Summary
Since the late 2010s, tariffs and restrictions on U.S.–China trade, supply chain bottlenecks associated with the COVID-19 pandemic, and Russia’s invasion of Ukraine have all raised the cost of and added barriers to trade. These disruptions to trade highlight the inflationary risks associated with a reversal of global economic integration. We assess these risks using two approaches. Empirically, we estimate the historical cost of trade disruptions using a sizable cross-country, disaggregated trade data set. The results suggest a notable effect of rising import costs on inflation. The effect is particularly persistent when disruptions affect trade in intermediate goods, which account for more than half of global trade (figure 1, red line). We also use a general equilibrium model that incorporates trade disruptions in intermediate and final goods to quantify the effects of a significant increase in trade barriers between the U.S. and China. We find that a shift in trade costs somewhat more severe than the one observed during tariff hikes in the late 2010s leads to persistently higher inflation, importantly because disruptions affecting intermediate inputs reduce firms’ production efficiency.