Environmental degradation and comparative advantage reversal

Abstract

With the climate rapidly changing and a substantial part of the economy relying on the environment for its productivity, can current competitive advantages and trade patterns be assumed to stay the same in the future? In order to tackle this question, we propose a Comparative Advantage model in which productivity of countries is assumed to be negatively affected by environmental degradation, with larger impacts on the productivity of developing countries. We show that comparative advantages may invert if the environment is sufficiently degraded, leading to a reversal in product specialisation of countries that might make some agents worse off in an open economy.