Temperature and domestic trade: City evidence from China

Abstract

Climate change poses an enormous global challenge, particularly for human economic activities. Previous literature has paid limited attention to the impact of temperature change on domestic trade. To examine the nexus between temperature and domestic trade, we employ panel data from 285 Chinese cities from 2000 to 2021 and a spatial econometric model. First, we reveal significant spatial correlation between domestic trade between cities. More importantly, a city's domestic trade is found to be significantly influenced by temperature changes in neighbouring cities. Specifically, the significantly negative spillover effect of temperature changes on domestic trade is consistent with the significantly negative direct effect, suggesting an overall negative total effect. Temperature changes also have a cumulative impact on domestic trade. Labour productivity, population migration and meteorological disasters are the mechanisms through which temperature changes influence Chinese cities’ domestic trade. Furthermore, the negative impact of temperature changes is more pronounced in the retail sector and in cities with low air–conditioning penetration. We provide city–level evidence of the relationship between climate change and economic activities from a new perspective of domestic trade, highlight the influential channels and confirm the role of temperature change in impeding the prosperity of domestic trade.