Re-evaluating the role of trade and value chains during pandemics

The interaction between trade and epidemics

Antràs and al. develop a conceptual framework that combines international trade with a SIR model. Their overriding assumption is that both international trade and the spread of disease are driven by human interactions. Their model consists of agents who in each country consume differentiated varieties and choose how many of these varieties to source from home and abroad. Sourcing of varieties is costly, both in terms of the fixed costs of meeting with other agents that sell varieties, an activity that involves intranational or international travel. As a result, which varieties sourced at home and abroad are endogenously determined by trade frictions, country sizes, and the state of a pandemic. Their results indicate that globalization and pandemics interact in different subtle ways:

• Whenever countries are symmetric (in terms of infection levels), a decline in any international trade friction increases the likelihood of a global pandemic occurring. This is because a decline in international trade friction also leads to an overall increase in the total number of human interactions, domestic and foreign. As a result, the simulations below show that an increase in tariffs reduces the severity of the epidemic in both countries which are sufficiently symmetric;
• Whenever countries are different (one has a worse infection rate), a decline in international trade frictions decreases the likelihood of a pandemic. This happens because interactions within the country with the bad disease environment decline, thereby taking the global economy below the threshold for a pandemic to be self-sustaining for the world as a whole.

Globalization and Pandemics
Authors: Pol Antràs, Stephen J. Redding, Esteban Rossi-Hansberg
From: Harvard University, Princeton University

The role of global chains during pandemics

Bonadio and al. use a quantitative model of world production and trade covering 64 countries on all continents and 33 sectors spanning all economic activities. They simulate a global lockdown as a contraction in labor supply while taking into consideration the differences across countries both in terms of the stringency of the lockdown as well as the distribution of “work from home” occupations.

• The model produces a large contraction of economic activity, with an average 32.6% drop in GDP in the sample of countries for the duration of the shock. They compute that about 22.7% of the GDP contraction can be attributed to foreign shocks.
• The downturn would actually be slightly worse with renationalized supply chains with an average of 33.4%  drop in GDP.

But would renationalizing supply chains in specific sectors improve resilience?

To investigate this possibility, Bonadio and al. renationalized supply chains in individual sectors one by one. They found that there is no sector in which supply chain renationalization notably improves resilience, measured either by GDP, or value added in the sector itself.

Global Supply Chains in the Pandemic
Authors: Barthélémy Bonadio, Zhen Huo, Andrei A. Levchenko, Nitya Pandalai-Nayar
From: University of Michigan, Yale University, University of Texas at Austin