Join Fund Library now and get free access to personalized features to help you manage your investments.
Low inflation in the decades before the Covid-19 pandemic has often been attributed to globalization, so it would be natural to think the opposite – that less international trade, particularly with China, might lead to higher inflation. However, Vanguard’s latest Megatrends research suggests that the impact of slowing globalization on inflation will be modest.
It’s a compelling narrative: The low inflation that we’ve seen for most of the past 30 years has been a consequence of lowered trade barriers thanks to the ratification of the North American Free Trade Agreement (NAFTA) in 1993 and China joining the World Trade Organization (WTO) in 2001. The ready availability of cheap imports from China has largely driven the narrative.
Given today’s geopolitical tensions and rising trade barriers, it’s understandable if some might think that globalization is in full reverse and that inflation might again rise to the alarming levels we saw post-pandemic or in the 1980s before globalization’s rapid rise.
Indeed, as we observed in 2021, the glory days of globalization are likely behind us. But the worst-case inflation scenario is not likely, particularly in the U.S. To understand why, we need to look back over decades.
First, contrary to popular belief, globalization has had only a modest impact on inflation historically. The chart below illustrates this point.
The chart covers 1987 through late 2023, a period which included cycles of both accelerating and slowing globalization. While globalization helped contain inflation in the 1990s and 2000s, the magnitude of its impact was modest – far less than that of monetary policy, according to our research. Even as globalization has slowed over the last 15 years (a trend we sometimes call “slowbalization”), its impact on inflation has, again, been very modest. The reason? It’s the makeup of the U.S. economy.
The U.S. economy is more self-sufficient than some may realize, with almost 90% of its goods and services produced within its borders – a much higher proportion compared with most other countries.
Take personal consumption as an example. By dollar value, only about 10% of goods and services consumed in the U.S. are imported. This may seem surprising if much of your wardrobe was made in China or Vietnam, but imported nondurable goods like clothing and footwear make up just around 4% of the consumption basket.
Almost 70% of total U.S. consumption is in services – health care, education, housing, and so on – the vast majority of which takes place in the U.S. This is yet another reason why globalization during its heyday in the ’90s and 2000s had only a modest impact on inflation. And it’s why we expect slowbalization to have little impact on the U.S. economy and inflation going forward.
Finally, we should not underestimate countries’ abilities to adapt. Since the 2008 global financial crisis, for instance, economies have been doing more “nearshoring” or “friendshoring” – shifting trade to countries that are closer geographically or geopolitically to reduce the risk of shocks like supply-chain disruptions. As a result, the labels in your closet are more likely to say “Made in Vietnam” or “Made in Mexico” instead of the once-ubiquitous “Made in China.” Long before the latest trade disputes and pandemic-related supply shocks, these shifts have mitigated inflationary pressures stemming from any one region.
Given these forces – a domestic production base, service-based consumption, and adaptive strategies such as friendshoring – we believe the U.S. economy is well-positioned to adjust to shifting global trade dynamics. Globalization has slowed, and it may slow even further, but in the U.S., any resulting inflationary pressures should remain marginal.
Kevin Khang, Ph.D., Senior International Economist at The Vanguard Group, Inc. Grant Feng, Vanguard Senior Economist, contributed to this commentary.
Disclaimer
Content © 2024 by Vanguard Group. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article first appeared on the “Market Insight and Economic Analysis” page of the Vanguard Group, Inc.’s website. Used with permission.
Publication date: June 2024
The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.
The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.
Certain statements contained in this material may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.
While the information contained in this material has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.
This material is not a recommendation, offer or solicitation to buy or sell any security, including any security of any investment fund or any other financial instrument. The information contained in this material is not investment advice and is not tailored to the needs or circumstances of any investor, nor does the information constitute business, financial, tax, legal, regulatory, accounting or any other advice.
The information contained in this material may not be specific to the context of the Canadian capital markets and may contain data and analysis specific to non-Canadian markets and products.
The information contained in this material is for informational purposes only and should not be used as the basis of any investment recommendation. Investors should consult a financial, tax and/or other professional advisor for information applicable to their specific situation.
In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its subsidiaries or affiliates, including Vanguard Investments Canada Inc.
Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.
This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.
All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.
All monetary figures are expressed in Canadian dollars unless otherwise noted.
Image: iStock.com/ekinyalgin
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
