Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
Some new problems have afflicted the economy in the last year. Two examples come from the US: blockages in supply chain logistics and a critical shortage in infant milk formula. One problem applies to the EU even more than to the US: energy scarcity due to sanctions against Russian fossil fuel exports. And one now applies almost everywhere: inflation.
Some have associated these four problems with what is said to be excessive dependence on international trade, that is, with globalization. Deglobalization, fragmentation, reshoring, friend-shoring, decoupling, and resilience have become familiar buzzwords. The feeling is that individual countries would not have been so exposed to shocks if they had been more self-sufficient.
The argument goes beyond observing that private firms have discovered diminishing returns to ever-lengthening supply chains. Protectionist government policies have gained political support — beginning, notably, with Donald Trump’s trade war in 2018. The impression is that trade barriers could help insulate us all from external shocks.
Each of the four problems listed above can in fact be cited as examples where particular trade barriers erected by governments have reduced resilience and where liberalization could partially help remedy the problem. Let us go through them.
- Problem: Bottlenecks in US shipping. Remedy: Repeal the Jones Act, which requires that all shipping between US ports use American carriers and employ crews who are at least 75% American. This legislation was originally passed in 1920, with the intent of enhancing self-sufficiency and national security. But the US maritime industry has not been able to cope with sudden surges like the heightened demand for merchandise imports over the last year, contributing to supply chain delays. Without the Jones Act, American firms could hire foreign-owned vessels to handle the surge (for example, to carry imports from large US hub ports to smaller ports). Logistics would be more resilient.As to bottlenecks in US overland transport, a shortage of truck chassis has been part of the snafu. Imports of chassis from abroad could have helped fill the gap – except that they are impeded by a US tariff (one of the Section 301 tariffs imposed by the Trump Administration, in September 2018). Remedy: roll back the tariff.
- Problem: US infant formula shortage. Remedy: Remove tariffs, “Buy America” rules, and unnecessary administrative barriers that impede imports of baby formula.
Abbott Nutrition, one of only four major US producers of baby formula, recalled its product in February, due to the discovery of traces of bacteria in a factory. Recalls are common. But the resulting acute shortage illustrates how international trade could have helped, if it had been allowed to. There was no shortage of infant formula on international markets. If the US had been open to imports, foreign producers could have made up most of the shortfall. But the US (like some other countries), has serious protectionist barriers against importing dairy products. The barriers include tariffs as well as unnecessarily restrictive administrative hurdles and “buy American” policies that constrain the federal Special Supplemental Program for Women, Infants, and Children (WIC), which distributes half of infant formula consumed in the US. Donald Trump even raised barriers on imports of infant formula from Canada when he renegotiated NAFTA.
One can draw a general conclusion. It is true that exposure to international trade can sometimes be a source of volatility when the shocks arise abroad. For example, Germany’s willful increase in dependence on Russian natural gas over the past ten years, made it highly vulnerable when Russia invaded Ukraine in February. But freedom to trade can also mitigate volatility, when the shock originates domestically, such as the recall of baby formula in February.
- Problem: the EU and US want to substitute renewable energy sources in place of fossil fuels, especially those bought from Russia. Remedy: One policy that could help to bring down further the cost of solar and wind power is to liberalize barriers against the import of solar panels and wind turbines.
On June 6, the Biden Administration announced a 2-year pause on pending new tariffs on solar panel imports. That’s good… for the environment as well as for coping with higher global energy prices. But the US still has the old tariffs.
And so does the EU, where cutting the demand for Russian fossil fuels will be much harder. European imports of components that facilitate renewable energy have apparently been the target of more than half of the “trade defense instruments” in force in the EU. Rolling back tariffs and other barriers against imports of renewable energy equipment would be a step in the right direction.
- Problem: Inflation. Remedy: cut import barriers generally. What is true of truck chassis, infant formula and solar panels is also true of tradable goods in general. Examples include commodities as well as manufactured goods. Tariffs on US imports of softwood lumber from Canada have worsened the rising price of housing construction. Trump’s tariffs on steel and aluminum have raised the prices paid by US firms, which in turn has contributed to the rise in retail prices of nails, automobiles, and the many other industries that use the two metals. A March study from the Peterson Institute estimated that “a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points, amounting to $797 per US household.”
The Biden administration is reportedly now considering rolling back some of the Trump tariffs, with respect to imports from China in particular, one of the few concrete steps it can take that would immediately help alleviate inflation. The effect on inflation will turn out to be less than the 1.3 % estimate, because the full package will not be adopted. But it would be a step in the right direction.
To be sure, trade liberalization would not be nearly enough to eliminate inflation. But the lesson remains: openness to trade need not imply an increase in economic volatility but can itself be a source of resilience.
This post written by Jeffrey Frankel.