This paper develops a two-country, two-sector model of international trade in which the stock of environmental capital accumulates over time. It shows how the pattern of production and the welfare level of each country change by opening trade when there is production externalities in the form of worldwide-scale pollution.
There have appeared many theoretical studies on the interaction between trade and the environment. Among them, we focus on the model of Copeland and Taylor [3] (1999) which analyzes the pattern of production and the welfare level of each country in the Ricardian type of trade model with local environmental pollution.
In this paper we re-examined their analysis under the supposition that pollution generated in one country possibly influences the economic activities of other countries. Then we show essentially the same results as those in Copeland and Taylor's analysis. But we deepen their analysis and obtain an implication that the relationship between the relative demand of manufacturing goods to the agricultural ones and the relative level of foreign environmental capital to the home one plays the significant role in determining the pattern of production. In addition, we make clear the relationship between the pattern of production and the transboundary degree of pollution.