Importing deflation is the globalistic answer to the US’s trade war, after its long list of lost wars
It might be nice to fantasize about being number one, but in today’s world, we have to be globalistic. As the US kerfuffles over trade, some countries uphold a targeted approach to fighting inflation, by importing deflation.
After a long list of lost wars, from Vietnam to Afghanistan to Ukraine, the US tariff drama has set the tone for price increases.
We can see inflation brewing in interest rates. Here it is manifesting in the 30-year US Treasury market as a bullish engulfing pattern:
Last week’s green bar fully covers, or “engulfs” the preceding week’s red bar, indicating a strong move upward in interest rates is likely in the coming weeks.
…ending almost a century of US trend-setting. Because the inflationary scenario playing out in the US is not the inevitable reality for every country.
A quick fix
You may have heard of imported inflation, but what about imported deflation?
Everyone who drives a car knows the scenario of imported inflation, especially in countries heavily reliant on imported oil that see widespread inflation when oil prices surge. Conversely, if a country imports significantly from a nation undergoing deflation, a decline in price levels means those goods become less expensive, contributing to an ease in local inflation.
An approach that maps out current inflation worldwide is called for today, like this one from 2023:
Our economies are interconnected after decades to centuries of peaceful trade. Globalism might be crumbling for some, but not for all. Now, with inflation spiking amidst these isolationist tariffs, dealmakers in the “ROW” are decoupling from the US. Even Western allies are scrambling to counterbalance inflation by bringing down prices.
A viable vision to keep inflation in check
Canada’s new win-win trade deal with China will counteract inflationary pressures from Canada’s southern border, as it reroutes oil exports westward to China, and Canadian Solar invests in solar manufacturing, wind farms, and rare earth processing in a little-utilised region of China.
Trade relationships and supply chains with a deflationary economy like China’s mean lower-priced imports are readily available, putting downward pressure on domestic prices.
Prices we see in stores are not just the result of local events but are significantly influenced by the economic trends and price levels of our international trading partners. In times of rising prices, it’s useful to look at how trade can bring down inflation.
The impact of importing deflation
China’s entry into the World Trade Organization (WTO) on December 11, 2001 boosted its exports. Its large labor force and increasing productivity kept export prices competitive, contributing to global disinflationary pressures.
The West saw a significant increase in imports from China, ranging from electronics and textiles to various manufactured goods. This influx of cheaper imports exerted a deflationary pressure. If a trading partner experiences significant deflation, the lower prices of their exports will likely lead to a general fall in prices within the importing country.
Importing from a country that is already experiencing deflation is an effective means of heading off inflation. Unlike traditional deflation, which is often the result of domestic factors like falling demand or increased productivity, imported deflation is driven by international influences stemming from another country’s economic situation.
Imported deflation can have a significant impact on a country’s economy.
The cost of living decreases, which can benefit consumers’ budgets in the short term. The downward influence on inflation could alleviate the need for interest rate hikes to head off inflation, as cheap imports enable central banks to ease interest rates and stimulate economic growth.
A country heavily reliant on imports from a nation experiencing deflation may see widespread price decreases across various sectors. An economy with a strengthening currency relative to a deflationary trading partner might find that the cost of all its imports from that partner decreases, lowering prices across the board.
Related Articles: Making Sense of Trade Turbulence | Trump’s Trade Gambit Risks Global Fallout | Tariffs and Toilet Paper: What Happens to the Bottom Line? | Trump Temporarily Eases Tariffs for Most Nations, Escalates China’s to 125% | Trump’s Tariff Diplomacy: Will Europe Dance to the Same Old Tune?
Mitigating risks
There are risks to economies not experiencing inflation and to local industry, so a targeted approach is in order.
Increasing imports of products not already made by the local economy is most effective, since competing with cheaper imported goods harms local businesses.
Importing deflation can be an effective tool, as long as it is aimed at the sweet spot — at a local economy that is in an inflationary environment.
The risk to an economy not in an inflationary environment was demonstrated during Japan’s “Lost Decade(s)” and its recovery through imports from China from the 1990s to the early 2000s. After Japan’s asset price bubble burst in the early 1990s, Japan experienced a prolonged period of deflation. Domestic demand was weak, and prices stagnated or fell.
Simultaneously, China’s rapid economic growth led to a surge in its exports, often at lower prices due to lower labor costs and increasing manufacturing efficiency. Japan, being a significant importer of relatively inexpensive consumer goods and raw materials from China, experienced imported deflation.
These cheaper imports put downward pressure on domestic prices in Japan, exacerbating the existing deflationary environment. While beneficial for Japanese consumers in terms of lower prices, it made it harder for Japanese businesses to raise prices and contributed to the overall deflationary spiral the country struggled with for many years.
A targeted approach
A strategic approach to managing imported deflation involves carefully channeling lower-priced imports into specific “vacant” or underserved sectors of the local economy.
By selectively accommodating imported deflation in these areas, policymakers can mitigate downward price pressures on domestically produced alternatives in sectors where local industries are more established or strategically important. This targeted absorption can help preserve the price stability and viability of domestic production.
Strategically directing imported deflation towards specific, underserved areas of the local economy presents a potential avenue for mitigating its negative impact on domestic producers and preserving price stability in key sectors, while allowing consumers to benefit from lower import prices in other areas.
Stability can be achieved more easily using careful analysis, well-designed policies, and a nuanced understanding of the interconnectedness of the economy, than by complaining about “Trump’s tariffs.”
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com — In the Cover Photo: A detailed close-up of a blue and yellow target, showing the concentric circles and contrasting colors. Cover Photo Credit: Oleg Gapeenko.
