We Are All in the Same Boat: Cross-Border Spillovers of Climate Risk through International Trade and Supply Chain
IMF Working Papers, January 22, 2021
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- We Are All in the Same Boat: Cross-Border Spillovers of Climate Risk through International Trade and Supply Chain
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Bibliographic details
- Authors: Alan Feng, Haishi Li
- Published: January 22, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513564586.001
Summary and core findings
- Study timeframe: historical data between 1970 and 2018.
- Globalization increased the similarity of countries’ global climate risk exposures.
- Exposures to foreign climatic disasters in major trade partner countries (both upstream and downstream) lower the home-country stock market valuation for:
- the aggregate market, and
- the tradable sectors.
- Exposures to foreign long-term climate change risks reduce the asset price valuations of the tradable sectors at home.
- Climate adaptation efforts in a country can have positive externalities on other countries’ macrofinancial performance and stability through international trade.
Mechanism and scope
- Cross-border spillovers operate through international trade and supply chain linkages.
- The analysis links physical climate risks (disasters and long-term change) in trading partners to domestic asset valuations, with effects observed for landlocked and non-landlocked countries via trade exposure.
Policy implications and recommendations
- Domestic climate adaptation can yield international macrofinancial benefits by mitigating spillovers through trade and supply chains.
- Policymakers should consider cross-border externalities of adaptation when designing climate resilience strategies.
- Financial regulators and market participants should account for foreign climatic disaster exposure and long-term climate change risk in assessing asset valuations, especially in tradable sectors.
Subject tags and keywords (as listed)
- Subject: Climate change, Economic sectors, Environment, Financial markets, Financial Sector, Foreign currency exposure, Money, Natural disasters, Stock markets
- Keywords: assets ratio, Climate change, climate risk, disaster damage, expected return, exposure measure, Financial sector, financial spillover, financial stability, Foreign currency exposure, Global, Natural disasters, risk exposure, spillover index, Stock markets, supply chain, WP
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- Working Paper