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Weather Variations and International Trade

The literature on the effects of climate change on the economy concentrates on the effects in countries, if they were independent from other countries. In this chapter, I take into account that countries are interdependent and that climatic shocks that affect a country will also affect other countries through international trade. I thus investigate the effect of weather variations in the exporter and importer countries separately, as well as a the difference between weather variations in both countries, on bilateral trade flows, and on the revealed comparative advantage. The analysis is done at the country, sectoral and product levels, worldwide, and over the 1992-2014 period. I find a negative effect of temperature variations in the exporter country and in the difference between exporter and importer countries, on bilateral trade, at the country level. At the product level, both negative and positive effects arise, but the negative effect of temperature dominates. The temperature effects are on the agricultural and manufacturing sectors, especially in the textile and metals sectors. I show that possible channels are the impact of temperature on output and labour productivity. The negative impacts are larger in exporter countries that are closer to the Equator, that have lower quality of institutions, and that export to more remote countries. If countries are able to adapt to climate change, the long term effects of temperature variations should be lower than the contemporaneous effect. Nevertheless, my results on the long term effects analysis do not support this hypothesis, suggesting no or very low adaptation. Moreover, the negative effect of temperature is persistent and cumulative through several years after the temperature shock. Concerning precipitation variation effects, they are found mainly at the product level, with the positive effect dominating for the affected products. The results suggest that weather variations also affect bilateral revealed comparative advantages, mainly for the weather sensitive products that I identify in the analysis.

JEL codes: F14, F18, Q56.

Keywords: climate change, trade diversification, weather shocks.

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