Less globalization may not mean higher inflation

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.

Special thanks to Grant Feng, Vanguard senior economist, for his contributions to this commentary.

• Vanguard's economic and market views (hub, updated June 2024)
• AI, demographics, and the U.S. economy (33-page PDF, issued June 2024)
• The deglobalization myth(s) (12-page PDF, issued May 2021)