Heat Waves Cause Exports to Plummet Worldwide

Extreme heat causes labour productivity to fall. The resulting supply losses are having an impact on international trade: Fewer goods are exported overall and importers have to accept the losses of the affected exporters or switch to other exporters, which causes additional costs. A study by ZEW Mannheim and the Frankfurt School of Finance & Management shows for the first time that substantial parts of the economic damage occur in countries that are not even directly affected by the temperature shocks.

The researchers found that exports fall by an average of 3.4 per cent when the average monthly temperature in a country is at least 30° C – compared to a month when the average temperature is below this threshold. Other definitions of a heat wave show similar results. Decisive for the extent to which exports decline due to climate change is the labour intensity of the goods. “In the study, we found that the negative effects of heat on exports are most pronounced where trade is preceded by labour-intensive production processes,” says Dr. Daniel Osberghaus, senior researcher in the ZEW Research Unit “Environmental and Climate Economics” and co-author of the study. Heat can reduce labour productivity and labour supply, which manifests itself in supply declines – especially for labour-intensive products.

Even if extreme weather events occur locally, they affect trade on a global scale. This is because the local decline in supply is causing importers to look for alternative options: “Importing countries try to compensate for supply losses by purchasing goods from third countries. However, this often results in higher costs,” says Osberghaus. The researchers found that an average heat wave incurs costs of around 360 million US dollars due to declining imports worldwide. “Two-thirds of these costs are borne by countries that were not directly affected by the heat,” says co-author Professor Oliver Schenker of the Frankfurt School of Finance & Management.

It is foreseeable that economic losses due to climate change will not decrease in the future. Based on a middle-of-the-road climate projection, i.e. a scenario of global climate development that is neither too pessimistic nor too optimistic, the researchers calculated the trade losses to be expected from future heat waves. Accordingly, annual global trade is reduced by about 735 million US dollars in the period 2020–2039 compared to 2015. However, it is also certain that protectionist trade policies do not help to solve this problem. On the contrary, “it is precisely global trade with its substitution possibilities that reduces the economic losses caused by climate change,” says Schenker.