• WTO report says climate change is likely to increase trade costs unevenly across regions
• The report says transport infrastructure is at risk of damage from gradual climatic change and extreme weather events that ruin roads, bridges, runways and railway tracks faster
• Maritime transport, which moves 80% of world trade by volume, is particularly vulnerable and exposed to climate change, and so are ports
Climate change is likely to increase trade costs unevenly across regions, according to a report by the World Trade Organization on the economic impact of extreme weather events (EWEs) such as this year’s Pakistan flooding, droughts in Africa, and transport-paralyzing drying up of great rivers in the United States and Europe.
Pakistan’s deadliest flooding in more than a decade that lasted from mid-June to October this year has caused economic losses that leading financial institutions said was over US$15.2 billion. Damage to property and infrastructure was estimated that the government says would cost about $16.3 billion to rebuild and rehabilitate.
WTO’s “World Trade Report 2022: Climate change and international trade” released in November says transport infrastructure is dangerously at risk of damage both from gradual climatic changes and from EWEs, as rising temperatures can depreciate roads, bridges, runways and railway tracks faster.
Transport infrastructure and inland waterways can become partially or completely inoperable due to EWEs and sea level rises in coastal regions. Climate change will raise infrastructure maintenance and repair costs, indirectly increasing trade costs. WTO says the unpredictability of EWE-caused damages causes uncertainties and high operational risks that can increase disruptions and delays, thus creating additional costs, such as requiring freight insurance.
While all transport modes are likely to be hit by EWEs, maritime transport – the mover of 80% of world trade by volume – is particularly vulnerable and exposed to climate change.
In a worst-case “high emission” scenario where greenhouse gas (GHG) emissions increase rise unchecked and global temperatures rise about 4°C by 2100, the number of ports at extremely high, very high or high risk from multiple climate hazards could almost double from 385 to 691 key ports globally out of 2,013 examined.
Greater heat stress, increased coastal flooding and overtopping due to sea level rise can have a strong impact on waterways and port capacity, impact hit trade by exacerbating bottlenecks, capacity constraints, congestion and delays, and increasing trade costs.
For example, in the three months following Hurricane Katrina in 2005, Gulfport and the Port of New Orleans saw direct reductions of 71% to 86% of both exports and imports due to destroyed port facilities. While developed and larger economies tend to have a more diversified and resilient transport infrastructure, small or landlocked countries with trade flowing through a limited number of ports and trade routes are especially vulnerable.
Climate change has caused the US’ Mississippi River’s water level to drop several meters, forcing cargo ships to operate at half or lower capacity to transport farm commodities and other goods, causing significant congestion and delays around the waterways and ports. Other rivers, including the Danube and the Rhine in Europe, are experiencing similar situations.
The report said climate impact on transportation could positively affect some regional transport networks. For instance, melting ice may open new, shorter shipping routes. The Arctic ice cap thaw could clear a northwest passage in certain months, cutting shipping times and distances between Asia and Europe up to 40%. Gains from such routes are still uncertain.
If temperatures rise in the absence of robust adaptation measures, climate change will have profound effects on trade in agriculture. For countries that will lose agricultural productivity, or negative yield shock, the impact on trade will depend on the impact of the shock in other countries. Sub-Saharan Africa and South Asia are often projected as the most vulnerable to climate change effects.
Climate change is also likely to raise agricultural trade volatility. The possibility of simultaneous production losses of over 10% in the four largest corn-exporting economies in any given year could rise from 0% to 7% due to 2°C, and to 86% due to 4°C global warming. That would cause widespread shortages and world price surges of these commodities.
Manufacturing sectors tend to be less vulnerable to climate change, partially due to a lower sensitivity and higher adaptive capacity to climatic variability. Industrial sectors dependent on climate-sensitive inputs, such as food processing, labor-intensive sectors and sectors highly integrated into global value chains may be affected, the report said.
Climate change also impacts manufacturing through disruptions in supply chains. For instance, the 2022 floods in Pakistan destroyed about 40% of its cotton crop, severely impacting the textile industry, which relies heavily on domestic cotton production for raw materials.
Adverse effects of local weather events can spread along supply chains and across countries, the report said. For example, in 2011, floods in Thailand disrupted the global electronic and auto industries, causing global output to dive 80% year-on-year in November 2011 and an estimated 2.5% decline in global industrial output. Japanese carmakers heavily dependent on intermediate inputs from Thailand produced at least 423,000 fewer cars in 2011 because of the floods.
The report concludes that major economic investment and ambitious policy actions will be required to steer the global economy towards a sustainable, low-carbon growth trajectory to mitigate climate change and adapt to its disruptive and costly consequences. Thus, both climate change and climate policies will have significant consequences for international trade and trade policies.
“Given the crosscutting nature of climate change, trade and climate change policies need to be mutually supportive. This requires coordination, coherence and transparency,” the report says.
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