Weather shocks affect trade policy: Evidence from preferential trade agreements

Abstract

AbstractWe show that weather shocks affect government trade policy decisions. We exploit variation in rainfall during the growing season within and across countries to show that weather shocks impact agricultural output and trade. Using information on tariff cuts by commodity from preferential trade agreements signed between 1995 and 2014, we then show that weather shocks that happen during the negotiation period correlate strongly with the size of tariff cuts. When weather shocks increase (decrease) a country's capacity to produce a given crop, its government negotiates a smaller (larger) tariff cut. These results are consistent with a political economy trade model with sector‐specific inputs in which the government places more weight on producers relative to consumers in its objective function. They also reveal that governments update their beliefs about domestic agricultural production capacity in response to weather shocks.