The world’s economies and cultures have become more interconnected, and trade has driven the growth of many developing economies. This growth has led to a reduction in absolute poverty levels, higher living standards and more employment, greater variety and quality of goods, and more opportunities around the globe. It is perceived as a driver of economic growth, welfare, political freedom, security and technological innovation. There are some significant downsides to globalised trade mostly related to the outsourcing of jobs such as exploitation and oppression, sometimes even child labour and no safety protection. These problems are receiving more and more attention in the last years and can be minimised in the future with enough regulations and awareness.
While long-term effects of trade and on trade are very important, one other particular field is getting more attention in the last years: exogenous shocks. With the start of 2020 the world experienced many unpredictable events. The bushfires in Australia spread across all states and become some of the most devastating on record. The world feared a “world war 3” with the escalating pressure between the US and Iran. Right afterwards, the coronavirus affected everyone’s life in unexpected ways and led the world economy to a recession. These current events give motivation for more research concerning exogenous shocks. Most of the related literature so far examines the macroeconomic impacts but the effects on trade are also of the utmost importance. Therefore, I will concentrate on the effect of exogenous shocks specifically on trade and how trade mitigates (or exacerbates) the effects of such shocks. My main focus is natural disasters.
The presented studies can be divided into two strands of literature, which are relatively independent from each other: The first one focusing on natural disaster effects on trade, and the second one estimating whether trade mitigates effects of natural disasters.
For the first part, I mainly concentrate on a recent paper by Gassebner et al. (2010), which examines data on disasters in 170 countries between 1962 and 2004 using a gravity model. I explain their methodology and include rela
Findings on the effects of natural disasters on trade are more ambiguous, but at least it can be said that exports seem to be affected negatively by occurrence and severity of disasters in the exporting country. Imports may decrease, increase, or remain unaffected by natural disasters. Regarding heterogeneous effects, small, poor, and hot countries with low degrees of institutional quality and political freedom seem to face the most detrimental effects on their trade flows.
Droughts were inevitable in India even without global warming due to its hot climate and warmer temperatures in the Pacific. Millions of people have died as a result of famine in the last three centuries. This is due to the fact that the population relies mainly on agriculture which is heavily dependent on climate.
The rest of the paper is structured as follows. Section 2 presents the studies for the impact of natural disasters on trade. Section 3 reviews the literature on how trade mitigates the effects of climatic shocks. In Section 4 I discuss the researches and observe possible issues. Finally, section 5 concludes.
