Op-Ed: How Economic Trade Liberalization Could Reduce Inflation and Supply Chain Problems


Major economies faced new challenges over the past year. The United States is grappling with both supply chain blockages and a critical shortage of infant formula. The European Union faces the threat of scarce energy supplies, due to sanctions on Russian fossil fuel exports. And almost all countries have high inflation.

Some have attributed these problems to an overreliance on international trade, ie globalization. Deglobalization, fragmentation, relocation, friend-shoring, decoupling and resilience have become now familiar buzzwords. There is a widespread feeling that individual countries would have been less exposed to recent shocks if they had been more self-sufficient.

The argument goes beyond the observation that supply chains generate diminishing returns for private companies. Government policies that economists label as protectionist have gained political support, notably beginning with former President Trump’s trade war in 2018. The impression is that trade barriers could help protect us all.

But the problems we face are, in fact, examples of how trade barriers erected by governments have reduced resilience. In each case, liberalization could help alleviate the problem.

Start with bottlenecks in shipping to the United States. The remedy here is to repeal the Jones Law, which requires all shipments between U.S. ports to use U.S. carriers and employ crews that are at least 75% American. This legislation was originally enacted in 1920, with the aim of enhancing self-sufficiency and national security. But the inability of the U.S. shipping industry to cope with sudden surges in demand, such as for imports of goods over the past year, has contributed to the supply chain delays. Without the Jones Act, American companies could hire foreign ships to cope with such an increase, and logistics would be more resilient.

When it comes to ground transportation disruptions in the United States, a shortage of truck chassis is part of the problem. The solution is to roll back the rate this stop chassis imports from abroad, which could help fill the gap.

The baby formula shortage calls for a similar approach. Abbott Nutrition, one of the top four US infant formula manufacturers, reminded some of its products in February following the discovery of traces of bacteria in a factory. Callbacks are frequent. But the resulting acute shortage illustrates how international trade could have compensated most of the shortfall.

After all, there was no shortage of infant formula on international markets. But the United States has strong protectionist barriers against imports of dairy products. These include tariffs as well as unnecessarily restrictive administrative hurdles and “Buy American” rules that limit the federal government’s ability to Special supplemental program for women, infants and children (WIC), who distributed half of the infant formula consumed in the United States Trump himself raised barriers to the importation of infant formula from Canada when it renegotiated the North American Free Trade Agreement. The United States Food and Drug Administration recently agreed to cut from the bureaucracy to let in imports temporarily. But there shouldn’t be any obstacles in the first place.

A general conclusion can be drawn from the infant formula episode. It is true that exposure to international trade can sometimes be a source of volatility when shocks occur abroad. For example, Germany’s willful increase in dependence on Russian natural gas over the past 10 years made it very vulnerable when Russia invaded Ukraine in February. But free trade can also dampen volatility when the shock is domestic in origin.

Meanwhile, the EU and the US want to substitute renewable energy sources for fossil fuels, especially those purchased from Russia. One policy that could help further reduce the cost of solar and wind energy is to remove barriers to imports of solar panels and wind turbines.

On June 6, President Biden’s administration announced a two year break on new pending tariffs on imports of solar panels. That’s good for both the environment and America’s ability to weather rising global energy prices. But the US still has the old tariffs.

The EU toowhere the reduction in demand for Russian fossil fuels will be much more difficult. Removing tariffs and other barriers to importing renewable energy equipment would be a step in the right direction.

Finally, an informed remedy inflation problem is to lower barriers to imports in general. Tariffs on U.S. imports of softwood lumber from Canada have exacerbated the rising cost of housing construction. of trump prices on steel and aluminum have increase the prices paid for by the United States companieswhich in turn contributed to the increase in prices paid by consumers for nails, automobiles and many other products containing both metals.

In a recent studythe Peterson Institute for International Economics valued that a workable package of trade liberalization could result in a one-time reduction in consumer price index inflation in the United States of about 1.3 percentage points, or $797 per household.

The Biden administration is would have count now to move back some of Trump’s tariffs on imports from China in particular, as one of the few concrete steps he can take that would immediately help dampen inflation. The effect on inflation will be less than 1.3 percentage points, as the full “achievable package” will not be adopted. But it would be an encouraging step.

Admittedly, trade liberalization will not be enough to eliminate inflation. But the larger lesson is the same as for infant formula, transport bottlenecks and energy security: openness to trade can be a source of resilience.

Jeffrey Frankel is the James W. Harpel Professor of Capital Formation and Growth at Harvard University.


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