Working Paper: CEPR ID: DP15649
Authors: Ernst-Ludwig von Thadden; Viral V. Acharya; Zhengyang Jiang; Robert Richmond
Abstract: We analyse the role of international trade and health coordination in times of a pandemic by building a two-economy, two-good trade model integrated into a micro-founded SIR model of infection dynamics. Uncoordinated governments with national mandates can adopt (i) containment policies to suppress infection spread domestically, and (ii) (import) tariffs to prevent infection coming from abroad. The efficient, i.e., coordinated, risk-sharing arrangement dynamically adjusts both policy instruments to share infection and economic risks internationally. However, in Nash equilibrium, uncoordinated trade policies robustly feature inefficiently high tariffs that peak with the pandemic in the foreign economy. This distorts terms of trade dynamics and magnifies the welfare costs of tariff wars during a pandemic due to lower levels of consumption and production as well as smaller gains via diversification of infection curves across economies.
Keywords: International trade; tariffs; SIR model; COVID-19; health policies; terms of trade
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncoordinated governments adopting national mandates (H10) | Containment policies (E65) |
| Containment policies (E65) | Suppress infection spread domestically (H56) |
| Uncoordinated governments adopting national mandates (H10) | Import tariffs (F19) |
| Import tariffs (F19) | Inefficiently high levels during a pandemic (H12) |
| Inefficiently high levels during a pandemic (H12) | Distort terms of trade (F14) |
| Coordinated risk-sharing arrangements (E44) | Mitigate infection and economic risks internationally (F69) |
| Coordination (P11) | Improve health outcomes (I14) |
| Coordination (P11) | Improve economic welfare (D69) |
| Uncoordinated trade policies (F13) | Incidence of deaths increases (I12) |
| Higher tariffs (F19) | Poorer economic risk-sharing (F62) |
| Nash equilibrium behavior (C72) | Lower international disease transmission (F42) |
| Nash equilibrium behavior (C72) | Worse health outcomes than socially optimal coordinated policies (I14) |
| Cooperation on trade during a pandemic (F10) | Superior economic and health outcomes (I14) |