goods. The following proposition clarifies the findings of the original case for the two
countries:
Proposition 4. In the original case, the domestic country has a higher relative price of the
manufacturing good in an autarkic situation, exports the resource (cleaner) good upon opening
up to trade, degrades its environmental resource stock, and consequently faces welfare losses at
the post-trade diversified steady-state because of the expansion of the relatively “dirtier” sector.
However, the foreign country exports the manufacturing good with a lower relative price,
rebuilds its resource stock depending on the expansion of a relatively “cleaner” industry in free
trade, and benefits from trade.
22
It is known that the world relative demand to M -good is sufficiently high, which is denoted by a lower levels of β
in the original case. This explains why the environmental effect in the domestic (foreign) is negative (positive)
because lower levels of β means a movement of labor from respectively less (more) resource-depleting activity to
more (less) damaging production
Proof. See the Appendix.
3.3. Determining the conventional or original case
This model has not yet characterized the determinants that specify whether trading economies
find the equilibrium in the conventional or original case. The fundamental factors include the
taste of preferences, β , the amount of labor endowment, L, and the natural growth rate, G [ S ]. As
discussed in the previous section, the role of the taste parameters can be easily seen in Figures 4
and 6. Suppose that the conventional case is demonstrated in Fig. 4, and if preferences shift in
favor of the manufacturing good, causing the relative demand curve to move outward and
resulting in the original case.
Regarding the labor force endowments, the consequences of Section 4 suggest that an increase in
the foreign labor endowment (assume that L¿ > L) leads to the possibility of the existence of the
original case, arising from the fact that D¿ > D in the autarkic equilibrium. Furthermore,
population growth in the foreign country would ultimately induce the original case to arise.
Lastly, suppose that the general form of the natural growth rate G [ S ] decreases. In that case, a
lower relative autarkic price would arise in the post-trade equilibrium, ensuring that the
equilibrium would take place with the lower preference levels for the manufacturing good. Note
that a sufficient reduction in G [ S ] may guarantee an original case equilibrium. It should be noted
that the G [ S ] term can be lowered as far as it satisfies the stability condition for the steady-state
equilibrium defined in Eq. (10).
When taking all of these results into account, it can be concluded that the renewable resource
stock is subject to a serious environmental burden in autarky when resource stock expansion rate
slows down, the labor force increases or the preferences for the manufacturing good become high
enough. This situation is specified as the original case in the model. This implies that the total
burden of economic activities on the resource stock in the foreign country can be higher than that
in the domestic country. In each case, international trade cannot be considered the best policy for
environmental conservation from the viewpoint of resource protection and welfare gains in the
long run, as demonstrated in this paper that free trade can mitigate welfare gains and the level of
the resource stock, in at least one trading partner.

