Working Paper: NBER ID: w28176
Authors: Viral V. Acharya; Zhengyang Jiang; Robert J. Richmond; Ernst-Ludwig von Thadden
Abstract: We analyze 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; health coordination; pandemic; tariffs; SIR model
JEL Codes: F1; F4; H87; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncoordinated governments can adopt containment policies (E61) | inefficiently high tariffs in Nash equilibrium (F12) |
| inefficiently high tariffs in Nash equilibrium (F12) | terms of trade dynamics (F14) |
| inefficiently high tariffs in Nash equilibrium (F12) | lower levels of consumption and production (E20) |
| lower levels of consumption and production (E20) | magnifying the welfare costs of tariff wars during a pandemic (D69) |
| lack of coordination (P11) | inferior health outcomes (higher death rates) (I14) |
| coordinated policies (F42) | better health outcomes (reducing incidence of deaths) (I14) |
| coordinated policies (F42) | improving consumption and production levels across economies (E20) |