Climate Change Increases Bilateral Trade Cost

It is well established that climate change affects economic production, but its effects on trade costs have not been studied. Max uses international trade and weather data covering almost 200 years to show that climate change increases trade costs.

Estimating a simple augmented gravity framework, he finds that rising temperatures at the origin or destination country increase bilateral trade cost, possibly driven by the vulnerability of seaports to climate related adverse weather events. Adaptation to this impact appears to be slow, which is concerning given the increasing pace of climate change. Combining these results with a standard international trade model, he finds that 2010s welfare would increase by 2.6 percent if we could undo the impact of climate change on trade cost over the preceding 100 years. A counterfactual exercise shows that ignoring this trade cost channel and focusing only on productivity changes leads to a roughly ten percent underestimate of the welfare effect of climate change. The welfare effects Max finds are consistent in magnitude with recent, larger estimates of the welfare impact of climate change. Because it is based on a gravity estimation, this methodology can easily be embedded in studies of the impact of climate change.

About Maximillian Huppertz

Max is a Research Economist at the Bank of England. He studies the impact of climate change on firms and trade and has also worked on the effect of information frictions on supply chains. Max uses reduced-form and machine learning methods to identify causal relationships and combine them with structural models to understand equilibrium and policy implications. He received his PhD from the University of Michigan in 2024.