4. Conclusion
This paper investigates the effect of trade liberalization on environmental conservation and
welfare results in a two-country framework with less stringent management regimes under
different world relative demand levels. This model considers trade between two economies, each
with nationally confined resource stocks that are subjected to two interrelated depleting
externalities: resource extraction and industrial pollution. This study formulates the cross-country
heterogeneity resulting from the relative magnitude of the environmental pressures by assuming
variations in their effective pollution intensity parameters. This setup provides new insights into
analyzing the effects of trade on the resource protection and welfare patterns in a more complex
and realistic consideration.
The present paper also allows the assessment of the setting in which international trade occurs
between different types of countries (denoted by domestic and foreign), which represents the
trade pattern between South-South, where the developing economies generate more industrial
pollution as a fundamental source of environmental degradation, and less-developed countries
with abundant renewable resources, where excessive resource extraction is the common cause of
environmental damage. I examined two trading countries by taking two different levels of world
relative demand into account. One case is referred to as “conventional” and suggests a post-trade
circumstance in which the resource-scarce country has a comparative advantage in the M -good
and exports it, in return for importing resource goods from the resource-abundant country. In the
other case, denoted by “original,” the resource-scarce country becomes a steady-state importer of
the manufacturing good when opening up to trade, and the resource-abundant imports the
resource good. Moreover, this paper provides a dynamic and intuitive analysis to figure out the
potential impact of trade on welfare grounds: TOT and environmental effects.
This paper's primary finding, which is different from previous studies, is that trade liberalization's
effect on the resource stock and welfare goes beyond simply analyzing production and
consumption shifts between sectors as well as exports/imports and domestic supply. Previous
studies generally focus on the supply side of the analysis and claim that a policymaker might
expect that a country exporting cleaner (dirtier) goods would undoubtedly benefit (lose) from
trade because it could allocate all labor force to the cleaner (dirtier) industry, raising (depleting)
resource stock and productivity (Brander & Taylor, 1997a; Brander & Taylor, 1998; Rus, 2016;
Takarada et al., 2020; Li & Yanase, 2022). Therefore, the possibility that a country exporting
polluter (environmentally friendly) goods could experience utility gains (losses) after trade has
not been discussed. However, the findings in this paper indicate that a cleaner (dirtier) goods-
exporting country may suffer a decline (experience an increase) in steady-state utility resulting
from trade because of a low (high) level of world relative demand. The relative magnitude of
demand unambiguously yields contrasting results and ensures that the best result that can be
obtained is a “win-lose” outcome in South-South trade. Existing theoretical studies characterizing
open access problems and industrial externalities separately or simultaneously have not reached
this result. The other foremost results of this model are summarized as follows.
In the conventional case, trade-induced comparative advantage in the polluting industry results in
less dirty industry production, provided that preferences shift towards the resource good. This
suggests that national resource stocks and welfare gains will increase, compared to previous
models. In such a scenario, insufficient world relative demand for manufacturing good (the lower
position of the demand curve) leads to a decrease in the production of more resource-depleting
goods in the long run in resource-scarce countries. It is argued that trade does not exacerbate the
polluting goods problem even though the country exports the polluting goods. Moreover, trade
liberalization shifts the labor force towards the resource-good sector to satisfy the relatively high
enough demand for the resource good in both countries, which increases (decreases) the
productivity in the resource-intensive industry in the resource-scarce (resource-abundant)
country.
This paper also examined the original case in which the domestic country might have a high
enough demand for manufacturing goods. Here, the domestic country can become a steady state
exporter of relatively "cleaner" goods when opening up to trade; however, the environment and
welfare level tend to worsen when the world’s relative demand for the pollution-producing good
is at a sufficiently strong level. Remarkably, it is found that the domestic country finds itself in a
situation where it increases the production of the relatively more damaging good on the resource
stock. Hence, trade turns out to be welfare-reducing and resource-depleting for resource-scarce
countries (diversified resource-good exporters) even if they export the more environmentally
sensitive good at the diversified post-trade steady-state equilibrium. In contrast, this model
demonstrates that trade improves the steady-state welfare and the environmental resource stock
of resource-abundant countries. The reason is that the higher enough demand allows the resource-
abundant countries to allocate more labor in the sector that is less damaging for the national
resource stock (albeit being an exporter of relatively more environmentally harmful goods). In
summary, trade liberalization can encourage a country to export “cleaner” goods, but it may not
be beneficial for improving the renewable resource stock in the original case. This is the opposite
of what this analytical study specified in the conventional case.
These findings highlight that the South-South trade pattern is not the best policy for each country
in terms of resource conservation and welfare outcomes simultaneously. In a conventional case,
free trade might be the environmentalist's best friend for the resource-scarce country. In contrast,
it might be considered the first-best policy for the resource-abundant country in the original case.
These results establish some examples of the second-best in economic theory. To the extent that
trade liberalization leads to a decrease in a relatively more harmful industry (as illustrated by the
pollution-producing good for the resource-scarce economies in the conventional case), it may
bring about positive welfare impacts. However, if free trade causes the expansion of relatively
more damaging economic activities (as illustrated for polluter goods of the resource-scarce
economies in the original case), it can yield welfare losses.
In reality, a possible policy suggestion for an emerging resource-scarce economy is to stimulate
the traditional sector expansion at the expense of exporting polluter goods, and increase welfare
gains with trade liberalization. On the other hand, trade can induce the expansion of the polluter
sector in the case of exporting cleaner goods, which may result in welfare losses. These outcomes
depend on the position of world relative demand. In other words, the long-term trade results
cannot be solely determined on the basis of export production patterns.
Furthermore, a potential policy lesson for an emerging country is that policymakers should take
the relative level of world demand into consideration before opening up their economies to trade.
That is, they should be aware that the relative strength of world demand can have a greater
impact on welfare results than the supply-side determinants. A short-sighted approach (focusing
only on the post-trade export or import patterns) without considering the current situation of
world relative demand can easily lead to undesired results, as discussed for the resource-scarce
country in the original case. Unlike Copeland and Taylor (1999), free trade may be welfare-
reducing, even when the country is a net exporter of its respective “cleaner” goods.
One possible extension would be to assume an internationally shared resource stock, which
would easily eliminate the condition that the incidence and generation of industrial pollution
remain within national borders. Another possible extension would also be of striking interest
 would be to endogenize the effective pollution intensity parameter and labor endowment,
allowing for important implications on the environment and welfare through trade. These
possible extensions should be considered for future studies.

