Comparative advantage, capital destruction, and hurricanes

Abstract

The comparative advantage of countries evolves over time, yet firms do not continuously adapt their production structure to this evolution. This slow adaptation may be due to high adjustment costs, such as those associated with the disposal of existing physical capital. In practice, these costs may explain why we observe that countries export goods at both ends of the comparative advantage spectrum. This article investigates what happens if the cost of adjusting to the dynamics of comparative advantage is unexpectedly reduced. We use hurricanes to evaluate whether a negative exogenous shock to firms' physical capital leads to a reorganization of exports towards comparative advantage industries. Using a panel of 46 countries and 4-digit industries over the period 1980-2000, we show that the effect of hurricanes on exports is monotonically increasing in comparative advantage. Specifically, export levels drop for industries with a low comparative advantage and grow for industries with a high comparative advantage. Our results also indicate that the process of shifting resources towards higher comparative advantage industries intensifies within the three years following the shock. These findings suggest that if the opportunity cost of adjustment decreases, firms tend to build back better and move up the spectrum of comparative advantage.

The Effects of Natural Disasters and Weather Variations on International Trade: A Review of the Empirical Literature

“…Second, they repeat the baseline estimation for different subsamples defined by sectoral trade (Barua & Valenzuela 2018, Dallmann 2019, Jones & Olken 2010, Oh 201710 , Pascasio et al 2014). Third, they employ estimations at a level of observation which includes sector or product categories (e.g., at the sector-countrypair-year-level) (El Hadri et al 2018, Jones & Olken 2010, Li et al 2015, Pascasio et al 2014, Pelli & Tschopp 2017.…”

“…Beside these relatively robust interaction effects, some studies introduce quite unique interaction effects, motivated by their particular research questions. Pelli & Tschopp (2017) show that hurricanes decrease exports only for industries with low comparative advantage, while they may even increase exports of very competitive industries. The authors conclude that hurricanes, by destroying capital of partly non-competitive industries, induce firms to invest in new technologies in the reconstruction process after hurricanes.…”

“…These approaches can be grouped into three categories, depending on how much importance the authors place on the exogenous character of the disaster variable. The first group of studies uses purely physical measures of disasters such as hurricane wind speeds or earthquake magnitudes (El Hadri et al 2018, Hsiang & Jina 2014, Pelli & Tschopp 2017, Sytsma 2018a). The second group is a relatively large body of literature which bases its research on the widely-used international disaster database of the Centre for Research on the Epidemiology of Disasters (EM-DAT).…”

“…In contrast, Oh (2017) finds significant positive effects on agricultural trade if both trade partners experience a natural disaster, while most other industries are negatively affected. Also Pelli & Tschopp (2017) differentiate between economic sectors, focusing on their comparative advantage. These results are presented in the next sub-section.…”

“…Moreover, some studies focus on the role of institutions and political indicators for the resilience towards natural disasters (Gassebner et al 2010, Oh & Reuveny 2010. Cuaresma et al (2008) and Pelli & Tschopp (2017) raise the question whether natural disasters may induce technological change via a build-back better effect and use product-specific trade data to test their hypotheses. Finally, some more isolated motivational settings include the analysis of temporal and spatial displacement of trade flows and the substitutability of ports in the USA (Sytsma 2018a), the disentangling of the total disaster effect on trade into partial effects (El Hadri et al 2018), and an analysis of economic impacts of hurricanes in a historical setting (Mohan & Strobl 2013).…”