Divided We Fall: International Health and Trade Coordination During a Pandemic

Abstract

We analyze the role of international trade and health coordination during a pandemic by developing a two-economy, two-good trade model integrated into a micro-founded SIR model of infection dynamics. Governments can adopt containment policies to suppress infection spread domestically, and levy 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 the Nash equilibrium of uncoordinated governments with national mandates, 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 during a pandemic, featuring 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 Classification: F13, F42, F44