Trade and Transboundary Pollution: Spatial Separation Reconsidered

Copeland and Taylor (1999, J. Int. Econ.47, 137–168) show that trade allows the spatial separation of two incompatible industries. Concentrating the polluting industry in one country eliminates its degenerative effects in the other. This paper extends the analysis by allowing for transboundary pollution. Thus specialization has indirect repercussions on the level of pollution in the other country. We show (i) how cross-national differences in exposure to pollution emissions can generate comparative advantage and (ii) under what condition the resulting trading pattern combined with transboundary pollution can increase pollution exposure with negative effects on productivity and welfare in both countries.