Globalization in the Time of Covid-19

The economic effects of a pandemic crucially depend on the extent to which countries are connected in global production networks. In this paper we incorporate production barriers induced by Covid-19 shock into a Ricardian model with sectoral linkages, trade in intermediate goods and sectoral heterogeneity in production. We use the model to quantify the welfare effect of the disruption in production that started in China and quickly spread across the world. We find that the Covid-19 shock has a considerable impact on most economies in the world, especially when a share of the labor force is quarantined. Moreover, we show that global production linkages have a clear role in magnifying the effect of the production shock. Finally, we show that the economic effects of the Covid-19 shock are heterogeneous across sectors, regions and countries, depending on the geographic distribution of industries in each region and country and their degree of integration in the global production network.