Exploring the Role of Energy Consumption and Labour Productivity in Understanding the Effects of Climate Change on International Trade

ABSTRACT Climate change can influence international trade through several mechanisms, including infrastructure damage, disruptions to energy systems and reductions in labour productivity. Recent evidence for the United States also suggests that energy consumption responses play a central role in transmitting the real effects of natural disasters. Using a panel of 67 countries from 1986 to 2016, we examine whether rising temperatures and extreme weather events (wildfires, floods, extreme temperatures, epidemics, insect infestations, storms, droughts and landslides) affect countries' primary energy‐intensity consumption and labour productivity, two mechanisms that may subsequently shape international trade patterns. Our results show that improvements in energy intensity, particularly in several European economies, constitute a channel through which higher temperatures influence international trade, effectively positioning these countries as potential beneficiaries of warming. By contrast, the trade effects of extreme events appear not to operate through energy intensity or labour productivity. Additional evidence reveals substantial country heterogeneity, with China playing a prominent role. Large‐scale post‐disaster infrastructure investments may have shifted the relative performance of domestic versus international trade flows in this country.