Appendix
A.1. Proof of Proposition 1

Suppose that certain production outputs on the long-run PPF [ H 1 , M 1 ] correspond to the steady-
state resource stock S∞ ( β 1 ) . Relying on the short-run PPF expression, the model obtains that a
straight line connecting ( L , 0 ) to a certain point [ H 1 , M 1 ] is the short-run PPF for a given common
stock S=S ∞ ( β1 ) . If the domestic (foreign) country is considered, it holds that the short-run PPF
intersects the long-run PPF from above (below), which proves the convex (concave) shape of the
long-run PPF around ( L , 0 ). The sign of the second derivative of the production possibilities
frontier in the long term can be determined by using expression (14) to identify the shape of the
long-run PPF as follows:

J ' ' ( M )= [
dM dM
= ]
d dJ ( M ) dφ dβ
dβ dM
' β
α
q
where φ=− A [ S ∞ ( β ) ] S∞ ( β ) q − A [ S∞ ( β ) ] and β=1−
'
α
M
αL

Rearrange the expressions for simplicity as follows:

dφ β β q q
=− A [ S ∞ ( β ) ] S ∞ ( β ) S∞ ( β ) q − A [ S ∞ ( β ) ] S∞ ( β ) q − A [ S ∞ ( β ) ] S ∞ ( β ) − A [ S ∞ ( β , β ) ] S ∞ ( β )
'' ' ' ' '' ' ' ' ¿ '
dβ α α α α
(A.1)
'' dφ dβ
what it follows is that J ( M )= is expressed as the terms below,
dβ dM

¿
q
αL [ ][ ' 2
A [ S ∞ ( β ) ] ( S ∞ ( β ) ) β+ A [ S∞ ( β ) ] S ∞ ( β ) β+ 2 A [ S ∞ ( β ) ] S∞ ( β )
'' ' '' ' '
]
(A.2)
ή

First, focus on the term S' ' ( β ) in ή. Before proceeding to further steps, A' and S'∞ are used instead
of A [ S ∞ ( β ) ] and S'∞ ( β ), respectively. It follows from Eq. (11), and
'

''
S∞ ( β )=¿ ¿ (A.3)

where ψ 1=qA ( S )−γ and ψ 2=G ' − A ' L ( qβ ) . By using these notations, it can be expressed as
' ψ1 L
S∞ = , then, rearrange (A.3) for a simpler form, and have:
ψ2
 [ ]
2
ψ1 L ψ1
''
S∞ ( β ) = 2
2q A +
'
( L ( qβ ) A' ' −G' ' ) (A.4)
ψ 2
ψ2

and then follows that

A [ S ∞ ( β ) ] S∞ ( β ) β=
' '' ψ1
ψ 2
2
' 2
A β L 2q A +
[ ' ψ1
ψ2
( L ( qβ ) A '' −G' ' ) ] (A.5)

Now, I will identify the remaining terms in ή as following:

i) A' ' [ S ∞ ( β ) ] ( S'∞ ( β ) ) β=

2

[ ] ψ1 L
ψ 22
ψ 1 A ' ' βL

(A.6)

ii) 2 A [ S ∞ ( β ) ] S ∞ ( β ) =2
' '
[ ]
ψ1 L
ψ 2
2
ψ2 A
'

(A.7)
These together yield ή as shown below:

