Environmental standards, resource depletion, and trade stability: a two-country model of cross-border pollution

This study aims to explain the trade instability in countries with less stringent environmental standards. Constructing a theoretical model involving two countries illustrates how differences in resource management standards in the context of transboundary pollution can affect potentially stable trade patterns and post-trade welfare outcomes influenced by environmental pressures, such as overharvesting and transboundary pollution. The findings suggest that if the pollution externality outweighs the open-access problem in trading countries, a stable trade pattern is likely when the degree of transboundary pollution is small, even if resource stocks decline. However, when the damage from the open-access problem is more severe, a stable trade pattern cannot be expected. From a policy perspective, these results can help governments promote a more stable post-trade environment. One policy suggestion is to encourage the expansion of pollution-producing sectors with green transformation to promote the contraction of resource-intensive industries and prioritize actions to minimize transboundary pollution. This can help create a balance and ensure sustainable economic growth for developing countries, possibly by sharing cross-border pollution with trading partners.