Trade Theories in Scarce Resources

This article discusses the role of scarce resources in international trade and the impact of trade decisions on the environment and economic growth. It covers traditional trade theories, Hotelling's rule, and the resource curse. The article emphasizes the importance of proper management of scarce resources and mitigating the harmful effects of extraction. Desklib offers study material on trade theories and more.

Running head: TRADE THEORIES IN SCARCE RESOURCES
Trade Theories in Scarce Resources
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1TRADE THEORIES IN SCARCE RESOURCES
Natural resources have always played a very crucial role in international trade. Based on
their geographical distribution, which is uneven among the different countries in the world, the
resource endowments in different countries are different. According to the traditional trade
theories or the Ricardian model, countries will specialize and export those goods and services,
which they have, in abundance as they enjoy a comparative advantage in those goods and
services. Therefore, differences in factor endowments prompt trade decisions. This was the
allocation of resources is far more efficient which result in the country to reap out high ‘gains
from trade’ as there is an increase in the social welfare.
David Ricardo in his theory of comparative advantage in the 19th century believed that the
world output would increase if countries use the theory of comparative advantage while making
trade decisions. Ricardo believed that by efficiently allocating their scarce resources to make
trade decisions a country can get a comparative advantage and the combined output will be
increased in comparison to the output that would be produced if the countries produced all the
goods and tried being self-sufficient. The comparative advantage is gained, as the opportunity
cost is lower when fewer goods are produced.
According to the standard Heckscher-Ohlin model, trade decisions are governed by the
relative differences in different country’s resource endowments that is a country will export in
those goods that uses the country’s abundant resources or factors of production and imports those
goods whose production would use the country’s scarce factor of production including trade in
scarce natural resources (Sunley and Martin 2017). The immobile and scarce natural resources
act as a source of comparative advantage that assist in international trade. This is consistent with
Leamer’s theory of relative abundance whose findings suggest that a country with abundant oil
would export crude oil and an abundance of coal and minerals would lead to raw materials to be

2TRADE THEORIES IN SCARCE RESOURCES
the chief export. Similar results have been found in Trefler’s study, which is in the grounds of
trade in resource-intensive goods. There are various extensions to the Hecksher-Ohlin theory,
which further influence the comparative advantage. This suggests that natural and scarce
resources are not the ultimate condition necessary for trade.
Scarce natural resources are identified by their finite availability ad that their extraction
or consumption in the present day can make irreversible alterations to the future generations.
Hotelling, in his study on the economics of exhaustible resources, developed a framework for
predicting the extraction path behavior as well as the behavior of prices in the light of scare
resources, which have the feature of inter-temporal trade-off (Kozlenkova, Samaha, and
Palmatier 2014). The Hotelling rule suggested that a social optimum is reached when the price of
the resource after the deducting extraction costs grows at a rate, which is equal to the rate of
interest. If the price of the resource remains constant over time then there is no gain from the
extraction or from the growing of the resource. However, in the context of scarce resources, a
policy maker in a country must have in mind that, given the limited supply of scarce resources, a
change in the rate of extraction in one period will lead to reduced scope of extraction in the next
period (Farah and Cima 2013). This will have negative welfare effects on the future generations.
Further research shows that a country, which has a relatively well endowment of scarce
resources, will trade either in it or in goods that would use those scarce resources and there will
not be any over exploitation unless there are any market or political economy failures.

3TRADE THEORIES IN SCARCE RESOURCES
Source: World Trade Report 2010
The graph takes into consideration two periods. The horizontal axis measures the total stock of
resources and the vertical axes measure the price of the resource. The amount of consumption in
each period is decided on by the prevailing price. At the point of intersection, the producer of the
resource is indifferent about producing in the first or second period (Debaere 2014).
By relaxing the assumption of perfect markets, previous literature shows that the
predictions of standard trade models hold and the resource markets are prone to market failure.
This imperfect market scenario is because these resources are limited to a few countries, there is
scarcity of supply and due to high fixed cost of production, and the producers of these resources
face increasing returns to scale. Additionally, some markets face a monopolistic market structure
and the existence of cartels. Geographical concentration of natural resources portray that the
country has a comparative advantage in the production of that resource and with the absence of
barriers to trade the extraction path will be dependent on the inter-temporal global demand
schedule (Bell Mollenkopf and Stolze 2013). Changes in the environment occurs due to the use
of exhaustible resources in production and consumption activities for example, in the case of

