JACKSON HOLE, Wyoming (AP) – Growing trade barriers. aging population. A comprehensive transition from carbon-emitting fossil fuels to renewable energy.
The prevalence of such trends around the world could exacerbate global inflationary pressures in the coming years and make it more difficult for the Federal Reserve and other central banks to meet their inflation targets.
That concern was expressed in several high-profile speeches and economic studies presented Friday and Saturday at the Fed’s annual conference of central bankers in Jackson Hole, Wyoming.
For decades, the global economy had been moving toward greater integration, with goods flowing more freely between the United States and its trading partners. Low-wage production overseas allowed Americans to enjoy cheaper goods and kept inflation low, although at the cost of many American manufacturing jobs.
However, since the pandemic, there have been signs of a change in that trend. MNCs are relocating their supply chains away from China. Instead they are seeking to produce more goods – especially critical to the production of semiconductors, auto and electronic goods – in the United States, encouraged by massive subsidies by the Biden administration.
Also, large-scale investment in renewable energy could prove disruptive, at least temporarily, by increasing government borrowing and raw material demand, leading to inflation. Most of the world’s population is aging, and older people are less likely to work. Those trends could act as supply shocks, similar to the shortages of goods and labor that accelerated inflation during the rebound from the pandemic recession.
“The new environment sets the stage for a larger relative price shock than was seen before the pandemic,” Christine Lagarde, president of the European Central Bank, said in a speech on Friday. “If we face both higher investment requirements and greater supply constraints, we are likely to see stronger price pressures in markets such as commodities – particularly for metals and minerals that are important for green technologies.”
This will complicate the job of the ECB, the Fed and other central banks whose job it is to control price growth. Almost all central banks are still struggling to curb high inflation that peaked in early 2021 and has only partially subsided.
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“We are living in a world in which we can expect more and probably bigger supply shocks,” Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund, said in an interview. “All these things make it harder to produce goods and it becomes more expensive. And it’s certainly the configuration that central banks dislike the most.”
Changes in global trade patterns received the most attention during Saturday’s discussion at the Jackson Hole conference. A paper presented by Harvard Business School economist Laura Alfaro found that after decades of growth, China’s share of US imports is set to fall by 5% from 2017 to 2022. His research attributed the decline to tariffs and efforts imposed by the United States. Large US companies have had to find other sources of goods and parts after the epidemic shutdown in China disrupted production.
Those imports largely came from other countries such as Vietnam, Mexico and Taiwan, which have better relations with the United States than China — a trend known as “friendshoring.”
Despite all the changes, US imports are set to reach an all-time high in 2022, indicating that overall trade remains high.
“We’re not deglobalization yet,” Alfaro said. “We are witnessing an imminent ‘Great Reallocation’ as business patterns change.”
He said there are also tentative signs of a “restoration” — a return of some production to the United States. Alfaro said the United States is importing more parts and unfinished goods than before the pandemic, which is evidence that more final assembly is taking place domestically. The decline in US manufacturing jobs appears to have bottomed out, he said.
Yet Alfaro cautioned that these changes also bring downsides: Over the past five years, the cost of goods from Vietnam has risen by about 10% and from Mexico by about 3%, adding to inflationary pressures.
In addition, he said, China has increased its investment in factories in Vietnam and Mexico. In addition, other countries that ship goods to the United States also import parts from China. Those developments show that the United States has not scaled down its economic ties with China.
Also, some global trends may work in the other direction and moderate inflation in the coming years. One such factor is weakening growth in China, the world’s second largest economy after the United States. With its economy struggling, China will buy less oil, minerals and other commodities, a trend that should put pressure on the global cost of those goods.
Bank of Japan Governor Kazuo Ueda said during a discussion on Saturday that although China’s slowing growth is “disappointing”, it stems mainly from rising defaults in its bloated asset sector rather than a change in business patterns.
Ueda also criticized the increased use of subsidies to support domestic manufacturing, as the United States had done in the previous two years.
“The widespread use of industrial policy globally can lead to inefficient factories,” Ueda said, “because they are not necessarily located on the most cost-effective sites.”
And Ngozi Okonjo-Iweala, Director-General of the World Trade Organization, defended globalization and also condemned increasing subsidies and trade barriers. He stressed that global trade often controls inflation and helps greatly in reducing poverty.
“Estimated trade,” he said, “is a source of disinflationary pressures, reduced market volatility and increased economic activity. …the economic fragmentation will be painful.”
