Staff Working Paper No. 1,160
By Maximilian Huppertz
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. I use an augmented gravity framework to show that rising temperatures at the origin or destination country increase bilateral trade costs. Adaptation to these impacts is slow. The impact appears to be driven by the vulnerability of sea ports to climate change. Combining these results with a standard international trade model, I find that 2010s welfare would increase by 1.6 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 neighbours' trajectories. Poor and rich countries are roughly equally harmed. Smaller economies, which are more reliant on international trade, are especially affected. Ignoring this trade cost channel and focusing only on productivity effects leads to a 9% underestimate of the welfare impact of climate change. Because it is based on a gravity framework, my methodology can easily be embedded in studies of the impact of climate change.
Climate change increases bilateral trade costs 