Evolving Comparative Advantage and the Impact

of Climate Change in Agricultural Markets:

Evidence from 1.7 Million Fields around the World
(Costinot, Donaldson and Smith, 2014)
International Trade

Tiago Matos

Outline

Introduction

Theory

Estimation Procedure

Estimation Results and Model Fit

Simulations of Climate Change

Concluding Remarks

Introduction

The impact of Climate Change in a globalised

world

Analysis build up on one simple observation: When countries can trade, the impact of microlevel shocks does not only depend on their average level, but also on their dispersion over
time.

Basic idea:

A wheat farmer cares not only about what CC does to the yields of the crops he could have
produced as well as their (relative) prices, which depend on how other farmers (relative) yields
are affected around the world.

Trade-openness can mitigate the ill-effects of climate change if it leads to more heterogeneity in
productivity within and between countries.

Trade openness can exacerbate the ill-effects of CC if the opposite occurs.

Empirical Strategy

Authors use the Food and Agriculture Organisations (FAO) Global Agro-Ecological Zones
(GAEZ) dataset.

1.7 million grid-cells (fields) covering the surface of the planet.

They cover 50 countries and 10 crops. They span the vast majority of world crop agriculture.

Usefulness of the dataset:

1. State of the art agronomic models to predict yield of given crop at each cell (based on
soil, topography, climate,)
2. 1.7 million grid-cells leads to plenty of scope for within country heterogeneity (which we
will see is important)

Predicted Change in Productivity due to Climate

Change

Predicted Change in Productivity due to Climate

Change

Theory

Basic Environment

Multiple Countries (denoted by i)

Only factors of production are fields (land-L) and labor (N)

- Keep in mind that they should be thought as equipped land
- All fields have the same size normalised to 1.

Fields can be used to produce multiple goods

- Goods k=1,, K are crops
- Good 0 is an outside good.

Preferences and Technology

Representative agent in each country with two-level utility function

Total Output of good k in country i:

Denotes the total factor productivity of each parcel of w

allocated to crop k in country i

measures the labor intensity of the

associated production process

Market Structure and Trade Costs

All market are perfectly competitive.

Trade is (potentially) costly:

Trade in crops k=1,, K is subject to iceberg trade costs,
bigger or equal to 1.

which can be

- Normalised to 1. No arbitrage between countries implies:

Local price of the domestic
variety of crop in country

Outside good (i.e. k=0) is not traded.

Competitive Equilibrium

Consumers maximise utility:

Firms maximise profits:

Given factor allocation, total output for good k in country i:

Competitive equilibrium is set for producer price P, output Q and consumption C such that
previous equations hold.

Estimation Procedure

What they do?

Aggregating up the GAEZ data requires an economic model:

1. Maximising agents (Consumers and Farmers)
2. Barriers to trade between countries
3. General Equilibrium (Supply = Equals demand in all crops and countries
4. A metric for aggregate welfare

They construct a simple (?) quantitative trade model:

- Estimate the 3 key parameters
- Evaluate goodness of fit
- Solve model under baseline and climate change GAEZ scenarios (future scenarios - predictions)

What they do?

Once they know all estimates of parameters, equilibrium for the economy is
calculated.

Baseline to assess model fit and provide model consistent benchmark

Under new productivity levels that are obtained under CC with full adjustment.

Under CC but while shutting down various models of adjustment (trade).

They estimate preferences, technology and trade costs.

After painful theory I will not bore you with all the math but will just present the
results.

Estimation Results and Model Fit

Goodness of Fit

Goodness of Fit

Goodness of Fit

Goodness of Fit

Simulations of Climate Change

Scenarios

Scenario 1: Baseline, matching the actual data (2009). True

Impact, full output adjustment (Output and Trade);

Scenario 2: Climate change, trade costs remain at baseline, and

there is no output adjustment, they cannot change what they
produce. (difference between 1 and 2);

Scenario 3: Climate change, Autarky (no trade), full adjustment of

production. The idea is to identify the benefits of being able to trade.
(difference between 1 and 3).

Concluding Remarks

Conclusion

Agronomists provide very detailed micro-level estimates

- Predictions about implications of CC for crop yields, crop by crop and location by location.

The authors have developed, and estimated a trade model to quantify the macro-level
consequences of the micro-level shocks to 1.7 million locations.
- Model highlights that in an interdependent world the key question is what will CC do to
comparative advantage?

With this model they find that the impact of CC would amount to a reduction of 0.26% of global
GDP when trade and production patterns are allowed to adjust.

While trade adjustments plays little role in explaining the magnitude of these effects, the paper
suggests that production adjustments caused by the evolution of comparative advantage
substantially mitigate the ill-effects of CC.

Outlook

Much land is just not cultivated, at most used for pasture;

Using yield of crops might not be the best option. One possible
substitute would be profitability since some crops might be
profitable on India but would not be in Switzerland depending on
different variables.

They use as a climate change, the rise in temperature but other kind
of phenomena can maybe influence the results in a different way.

Thank you for your attention.