Retreat From Globalization Adds to Inflation Risks

Date: Monday, December 6, 2021
Source: The Wall Street Journal

WASHINGTON—While supply-chain disruptions, labor shortages and fiscal stimulus have all been blamed for the rise in short-term inflation, another long-term force could also be at work: “deglobalization.”

Economists and policy makers have long argued that globalization helped to lower prices. As trade barriers fell, domestic companies were forced to compete with cheaper imports. Technology and trade liberalization encouraged  businesses to outsource production to low-wage countries. Generally liberal immigration policies allowed many lower-wage workers to move to richer countries, although the link between immigration and wages isn’t clear-cut.

That pattern might reverse as the pandemic speeds up the retreat from globalization that has been under way for several years. While supply-chain bottlenecks should eventually ease, other trends could persist—protectionist policies such as tariffs and “Buy American” procurement rules, businesses moving production back to the U.S. where it will be less vulnerable to those policies, and depressed immigration inflows.

“The reorganization and shortening of supply chains…will have a cost that will be passed down to the vendors and ultimately to consumers,” says Dana Peterson, chief economist for Conference Board, an independent research group supported by large U.S. businesses.

Studies have shown that globalization has influenced U.S. prices. Kristin Forbes, a Massachusetts Institute of Technology economist, has found that those parts of the consumer-price index influenced by global factors, such as commodity prices, currency fluctuations and global value chains, drove half the changes in the index between 2015 and 2017, up from about 25% in the early 1990s. Economists Robert Johnson of the University of Notre Dame and Diego Comin of Dartmouth found in a 2020 paper that international trade had the effect of reducing U.S. consumer prices by an annual 0.1 to 0.4 percentage point between 1997 and 2018.

The share of foreign content in global manufacturing production surged from 17.3% in 1995 to 26.5% in 2011, according to Asian Development Bank data analyzed by the Conference Board. It has since declined to 23.5% in 2020. Global foreign direct investment, a key gauge of cross-border business expansion, peaked at around $2 trillion in 2015 and fell to $1.5 trillion in 2019, according to the United Nations Conference on Trade and Development.

Deglobalization gained impetus with the global financial crisis of 2008, Britain’s vote to leave the European Union in 2016 and former President Donald Trump’s tariffs. It might be adding to current high inflation, though those effects are hard to disentangle from the pandemic.

Citi economists note that prices for household furnishings and operations, which declined nearly constantly following the 2008 financial crisis, started climbing in 2017 as the Trump administration prepared to hit China with tariffs, eventually imposing a 25% tariff on those products. Those prices rose 3% between October 2017 and March 2020 and have since gained another 8.5%.

The Trump administration’s tariffs on steel, aluminum and imports from China, combined with trading partners’ retaliatory tariffs, increased annual costs born by U.S. consumers by $51 billion annually, according to the American Action Forum, a center-right policy-research group.

President Biden has negotiated an end to some of Mr. Trump’s tariffs such as on steel and aluminum from Europe, but left most of the tariffs on goods from China in place.

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