Climate-Related Flooding May Quickly Disrupt Global Trade Chains

U.S.-China Exchange Especially Vulnerable

by Earth Institute | May 28, 2018

Intensifying river floods caused by global warming may hamper national economies worldwide, with effects propagating through global trade and supply networks, a new study says. It projects that China will be hit hardest, with an 80 percent increase in floods, and that the United States might in turn be particularly vulnerable to radiating effects, because of its unbalanced trade with China. The study says economic losses worldwide due to river floods could increase by more than 15 percent, accumulating to a total of about $600 billion over the next 20 years. The research was published today in the journal Nature Climate Change.

“Climate change will increase flood risks in the next two decades, and this is not only a problem for millions of people but also for economies worldwide,” said project leader Anders Levermann of the Potsdam Institute for Climate Impact Research (PIK) and Columbia University’s Lamont-Doherty Earth Observatory. Lead author Sven Willner of PIK said, “Through supply shortages, changes in demand and associated price signals, economic losses might be down-streamed along the global trade and supply network, affecting other economies on a global scale.”

The study is based on projections of river floods on regional scales. driven by greenhouse gas emissions that humans have so far emitted. The authors investigated the international economic response to flood-related shocks using a specifically designed dynamic computer simulation.

Without major adaptation measures, China could suffer the biggest direct losses from river floods, adding up to more than $380 billion over 20 years, corresponding to about 5 percent of China’s annual economic output. This would include natural floods not linked to human-induced climate change; $175 billion of the losses would likely occur due to climate change. “This is a lot,” says Willner, “and it is only the effect by river floods, not even taking into account other climate change impacts such as storms and heat waves.”

The European Union and the United States would be affected predominantly by indirect losses passed down along the global trade and supply network, the study says. In the United States, direct losses would be around $30 billion, and indirect losses $170 billion. The EU will suffer less from indirect losses, because it has a more or less even trade balance with China. The EU would be affected, for instance, when flooded regions in China temporarily fail to deliver parts that European companies need for production. On the other hand, Europe will profit from filling climate-induced production gaps in China. In contrast, the United States imports much more from China than it exports, leaving it more susceptible to climate-related risks, say the authors.

More intense global trade may help mitigate losses from local extreme events, said study coauthor Christian Otto of PIK and Lamont-Doherty. “When a supplier is impacted by a disaster hampering its production, international trade increases the chance that other suppliers can jump in and temporarily replace it,” he said. “The trade war we are currently seeing unfold by the U.S. administration against China and potentially the European Union is counterproductive in this situation. It might impede climate proofing [of] the U.S. economy.” Because of the way supply chains work, the global increase of climate-induced river floods could actually cause net gains for some economies such as Australia, India or some South East Asian countries, which could jump in to fill gaps in other nations’ production.

The study focused not on direct damages to production facilities, but on what extent a regional economy stagnates due to flooding. “We adopted a rather optimistic view when it comes to the flexibility and promptness of shifting production towards non-affected suppliers after an extreme weather event,” said Otto. “Our study [probably] underestimates production losses; things could eventually turn out to be worse.”

Levermann said that balanced trade with China leaves the EU better prepared against production losses than the United States. He said that if the tariffs against Chinese goods proposed by U.S. president Donald Trump take effect, this could exacerbate U.S. vulnerability. He pointed to two general alternatives for balancing trade: isolation, or more trade. “By introducing a tariff plan against China, Trump currently goes for isolation,” he said. “But Trump’s tariff sanctions are likely to leave U.S. economy even more vulnerable to climate change. Our study suggests, that under climate change, the more reasonable strategy is well-balanced economic connectivity. [That] allows to compensate for economic damages from unexpected weather events, of which we expect more in the future.”

World Bank economist Stéphane Hallegatte, who pioneered research in the area of indirect disaster effects (but was not involved in the study), said, “One of the most important policy messages is that the world is so interconnected that natural disasters are not local events anymore. Everybody can be affected by a disaster occurring far away. It means that risk management is more than each country’s responsibility: it has become a global public good.”

This story adapted from a press release by the Potsdam Institute for Climate Impact Research.