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fossil fuels, the oil or coal extraction leads to acidification of the sea and produces carbon di-
oxide. Similarly, timber extraction leads to loss of the natural habitat for plants and animal
species and changes in geochemical cycles (Low 2016). Additionally extraction can give rise to
environmental externalities where the prices of the resources do not reflect the full cost or
benefit.
A dynamic approach is required to understand and account for the concepts of extraction
and exploitation and this analysis is very complex in the purview of scarce resources. Economic
literature available is fragmented and does not provide a comprehensive account of the effects of
trade on the allocation and long run sustainability of resources (Foran, et al. 2013). The existing
theories of trade strengthen the predictions of the traditional trade policies that scarce resources
have comparative advantages. However, gains from trade can be derived only in the absence of
externalities and market imperfections. The limitations to gains from trade arises also due to the
dominance of scarce resources in the trading portfolio of certain countries. However, under
imperfect competition the depletion of resources is slower than in a perfectly competitive market
but the same cannot be said about countries with multiple resources nor in the case of complex
global markets. The predictions regarding gains from trade made by the traditional trade models
are reversed in cases of weak property rights or open access markets (Shohibul 2013). This
means that when property rights over a resource are poor, then there is a chance of over
exploitation and this will make a country who owns the resource worse off. This over-
exploitation will have its impact on the environment, which will further not lead to any gains
from trade.
Now over the years there has been a lot of debate over the relationship between natural
resources and economic development among economists, political scientists and policy makers.

5TRADE THEORIES IN SCARCE RESOURCES
Research has reflected a negative correlation between the abundance of resources and economic
growth in transition countries and this behavior poses a threat to countries who do not take
measures (Feenstra 2015). Therefore, policies are being put to place to ensure sustainable growth
and social wellbeing. This phenomenon is called a resource curse and is not fully understood
even if several factors are responsible to bring these undesirable economic consequences of
exploitation. Abundance of scarce resources has a rent seeking and corrupt attitude from the
government and elites and this impedes growth and development. This rest seeking tendency in
scarce resource extraction in places which has abundance of the scarce resource comes from
government control or ownership over these resources and the provision of concessions to large
firms both private and public (Copeland and Taylor 2013). These large firms reduce or even
eliminate the probable competition and stop the flow of concession and this way they end up in
monopolistic or cartel situations and once they get that position firms try to protect these
positions through bribing government officials. This power concentration among a few players
makes the rent seeking and corrupted environment in the manufacturing or service sectors. There
also exists crowding out effects in the manufacturing sectors, as the revenues are concentrated in
the hand of a few elite players (Chacholiades 2017). Thus depressing the competition among
manufacturers in export markets by raising their input costs. The boom and bust or business
cycles pose as obstacles as well in front of steady government investments. Moreover, for
countries dependent on a few scarce resource exports only exchange rate volatility can arise due
to demand swings creating more obstacles. Excess resources can also lead to underinvestment in
human capital as investments are diverted into manufacturing as the immediate revenues from
resources are seen and not the future benefits of investment in human capital (Konte 2013).
Scarce resource extraction also face the problem of being unsustainable has a long-term effect on

6TRADE THEORIES IN SCARCE RESOURCES
economic growth if the revenues are invested in a way that total income does not fall after the
depletion of resources and revenues from the extraction and export falls. The revenues can rather
be invested in renewable natural resources and also in human and built in capital (Bergstrom and
Randall 2016). Management practices and traditional policies narrow down decisions in the
hands of a few who have not been able to manage the declining resource base or the rising
demands from the side of the numerous stakeholders and the increasing complexities of the
interaction between natural resources and the human systems (Yang, Pfister and Bhaduri 2013).
Scarce resources approach provides basic concepts to decision makers and stakeholders
so that they can understand the value to avail the natural resources for economic and social
development. This approach helps the stakeholders to understand that this revenue cannot be
counted as income but as capital depletion (Barnett and Morse 2013). The use of this approach
by stakeholders helps in better decision-making and better management of the scarce resources,
which will ensure economic growth and development in a sustainable manner.
There is diversity in the extraction of resources of resources and the factors influencing it
includes availability and resource endowment, technological skills, colonial ties, trade
agreements and many more and this results in the differentiation in the global markets. Natural
resources account for almost 20% of the world trade and countries have taken up various policy
measures to manipulate the domestic and international prices although that goes against the
principles of the World Trade Organization (World Trade Report 2014). These measures include
price controls, taxes and quotas. These policy measures have proven to be inefficient for the long
run and are responsible for market failures. However doing away with these policy restrictions
would prove detrimental to the environment, as it would lead to over-exploitation.

7TRADE THEORIES IN SCARCE RESOURCES
To sum up, scarce resources are an indispensable aspect governing trade decisions and
exports. Trade in these resources is different from the trade in other resources. Countries having
limited supply of domestic resources benefit by trading in those resources by specialization. This
increases efficiency and provided countries revenues, which can be reinvested for further
production and diversification. On the other side, this re-investment can lead many
environmental issues due to over-exploitation like pollution, loss of biodiversity and many more
effects that are adverse. These can be controlled by proper management of these scarce resources
and mitigating the harmful effects inflicted on the environment as a side effect of these economic
activities. Apart from this political debate regarding these scarce resources and their future
availability for the future generations, a concern for the environment and the steady rise in prices
is leading to a fall in the overall welfare of the people. Thus, the social impact is negative. Trade
in these scarce resources will increase by greater degrees in the future it is important to
incorporate international cooperation and domestic policies that can sufficiently contribute
towards efficiency gains, elimination of the adverse effects of extraction and the use of natural
resources along with increased market price stability. Policy makers require a deeper
understanding of challenges to make a coherent theoretical framework.

8TRADE THEORIES IN SCARCE RESOURCES
References
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