Impact of Climate Change on International Trade: An Empirical Estimation

Zia Ul Islam, Dr George Thomas

Abstract: The purpose of this article is to examine how climate change affects bilateral trade flows. To achieve this, we employ a theory-based gravity model to analyze bilateral trade data from 10 countries spanning the years 2000 to 2016. We utilize temperature variations and extreme weather occurrences, along with their repercussions, as indicators of climate change. Overall, our findings indicate that international trade flows are less influenced by temperature changes compared to domestic trade flows, whereas the reverse is true for extreme weather events. Notably, there is significant variation among countries and types of events. Specifically, our results indicate that biological events, such as epidemics and insect infestations, along with extreme temperatures, storms, and landslides, negatively impact international trade flows more than domestic ones. Furthermore, the roles of China and Japan are particularly significant in shaping the overall results, with storms affecting China and extreme temperatures impacting Japan. Lastly, our General Equilibrium analyses reveal that insect infestations and extreme temperatures have a more severe adverse effect on welfare compared to other events.

Keywords: weather events, Temperatures, Domestic and International flows, and Climate change