Globalization and Pandemics

Steve Redding, Princeton University
Wed, Nov 11 2020, 1:00pm - 2:30pm PST

Joint with Pol Antras and Esteban Rossi-Hansberg

We propose a theory of the relationship between globalization and pandemics. We start by documenting the importance of international trade for the diffusion of infections in several pandemics throughout history. We also show that trade is closely intertwined with travel. Motivated by this evidence, we build a framework in which business travel facilitates trade according to a constant elasticity gravity equation mediated by mobility frictions. In turn, travel leads to human interactions that transmit disease, as in the Susceptible-Infected-Recovered (SIR) model. We highlight three novel interactions between these two mechanisms. First, trade-motivated travel generates an epidemiological externality across countries. Therefore, reductions in international frictions affect the evolution of the epidemic in each country, and the condition for a pandemic to occur. Second, if infections lead to deaths, or reduce individual labor supply, we establish a general equilibrium social distancing effect, whereby increases in relative prices in unhealthy countries reduce travel to those countries. Third, if agents internalize the threat of infection, we show that their behavioral responses lead to a reduction in travel that is larger for higher-trade-cost locations, and hence leads to an initial fall in the ratio of trade to GDP in the early stages of the epidemic, before a subsequent recovery.