Extreme Heat and the Domestic Value‐Added Ratio in Exports

ABSTRACT The impact of climate change on economic activities is an issue of widespread global concern. Using firm‐level data from China during 2000–2014, this paper examines how local extreme heat shocks affect firms' participation in global value chains, measured by the domestic value‐added ratio in exports (DVAR). Our results reveal that one additional day with a temperature exceeding 33°C in a given year leads to a decrease of 0.138% in the DVAR of Chinese firms. A back‐of‐the‐envelope calculation for the entire country suggests that each extra day of extremely high temperature was associated with an annual loss of USD 16.19 million in value‐added through export. The underlying mechanisms operate through two main channels: a direct productivity channel, in which extreme heat lowers labor productivity, and an indirect substitution channel, whereby firms increase their reliance on imported intermediate inputs from regions with lower climate risks. These mechanisms suggest that local heat shocks can propagate across supply chains, reshaping international production patterns. By emphasizing how climate risks transmit through production networks, this study provides new evidence that environmental shocks can become important determinants of comparative advantage in global trade.