Pandemics and Trade Policy

The COVID-19 pandemic resulted in a large number of unilateral trade policy actions on pandemic essential products: exporting countries tended to respond by imposing export restrictions while importing countries reduced trade barriers. We use the Jones (1971) specific factor model combined with the assumption that trade policy is chosen to maximise a weighted social welfare function to identify what types of economic and political shocks arising from the pandemic can explain these stylized facts. We find that market power changes are unlikely to explain the data, as they are highly sensitive to the manner in which excess demands shift during the pandemic. A shift in political weights from producers to consumers is the explanation most consistent with the stylized facts. We also solve for the efficient trade agreement and characterise the optimal price differences between countries in the pandemic state. Compared with the efficient agreement, the WTO agreement’s failure to constraint export policies during a pandemic results in terms of trade externalities.