Climatic natural disasters, political risk, and international trade

This paper statistically analyzes the effects of climatic natural disasters and political risk on bilateral trade in a large-N sample of countries and years. Our theory suggests that the effects of these forces on trade need to be studied together and that the two forces may interact with one another. In the statistical analysis, the unit of analysis is a pair of countries and the model is based on the trade gravity design. The results show that the direct effects of increases in the incidence of disasters and the political risk level in the importer or the exporter countries are negative, reducing trade. The results for the interaction between the two forces show (1) as the incidence of disasters increases, the marginal effect of political risk on trade becomes more negative, which indicates a greater decline in trade and (2) as political risk declines the marginal effect of disasters becomes less negative, indicating a smaller decline in trade. Additional analyses demonstrate the robustness of these results to changes in model specification, disaster measure, and estimation method. In the bigger picture, our findings suggest that if climate change increases the incidence of climatic disasters as projections of the global science suggest, the growth of economic globalization may decline, ceteris paribus. (C) 2009 Elsevier Ltd. All rights reserved.