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International Trade
Economic & Financial Crises
Climate
Extreme weather events are increasing in both intensity and frequency as climate change progresses. Understanding their impacts on the world economy thus takes on increased importance.
While most extreme weather events are localised, their economic impacts reverberate through global supply chains (GSCs). The importance of this is widely recognised, but the potential scale of economic risks to GSCs from such ‘fast onset’ events is still poorly understood. In this paper we look at how past extreme weather events affected supply chains, and how the public and private sectors should prepare for and try to mitigate future shocks.
We examine three distinct forms of disruption: lower manufacturing production due to natural disasters; reduced agricultural yields caused by floods and drought conditions; and damage to infrastructure and disruption of trade routes by climate conditions. In recent history, such events have had measurable effects, though limited by the diversified nature of global supply chains. Extreme events, such as the 2011 Thai floods or the 2022 drought affecting the Panama Canal, had measurable macroeconomic effects but remained short lived. As such events become more frequent and intense, the impact will become significantly larger and mitigation measures more important.
To prepare for the future, businesses need to invest not only in a better understanding of the risks to their supply chains, but also in mitigation measures. For governments, it will become increasingly important to set the right incentives for companies to mitigate their risks. At the international level, as the example of the 2007-2008 global rice crisis showed, uncoordinated policy responses can strongly exacerbate the effect of otherwise manageable climate-related production shortfalls. This highlights the need for globally coordinated policies.
