“A stronger US dollar will not be enough to rein in inflation in the US. Policies to liberalise trade and thus lower the cost of trade have been considered in the past months. Yet we find that even a full tariff-based trade liberalisation in the US and the EU would not be a game-changer for the inflation outlook. If tariff rates on the main import partners (including China) were shaved to zero, inflation would be reduced by just -0.4pp in the US and -0.1pp in the EU, given the high share of duty-free imports already in place in the EU.
“In contrast, lowering non-tariff barriers to trade would have a material impact. We estimate that reducing the share of trade subject to non-tariff barriers to below 50% would lower corporate markups and in turn knock at least -2pp off inflation in the US and -4.5pp in the EU. Businesses and consumers alike would welcome such a cut. Elsewhere, easing supply-chain disruptions could also lower inflation by up to -1.5pp in both the US and the EU, according to our estimates.”
Françoise Huang, Senior Economist at Allianz Trade