Do Natural Disasters Stimulate Trade? by Chenmei Li

Typically, disasters are seen as disruptions of normal economic activity and thus reducing trade. However, the existing empirical evidence for a negative relationship between disasters and trade is contradictory. On the contrary, it has been recognised that disasters may stimulate trade. How come? And what are the policy implications of this finding?


While this article deliberates on these central questions in brief, the motivation to write this article stems from my recently published collaborative work (Li and van Bergeijk 2019 in Nitsch and Besedes) on the same subject where this topic is discussed in greater detail.

Ensuring economic resilience and preventing trade disruptions has been an important issue for research and policymaking. The impact of natural disasters, closely related to this issue, is thus a topic of rising relevance for development studies. This is particularly true for countries that suffer often from natural disasters, especially the Small Island Development States (SIDS). In general, the occurrence of natural disasters has also been increasing over the past decades.

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Pic 2.pngFurther, disasters are commonly seen as disruptions in the normal economic activity and thus causing reduction in trade (e.g. Gassebner, Keck and Teh 2010; Oh and Reuveny 2010; Martincus and Blyde 2013; Hayakawa, Matsuura, and Okubo 2015). However, the existing empirical evidence does not convincingly support a negative relationship between disasters and trade, both when it comes to imports and exports (Li and van Bergeijk 2019).

Creative destruction

Disasters could also potentially impact trade positively, as recognized by more recent studies, through demand, technology upgrading and firm productivity. For example, disasters generate import demand in order to replace the lost production (Adam 2013). From a supply side perspective, Pelli and Tschopp (2012) pointed out the creative destruction aspect of disasters, supported by micro evidence from Yogyakarta Indonesia (Brata, De Groot and Zant 2018). The evidence suggests that the 2006 earthquake in Indonesia had a ‘cleaning effect’ on the manufacturing sector, forcing out unproductive firms, and opening rooms for new firms, which are recognized to be even more productive and have higher productivity growth than the surviving firms.

Recent macro level empirical evidence from 63 countries supports the counterintuitive idea discussed above (Li and van Bergeijk 2019). The main finding is that the natural disasters are associated with higher trade growth, both regarding imports and exports. In addition, the evidence suggests lower level of development is associated with higher disaster resilience. In particular, Least Developed Countries (LDCs) appear to have higher trade resilience, possibly due to better access to aid and greater awareness of the aid community. Preliminary evidence suggests Foreign Direct Investment (FDI) enhances trade resilience by different mechanisms for imports and exports. The enhancing effect for imports is associated with FDI flows while for export it is linked to FDI stocks. It is suggested that the political system, i.e. level of democracy, the often-assumed significant factor to resilience, is not determinative.

Implications

What does this finding imply? First of all, the study suggests that trade is even more important than normally thought. The countries that encounter more natural disasters, i.e. SIDS, are often the ones that largely depend on global markets. In a world of de-globalization (van Bergeijk 2019), trade resilience and preventing trade disruptions should be given attention for research and policy-making, and should be considered as a global joint task.

Second, mechanisms that are primarily discovered to cope better with, or even take advantage of natural disasters, offer new insights to policy makers. For example, giving priority to attract FDI could be an effective method to remain resilient. After natural disasters, a group of new firms with great growth potential is likely to emerge. Providing appropriate support to these firms could contribute to better economy. However, this requires more research on firm behavior after a natural shock as suggested by Brata, De Groot and Zant (2018).

It may be difficult to conclusively state whether disasters are good or bad for trade. The conclusiveness suffers from limitation of econometric methods. And there is a lack of country case studies on this subject. However, the importance of trade and investment flows for the resilience against natural disasters is clear. This gives extra reasons for policy makers and the international communities to be alert to possible trade disruption. This might be of particular significance given the current global dynamics, where the China-US trade war, Trumpism, and Brexit often dominate the headlines and create threat to global trade.


References:
Adam, C. (2013). Coping with adversity: The macroeconomic management of natural disasters. Environmental science & policy, 27, S99-S111.
Bergeijk, P.A.G. van (2010). On the Brink of Deglobalization: An alternative perspective on the world trade collapse. Deglobalization 2.0
Brata, Aloysius GunadiA.G. & de Groot, Henri H.L.F. & Zant, Wouter. (2018). Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia). Economies. 6. 26. 10.3390/economies6020026.
Chenmei Li and Peter A.G. van Bergeijk. (2019). Do Natural Disasters Increase International Trade? In Nitsch, V. and T. Besedes (eds), Disrupted Economic Relationships, MIT Press: Cambridge, MA. (Book chapter A). https://mitpress.mit.edu/books/disrupted-economic-relationships
Gassebner, M., Keck, A., & Teh, R. (2010). Shaken, not stirred: the impact of disasters on international trade. Review of International Economics, 18(2), 351-368.
Hayakawa, K., Matsuura, T., & Okubo, F. (2015). Firm-level impacts of natural disasters on production networks: Evidence from a flood in Thailand. Journal of the Japanese and International Economies, 38, 244-259.
Oh, C. H., & Reuveny, R. (2010). Climatic natural disasters, political risk, and international trade. Global Environmental Change, 20 (2), 243-254.
Pelli, M., & Tschopp, J. (2012). The Creative Destruction of Hurricanes. http://www.freit.org/RMET/2012/SubmittedPapers/Martino_Pelli03.pdf.
Trade and Openness During the Great Depression and the Great Recession Edward Elgar: Cheltenham.

About the authors:

Chenmei

Chenmei Li is currently a Project Specialist at Institute of New Structural Economics at Peking University, Beijing. She was in Economics of Development program, Batch 2014-15 at ISS. During the program she worked with Professor Peter van Bergeijk on the DEC research project “Crisis, deglobalization and developing countries”.pag van bergeijk

Peter van Bergeijk (www.petervanbergeijk.org) is Professor of International Economics and Macroeconomics at the ISS.

 

 

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