ή=
[ ][
ψ1 L
ψ 2
2
'
A βL 2 q A +
( ' ψ1
ψ2 )
( L ( qβ ) A' ' −G' ' ) +ψ 1 A '' βL+ 2ψ 2 A '
]
[ ][ ] [ 2 ( G' ) ψ 1
( )]
'
ψ1 L ' 2 d G
¿ A − βL
ψ2
2
A
'
ψ2 dS A'
(A.8)

( )
'
d G
Simplify the ¿ with the form of in (A.8). It yields that
dS A '

[ ] [
' 2 2 (G − A L q β )
( )]
' ' ¿ ¿
q q ψ1 L ψ1 d G'
''
J ( M )=ή = [ A ] − βL
αL αL ψ 22 A' ψ2 dS A'
(A.9)
Noting that β → 0 as, M → L and then

q [ ψ 1 A 2 ( G −A L q β ) ]
' ' ' ¿ ¿
''
lim J ( M )= 2
M → αL α ψ2
(A.10)
It is known that the stability condition must satisfy G' − A' Lq ¿ β ¿ <0 for all β є [ 0,1 ] because of
G' ( S )< A ' ( S ) L [ qβ +q ¿ β¿ ] =G' − A' Lq ¿ β ¿ as β=0 . This implies that the sign of J ' ' ( M ) is
ascertained by the opposite sign of ψ 1 when M approaches L, which is positive (negative) in the
domestic (foreign) country.
A.2. Proof of Proposition 2
Proof. Let S∞ ( β ) to be assumed as the resource stock level at the steady-state equilibrium. As
qA ( S ) dp dp dβ
described before, p= implies that = where M =α ( 1−β ) L. Taking the
α d ( M / H ) dβ d ¿ ¿
dp ( 1−β ) α
differential gives us that =[ q A' ( S ) S'∞ ( β ) ]in which A' ( S )> 0. Furthermore, M / H=
dβ β qA ( S )
dp
indicates that < 0. Considering these two differentials together and depending on Lemma
d(M / H)
dp
1, S'∞ ( β ) >0, and then follows < 0 for the domestic country. It is a fact that the relative
d(M / H)
qA [ S ∞ ( β=0 ) ]
supply is 0, if p ≤ is derived from the relative price condition. The profit
α
maximization condition in the manufacturing good states that the price of the M -good to be
qA [ S ∞ ( β ) ]
produced must equal its cost of production, meaning that p= . At β=0 , all labor is
α
allocated to the relatively more resource-depleting industries in the domestic, which ensures that
the resource stock approaches its lowest level. Additionally, the resource stock level cannot be
qA [ S∞ ( β=0 ) ]
below than its lowest level, a price level lower than points out that the production
α
of the manufacturing good cannot be feasible in terms of profit maximization perspective, and the
qA [ S∞ ( β=0 ) ]
firms in the M -good industry cannot recover their production costs, if p< occurs in
α
the economy. Therefore, producers are not keen to produce M - good, and then at,
qA [ S ∞ ( β =0 ) ]
p= the relative supply of the manufacturing good is zero. Similar reasoning can be
α
applied to the foreign, except for its maximum resource level can be reached at β ¿ =1 due to the
manufacturing being considered a more harmful activity on the resource stock in the foreign,
dp
resulting in > 0.
d(M /H)

