How do we get inflation down? According to our research department, raising interest rates in the US and the EU is not enough. It would be much more effective to remove the trade barriers that the US and the EU have established. In our view, this would reduce inflation by -4.5pp in the EU and -2.0pp in the US.

Our research department took a closer look at the effect of trade barriers on inflation. In doing so, we distinguished between barriers caused by trade rates (tariff-based trade restrictions) and non-tariff restrictions, such as trade quotas and protecting home grown, national products. In the US almost 80% of trade is affected by non-tariff measures, in the EU it is almost 95%.

The FED and the ECB make borrowing money more expensive by raising interest rates. The US central bank does this more vigorously than their European counterparts do. An additional effect is that the value of the dollar is rising rapidly against the euro. This makes American products less attractive (more expensive) worldwide, reducing demand and therefore price pressure. In our view, this effect will reduce US inflation by -1.4 percentage points.
Due to the appreciation of the dollar, the sharp rise in energy prices in the US will hit much less hard than in the EU. Nevertheless, inflation in the US will remain well above 2% next year. Hence, the Biden administration is considering lifting some of the trade tariffs imposed on China during the Trump era. Products from China will become cheaper as a result, lowering the cost of living for American households.

Lifting tariff barriers

We believe that removing only tariff barriers in the U.S. and EU will have a limited effect. If tariffs on major import partners (including China) are reduced to zero, inflation will fall by only -0.4 pp in the US and by only -0.1 pp in the EU.

Remove all trade protection

To really contain the inflation rate, we think it would be very effective to also remove non-tariff trade barriers in particular. If these were half reduced, inflation in the US would be -2.0pp lower. And in the EU even -4.5pp. Such measures, such as no longer protecting domestic products, provide consumers with a significant price advantage. At the global level, cars, steel products and phones are the goods most affected by non-tariff trade measures.

Repair the supply chain

By also normalizing global trade by addressing supply chain distortions, we follow that inflation will be lower by another -1.5 pp, both in the US and the EU.

103 results

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Oct 05, 2022

Low consumer price for basic energy needs

More and more households can no longer afford the energy bill. Our researchers argue for a fixed low price for basic energy needs. Read more.

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Sep 30, 2022

Missing chips cost EUR100bn to the European auto sector

No industry has been hit harder by the chip shortage than the automotive industry. We estimate that it led to a shortfall of about 18mn of vehicles around the world.

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Aug 31, 2022

Sharp decrease in inflation due to removing trade barriers

Our research department took a closer look at the effect of trade barriers on inflation. Find out the results of the study.

103 results