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 micro-

level 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 Organisation’s (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, which can be bigger or equal to 1.

- Normalised to 1. No arbitrage between countries implies:

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

Local price of the domestic variety of crop in country

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.