A.3. Proof of Proposition 3

According to Proposition 3, the domestic country exports manufactured goods and benefits from
trade in the conventional scenario. The following explanations capture the structure of its proof. The
diagrammatic tool in Figure 5 visualizes the conventional case. Propositions 1-2 list the
characteristics of the relative supply curves in each country, and it is noted that the “conventional
case” emerges when the relative demand curve is in the right place. It is also important to remember
that the relative demand curve is notably a function of the taste parameter, β , implying that it is
independent of the relative supply curve. It is also clear that the conventional case requires the fact
that total domestic externalities must be higher than the foreign’s total environmental pressure,
¿
leading to p< p .
Related algebra can be used to precisely show the proof, but the graphical demonstration and
associated reasoning provide the complete logic. In any case of the conventional case, the relative
world price of M -good is higher than the autarky price in the domestic country and is lower than the
autarky price in the foreign country. As shown in Fig. 5, establishing the relative supply curves
implies that the domestic country will export the harvesting good and the foreign country will
necessarily export the resource good.
Now, the proof will be completed by deriving resource conservation and welfare outcomes. Let
¿
denote β T and β T as the post-trade labor allocations in the domestic and foreign countries at the
steady state. The trade pattern is that the domestic exports M -good and the foreign exports resource
goods at the steady-state of diversified trading production, as explained above. Moreover, Figure 5
clearly indicates that the post-trade manufacturing production diminishes, meaning that β T > β and
¿ ¿ ¿ ¿
β ¿T > β ¿. Based on Lemma 1, S∞ ( β T ) > S ∞ ( β ) and S∞ ( β T ) < S ∞ ( β ) are found. Therefore, the
environmental stock in the domestic rises up and that in the foreign decreases at the trade steady-
state.
The final point is to prove the post-trade welfare outcomes. Remember that both countries remain
diversified at trading steady-state equilibrium. Following from Eq. (19), the post-trade utility in the
domestic, at a steady state with β T is U T =V +lnL+ ( 1−β ) lnα + βlnq+ βlnA [ S ∞ ( β ) ] in which
qlnA [ S∞ ( β ) ]
pw = . By rewriting the equation by changing the resource stock, given the world price
α
level, and then
U T =V +lnL+lnα + βln p w (A.11)
which with the utility function representing the autarkic equilibrium at the steady state yields for
domestic and foreign, respectively:
pw ¿ ¿ pw
U T −U= βln , and U T −U =βln ¿ (A.12)
p p
Following the post-trade price levels compared to those in autarky, U T −U >0 [the domestic gains
¿ ¿
from trade], and U T −U < 0 [the foreign loses from trade] are obtained.
A.4. Proof of Proposition 4
Proposition 2 constructs the case in which the model investigates the trade patterns and post-trade
welfare effects for the “original case.” Propositions 1-2 determine the features of the relative supply
curves, and the appropriate placement of the relative demand curve establishes the original case. A
low enough value of β will shift out the associated demand curve for the manufacturing good
sufficiently, which causes the original case to occur. Here, the relative world steady-state price of
the manufacturing good is higher than the autarky price in the foreign country and lower than that in
the domestic country. Following from Fig. 6, it can be easily demonstrated that the domestic
country is a net exporter of the harvest good in the original case, and the foreign country is a net
exporter of the manufacturing good. The proof is the mirror image of Proposition 3; for example, if
the domestic (foreign) shifts its labor force to the M -good production, denoting β T < β [ βT < β ] , and -
¿ ¿

manufacturing is relatively more (less) resource-depleting economic activity-, Lemma 1 ensures

that S∞ ( β T ) < S ∞ ( β ) [ S∞ ( β T ) > S ∞ ( β ) ] for the domestic (foreign) country. In terms of welfare, the
¿ ¿ ¿ ¿

domestic country experiences losses from trade at the diversified steady-state trading equilibrium.
p
Welfare losses in the domestic can be expressed as U T −U= βln w in which, pw < p [ p w > p ] ,
¿

p
implies that U T −U <0 [ U T −U > 0 ] . This is because the productivity in the resource-good sector is
¿ ¿

reduced by the environmental damage, which distorts the real purchasing power, given the same
nominal income as autarky. Even though consumers in the domestic country benefit from lower
prices for the manufacturing good, productivity losses outweigh this positive effect and cause
welfare losses. In contrast, the foreign country gains from trade. The intuition behind this result is
that opening up to trade will enable the foreign country to gradually increase its resource stock level
with the positive terms of trade effects, which will result in welfare gains in the long run.

Statements and Declarations

Ethics approval
The manuscript has not been submitted to more than one journal for simultaneous consideration.

Consent to participate
This study has not directly/indirectly involved human and/or animals.

Consent for publication

The manuscript was reviewed, and all authors consented to publish.

Authorship contribution
Gökhan Güven: Conceptualization, Methodology, Formal analysis, Writing - Original Draft,
Supervision.

Funding
This research received no specific grant from any funding agency in the public, commercial, or
not-for-profit sectors.

Competing interests
The author declares no competing interests.

Data Availability Statement

Data sharing not applicable to this article as no datasets were generated or analyzed during the
current study.

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