Introduction

This chapter reviews trade models that include environmental resources and environmental policy. Our purpose is to explain how the environment has been fitted into trade theory and to describe some of the major conclusions. The presentation is more or less chronological but first makes some general observations about the environment and the theory of comparative advantage (Section 2). Early work through the mid-1980s was primarily concerned with modifying positive trade theory to incorporate environmental resources and drawing conclusions with respect to traditional trade theorems (Section 3). More recent work has a broader policy orientation: North-South trade-environment interactions and the effects of trade liberalization on the environment (Section 4) and trade-environment policy coordination (Section 5). The chapter continues with a discussion of the effects of lifting two restrictive conditions, the small-country, constant terms of trade assumption and the assumption of immobility of factors internationally (Section 6). Section 7 examines the integration of strategic trade theory and environmental policy.

Environment and Comparative Advantage

The theory of comparative advantage asserts that countries will tend to specialize in the production and export of goods they produce relatively efficiently. Relative efficiency involves a double comparison, as among goods and as among countries. In the Ricardian one-factor input model, the source of relative efficiency is not explicit but resides implicitly in differences among countries in factor productivities.