Spatial Correlation, Trade, and Inequality: Evidence from the Global Climate

This paper shows that greater global spatial correlation of productivities can increase cross-country welfare dispersion by increasing the correlation between a country’s productivity and its gains from trade. We causally validate this general-equilibrium prediction using a global climatic phenomenon as a natural experiment. We find that gains from trade in cereals over the last half-century were larger for more productive countries and smaller for less productive countries when cereal productivity was more spatially correlated. Incorporating this general-equilibrium effect into a projection of climate-change impacts raises projected international inequality, with higher welfare losses across most of Africa.