Conference Agenda

It is well established that climate change affects economic production, but its effects on trade costs have not been studied. I use international trade and weather data covering almost 200 years to show that climate change increases trade costs. Estimating a simple augmented gravity framework, I find that rising temperatures at the origin or destination country increase bilateral trade cost, possibly driven by the vulnerability of sea ports 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, I find 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. Welfare gains depend not only on countries' own climate trends, but also on their trends relative to neighboring countries --- when countries experience less drastic climate change than their neighbors, they see relative trade cost gains and therefore less severe welfare losses. Looking at the distribution of gains, poor and rich countries are equally harmed by climate induced trade cost increases. Smaller economies, which are more reliant on international trade, are especially affected. A counterfactual exercise shows that ignoring this trade cost channel and focusing only on productivity changes leads to a ten percent underestimate of the welfare effect of climate change. The welfare effects I find are consistent in magnitude with recent, larger estimates of the welfare impact of climate change. Because it is based on a gravity estimation, my methodology can easily be embedded in studies of the impact of climate change.