Trade, spatial separation, and the environment

We develop a simple two-sector dynamic model to show how pollution can provide a motive for trade by spatially separating incompatible industries. We assume that the production of "Smokestack" manufactures generates pollution, which lowers the productivity of an environmentally sensitive sector ("Farming"). Two identical, unregulated countries will gain from trade if the share of world income spent on Smokestack goods is high. In contrast, when the share of world income spent on the dirty good is low, trade can usher in a negatively reinforcing process of environmental degradation and real income loss for the exporter of Smokestack goods. (C) 1999 Elsevier Science B.V. All rights reserved.