Li Haishi | In the Same Boat: Cross - border Spillover Effects of Climate Shocks on International Tr

Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.Assistant Professor, Business School, University of Hong KongLi HaishiAttendDepend onCIFERAssistant ResearcherPostdoctoral Fellow, Tsinghua University PBC School of FinanceFeng LuHostGreen Trade Sub-Forum 11，Sharing with collaborators (see below) on the topic of"Sailing Together: The Cross-Border Spillover Effects of Climate Shocks on International Trade and Supply Chains"》(We Are All in the Same Boat: Cross-Border Spillovers of Climate Shocks through International Trade and Supply Chain）The article.

Li HaishiHe is an Assistant Professor of Economics at the Business School of the University of Hong Kong. His research focuses on international trade and international macroeconomics, with interests encompassing transnational production, trade policy, and climate change.

Li Haishi

This paper finds that natural disasters suffered by a country can affect the macroeconomic and financial markets of its major upstream and downstream countries (i.e., major import sources and major export destinations) through international trade networks, and provides rich empirical evidence using monthly natural disaster data and bilateral trade data.

The country-monthly trade data in this paper comes from the Direction of Trade Statistics (DOTS). Major upstream countries are defined as those from which imports account for the highest share of a country's total expenditure, and major downstream countries are defined as those from which exports account for the highest share of a country's total output. Climate disaster data comes from the Emergency Events Database (EM-DAT), related geographic data from the Geocoded Disasters (GDIS) Database, infrastructure data from the United Nations Code for Trade and Transport Locations Database, stock market data from Refinitiv Datastream, and other macroeconomic data from International Financial Statistics (IFS), WIOD, and the OECD.

Based on the panel data constructed from the aforementioned data, this paper conducts a series of detailed empirical analyses. The paper finds that climate disasters damaging port facilities significantly reduce the total imports and exports of affected countries, exports to major downstream countries, imports from major upstream countries, and total output. In the four months following a climate disaster, affected countries experience an average monthly GDP decrease of 0.45%, exports a decrease of 0.11%, and imports a decrease of 0.11%. However, other disasters that do not affect ports do not have a significant negative impact on trade. Climate disasters damaging port facilities also significantly reduce the GDP of major upstream and downstream countries; in the four months following a climate disaster, the GDP of major downstream countries decreases by 0.38%, and that of major upstream countries by 0.35%. Natural disasters lead to supply chain restructuring, with affected countries experiencing a decrease in the share of their total output in exports to downstream countries, but an increase in the share of their total expenditure in imports from upstream countries.

To further analyze the channels through which climate disasters impact upstream and downstream countries, this paper constructs a formula that decomposes the total impact on GDP of upstream and downstream countries into demand/supply shocks (fixed trade share) and trade disruption effects. The study finds that export disruption slightly reduces downstream GDP, while supply chain restructuring significantly mitigates the negative impact of climate disasters on upstream GDP. Other disasters that do not affect ports have no significant negative impact on the macroeconomy of upstream and downstream countries.

To analyze the impact of climate disasters on stock market returns of major trading partners, this paper employs event analysis, a common method in financial literature. It finds that both overall stock market returns and stock market returns in the tradable sector of major upstream and downstream countries are negatively affected by climate disasters. A comparison is made between the 20 trading days before and 80 trading days after the disaster. The overall stock market index of major trading partners declined by 0.5%, with this negative impact varying across different industries; only the tradable sector was significant. For example, the automotive sector index declined by 2% after a foreign natural disaster. Through cross-sectional analysis, this paper finds that exposure to foreign natural disasters (the product of the disaster's damage as a percentage of GDP of upstream and downstream countries and their trade share) and sector tradability significantly increase stock market losses. Considering the importance to financial stability, this paper focuses on the financial sector, finding that countries with higher financial risk are more affected by foreign disasters.

Finally, this paper also analyzes the long-term impacts of climate disasters.This paper uses the P/E ratio to measure stock market valuation and constructs an analysis of foreign climate change risks using national-level climate risk indicators and trade share data. The analysis finds that, in the long term, international trade plays a more significant role in mitigating climate change risks.ofCountries exposed to foreign climate change risks experience a significant negative impact on the stock market valuations of their tradable sectors, regardless of trade openness or whether their trading partners are large, wealthy, or high-growth countries.

Feng Lu

CIFERAssistant Research Fellow, Tsinghua University PBC School of Finance (Postdoctoral Fellow)Feng LuThe review affirmed the paper's contributions, particularly its focus on the escalating climate change issue and the global carbon neutrality target. The paper points out that climate disasters can impact affected countries' major trading partners and even financial system stability through international trade, filling gaps in existing research on the impacts of climate change, financial stability, and production and trade networks, thus possessing significant policy implications. However, Feng Lu also raised three issues: first, climate disasters are spatially concentrated in certain regions and temporally in certain seasons, and this spatiotemporal correlation threatens the paper's identification of the trade transmission mechanism of climate disaster impacts; second, the paper uses total trade flows to calculate trade share, which differs somewhat from the supply chain issue mentioned in the title, suggesting the use of input-output tables to construct supply chain indicators to identify this mechanism; and third, whether the trade disruption effect can be further decomposed into the impacts of productivity changes and trade cost changes caused by climate disasters.

Professor Li Haishi thanked Dr. Feng Lu for his comments and responded to the three questions. Regarding the first question, Professor Li stated that they had conducted some robustness checks to mitigate the issue, which would be further emphasized in the subsequent article. Regarding the second question, Professor Li noted that since they were analyzing monthly trade data and currently lacked monthly input-output information, they suggested considering other methods to measure supply chain factors. Regarding the third question, Professor Li believed that the simplified empirical study in this paper was difficult to further decompose and suggested that a structural model could be used for in-depth analysis in the future.