DP15649 Divided we Fall: International Health and Trade Coordination during a Pandemic

Author(s): Viral V. Acharya, Zhengyang Jiang, Robert Richmond, Ernst-Ludwig von Thadden
Publication Date: January 2021
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Programme Areas: Public Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15649

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.