As part of the series of the "Finance Research Seminar", VGSF welcomes Viral Acharya from NYU Stern School of Business to present his research paper.
Divided We Fall: International Health and Trade Coordination During a Pandemic
We analyse the role of international trade and health coordination in times of a pandemic by building a two-economy, two-good trade model overlaid with an SIR-model of infection with costly deaths. Infection starts in one economy and spreads via consumption and production within and across economies. International goods trade can allow countries to diversify economic and health outcomes across economies; governments can employ (i) “containment taxes” to suppress infection spread domestically, and (ii) “foreign (import) tariffs” to prevent infection coming from abroad. Our main result is that uncoordinated, i.e., Nash equilibrium, trade policies adopted by finite-horizon, national-mandate governments robustly feature inefficiently high tariffs on foreign goods and are less sensitive to the state of pandemic in different economies relative to the efficient risk-sharing arrangement. This magnifies inefficiencies of tariff wars in the form of lower levels of consumption and production, smaller gains via diversification of infection curves across economies, and weaker post-pandemic economic recovery. The model also offers novel implications for the behavior of terms of trade during a pandemic.