Note: The authors thank Madi Sarsenbayev for carefully reviewing data in this Policy Brief.
With inflation running at 40-year high rates, President Joseph R. Biden Jr. is wringing his hands and the Federal Reserve is signaling more interest rate hikes in 2022 and 2023. But policymakers are overlooking one set of actions that could make a meaningful contribution to taming inflation: trade liberalization. The data cited in this Policy Brief indicate that a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points.
That reduction would amount to $797 per US household, about half the size of pandemic relief in 2021. As a bonus, the embrace of trade liberalization would curb inflationary expectations taking hold in American firms now protected by trade barriers from foreign competition.