Trade, innovation, and natural capital: Growth dynamics near ecological thresholds

This paper examines how increased trade in renewable nature-based inputs — such as wild terrestrial and marine biomass, along with tradable forms of clean air, soil, and water — affects economic growth in a world constrained by finite natural capital. Using a standard two-region endogenous growth model, we introduce two novel features: (i) a framework that explicitly models nature-based inputs by accounting for both the stock of natural capital and the flow of ecosystem services it generates, and (ii) ecological tipping points—thresholds beyond which natural capital and the ecosystems that sustain it may undergo irreversible degradation. We find that while global integration benefits all regions in the long run, it slows growth in nature-rich countries during the transition due to over-specialization and increased dependence on foreign technology. However, when tipping points are considered, agents internalize the risk of ecological collapse, reduce resource extraction, and shift toward innovation. Coordinated innovation and conservation policies can support more balanced and sustainable development.