HKC09 - Climate change increases bilateral trade costs

It is well established that climate change affects productivity, but its effects on trade costs have not been studied. I combine international trade and weather data covering 190 years and show how an augmented gravity framework can be used to estimate the impact of climate change on bilateral trade cost. I find that climate change, as measured by decadal temperature shifts at the origin or destination country, increases them. Adaptation to these changes seems slow. They appear to be driven by impacts on maritime trade in particular, perhaps due to the vulnerability of seaports to climate change. Combining these results with a standard international trade model, I find that 2010s welfare would increase by 1.7 percent if we could undo the impact of climate change on trade cost over the preceding 100 years. Welfare gains depend not only on countries’ own climate trends, but also on their neighbors’ trajectories. Smaller economies, which are more reliant on international trade, are especially affected. Ignoring this trade cost channel and focusing only on productivity impacts leads to a nine percent underestimate of the welfare effect of climate change, with larger differences for smaller open economies. Because it is based on a gravity framework, my methodology can easily be embedded in studies of the impact of climate change.