Attempting to predict short-term fluctuations in inflation is extremely difficult. However, if you look at the evolution of globalization, which has a major impact on inflation, accurately predicting long-term inflation trends is a bit easier. So let me start with globalization and how it’s evolving.

Advances in telecommunications, transportation and finance led to the integration of national markets through trade and investment. This process, known as globalization, has lifted millions of people out of poverty and significantly boosted American standards of living.

But globalization is like fire: it can cook your food, keep you warm, or burn your house down. It has been tremendous for American companies that produce products and services rich in intellectual property, and for U.S. workers engaged in life-long learning. However, it has presented new challenges for companies that manufacture low-technology products and for employees with limited skills.

A major aspect of globalization has involved offshoring: the practice of moving production from high-wage countries, like the United States, to low-wage ones in the Global South or Asia.

One of the major benefits historically provided by globalization — the seemingly endless supply of inexpensive products — will soon come to an end.

The offshoring of computer hardware in the 1990s, for example, resulted in a 10% to 30% drop in computer costs, according to Catherine Mann, chief economist at the Organization for Economic Cooperation and Development and a member of President George H. W. Bush's Council of Economic Advisers. In turn, sales of PCs soared and allowed greater numbers of workers to do much more in less time.

This led to a rapid rise in U.S. productivity and added $230 billion in cumulative gross domestic product from 1995 through 2002, Mann says. In the end, many new jobs emerged in the United States far exceeding those lost to offshoring. But that’s not all.

Over the last several decades, China has been a primary exporter to the United States of inexpensive products, like clothes, toys, furniture, and electronics. This, combined with lower costs derived from offshoring, has enabled American consumers to buy much more with less, stretching the dollar in a way that has subsidized the standard of living of middle and lower-income Americans. This has undoubtedly put downward pressure on inflation.

According to the Federal Reserve Bank of St. Louis, the average annual inflation was 2.4% for the period 1990 to 2020. How much downward pressure offshoring and low-cost imports from China and other countries has put on inflation is unknown; however, it's likely significant.

But as globalization evolves, the inflation rate is likely to rise. Let me explain.

Over the last several years, globalization has been adapting to a number of factors, including an increase in Chinese costs, shifting trade trends primarily due to U.S.-China tensions and trade war, and the pandemic.

For several years, U.S. import prices from China, as well as costs associated with offshoring there, have been rising for a variety of reasons. For one, China has a serious worker shortage.

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China's working-age population is continuing to shrink at an alarming rate due to its 1980 one-child policy. Although the Chinese government allowed two children per family in 2016 and three in 2021, the damage was done. The workforce is predicted to contract by 20% by 2050.

To attract workers from a shrinking labor pool, in addition to other reasons, Chinese companies have continued to boost wages. For example, average Chinese wages in the manufacturing sector rose from 30,700 yuan ($4,813) annually in 2010 to 82,783 yuan ($12,979) annually in 2020, according to Statista, a German-based firm specializing in market and consumer data. That’s an increase of 170%.

In addition, the trade war begun under the Trump administration has added U.S. tariffs on Chinese imports. These tariffs, combined with other trade restrictions placed on various country exports to the United States over the years, have effectively driven up costs to American consumers.

Plus, as U.S. supply chains diversify away from China to minimize risks should U.S.-Chinese trade tensions worsen, and toward low-cost Asian countries like Vietnam, other problems play a role. Their working populations are small, their infrastructure typically poor, and their quality often lower when compared to China.

As a result, they can't match China’s output. What’s more, many of these relatively smaller Asian countries may already be close to or at maximum production capacity.

The pandemic, as well as Chinese tensions, have changed the way we view and evaluate risk. In turn, companies are focusing more on risk reduction than efficiency gains and tossing out just-in-time inventory strategies which have often turned into just-too-late failures.

To reduce threats to business, including those associated with future pandemics, many companies are no longer relying on any one source of supply or single country, whether it’s China or another nation.

In turn, many U.S. firms are sourcing from a larger number of suppliers in different parts of the globe. This almost certainly is resulting in smaller scale purchases from a greater number of suppliers and driving up costs.

American firms also are increasing warehousing space while stockpiling more supplies in varied locations, both in the U.S. and abroad. These are additional factors boosting costs.

And finally, many American firms are backshoring production. This also is increasing the costs of goods unless manufacturing processes can be automated.

Added together, it appears that one of the major benefits historically provided by globalization — the seemingly endless supply of inexpensive products — will soon come to an end. While government deficits, the money supply, and other factors also impact inflation, those longer-term factors associated with globalization will be driving it up for years to come.

This article appeared in International Policy Digest.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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