Deglobalization, Costs, and Inflation

There is considerable angst developing in response to the developing move toward economic deglobalization. That angst is centered on the risk of inflation as nations move away from the Ricardian concept of nations focusing their economies on what their own population does best and/or has the best access to necessary resources, and importing from other nations that which the importer might need or want but that those other nations might produce more efficiently and cheaply. The Ricardian concept holds, correctly, that such specialization leads to lower costs overall for all nations and all consumers while yielding the greatest prosperity for all nations and their populations.

The angst is well enough described by Yuka Hayashi in her Sunday Wall Street Journal article.

…tariffs and “Buy American” procurement rules, businesses moving production back to the US 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 US businesses.


Studies have shown that globalization has influenced US 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 US consumer prices by an annual 0.1 to 0.4 percentage point between 1997 and 2018.


Deglobalization gained impetus with the global financial crisis of 2008…. It might be adding to current high inflation….

All of that is certainly true, and deglobalization is, not might be, contributing to high inflation, but none of that makes deglobalization, of necessity, an unvarnished bad.

Ricardo’s ideas work only in an idealized world where all the nations are, if not friendly with each other, at least have no enmity among each other. In the real world that does not obtain, and some nations are enemies of others. Within that, some nations might hold resources that their enemy nation(s) might need, and other nations might produce useful, even critical, goods that their enemy nation(s) cannot produce as efficiently or cheaply.

It is against that real world backdrop that a fluid balancing of economic globalization and deglobalization occurs.

Deglobalization certainly can be carried too far, but some deglobalization is necessary from a national security perspective: we need to identify the industries and materials that are critical to our national defense and to our economy and then develop wholly domestic supply chains for them that extend from dirt in the ground to final product at its usage destination. These supply chains don’t need to be—shouldn’t be—our sole source for those resources, intermediate products, or final products, but it’s a Critical Item to have one or two such for each industry and material from which we can expand should an enemy try to cut us off.

That will increase price levels for those items and for related, substitutable, items, but that’s a necessary price to pay for our security—especially compared to the price we’ll pay if we’re cut off completely by an enemy nation, as the PRC already has tried to do with its rare earths production near monopoly.

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