Tag: competition (economics)

Economics-Watching: Why Businesses Say Tariffs Have a Delayed Effect on Inflation

[from the Federal Reserve Bank of Richmond, 8 August, 2025]

by R. Andrew Bauer, Renee Haltom and Matthew Martin

Regional Matters

Ever since new tariffs were enacted in early 2025, a key policy question has been what is the extent to which businesses will pass tariff costs through to prices, and when? The effects of a tariff are rarely straightforward, given, among other things, competitive dynamics and the challenges of implementation, but the historically large and changing nature of these tariffs have created additional levels of uncertainty over the effects.

In uncertain times, anecdotal evidence from businesses can be especially insightful. We are learning how businesses are reacting to tariffs through the Richmond Fed’s business surveys as well as through hundreds of one-on-one conversations with Fifth District businesses since the start of 2025.

These conversations showcase that navigating tariffs is a complex and sometimes protracted process for firms, particularly when there is uncertainty. Firms describe several reasons they may not have experienced the full impact of proposed tariffs yet (even when goods and countries they deal with are subject to them), as well as reasons that even when they have incurred tariff-related cost increases, there can be a delayed impact on pricing decisions.

Reasons Firms May Not Have Incurred Tariffs Yet

Business contacts describe several strategies or circumstances that can delay or reduce the tariffs on inputs or other imported items. These include the following:

As our monthly business surveys have found, many firms report deploying more than one strategy to delay tariffs. Notably, many of these delays are only temporary.

Reasons Tariffs May Have a Delayed Impact on Prices

Even when firms have incurred tariffs, they give several reasons why tariffs may not be immediately reflected in the prices they charge for their products. These include the following:

  • Waiting for tariff policy to clarify. Higher prices could reduce demand for goods and services and/or lead firms to lose market share, so many firms said they are hesitant to increase prices until they’re sure tariffs will remain in place. For example, a large national retailer said if tariffs are finalized at a sufficiently low level, they’ll absorb what they’ve incurred to date, but if high tariffs stick, they’ll have to raise prices. A steel fabricator for industrial equipment described being reluctant to raise prices on the 10 percent cost increases they’d seen thus far but would have to raise prices should the increases reach 12 to 13 percent. A grocery store chain was reluctant to raise prices and instead might reduce margins, which had recovered in recent years, to maintain their customer base. Some firms explicitly noted a strategy to both raise prices over time and pursue efficiency gains to cut costs and completely restore margins within a year or two.
  • Elasticity testing. Firms reported testing across goods whether consumers will accept price increases. A furniture manufacturer said he’s seen competitors pass along just 5 percentage points of the tariffs at a time so it isn’t such a huge shock to customers, though in that sector, “We all end in the same place which is the customer bearing most of it.” A national retailer said most firms are doing a version of stair-stepping tariffs through, e.g., raising prices a small amount once or twice to see if consumer demand holds, and if so, trying again two months later. This retailer said prices were going up very marginally in early summer, would increase more in July and August, and would be up by 3 to 5 percent by the end of Q4 and into 2026. Another national retailer said they would start testing the extent to which demand falls with price increases, e.g., when the first items that were subject to tariffs—in this case back to school items—hit shelves in late July.
  • Blind margin. Some firms reported attempting to pass through cost in less noticeable ways. While any price increase to consumers will be captured in measures of aggregate inflation, the fact that price increases may occur on non-tariffed goods might make it difficult to directly relate price increases to tariffs. An outdoor goods retailer said, “Unless it’s a branded item where everyone knows the price, if something goes for $18, it can also go for $19.” A national retailer plans to print new shelf labels with updated pricing, which will be less noticeable for consumers compared to multiple new price stickers layered on top. This takes time (akin to a textbook “menu cost” in economics), so it will not be reflected in prices until July and August. A grocery store said their goal was to increase average prices across the store but focus on less visible prices.
  • Selling out of preexisting inventory: Many firms noted they still have production inventory from before tariffs were announced, so they do not need to raise prices as long as they still sell these lower cost goods. A national retailer noted they have at least 25 weeks of inventory on hand for most imported products. A firm that produces grocery items said they will decide how much to raise prices as they get closer to selling tariff-affected products. Similarly, retailers order seasonal items quarters in advance. Many were receiving items for fall and winter when the new tariffs were going into effect in the spring. They paid the tariff then, but we won’t see the price increase until those items hit the shelves in the fall or winter. One retailer speculated that seasonal décor items will look the most like a one-time increase.
  • Pre-established prices. Many firms face infrequent pricing due to factors like annual contracts or pre-sales. For example, a dealer of farm equipment gets half its sales through incentivized pre-sales to lock in demand and smooth around crop cycles. They noted that while it would be difficult to retroactively ask those customers to pay for part of the tariff, they will pass tariffs directly through on spare parts. A steel fabricator for industrial equipment has a contract for steel through Q3, so they haven’t been impacted yet by price increases. However, they will face new costs once that contract expires.

In general, compared to small firms, large firms have more ability to negotiate with vendors, temporarily absorb costs, burn cash, wait for strategic opportunity, and test things out. This matters because large firms often lead pricing behavior among firms, so these strategic choices may influence the response of inflation to tariffs more generally. Even within firm size, one often hears that negotiations on price vary considerably by relationship and item.

Conclusion

A key question surrounding tariffs is whether any effects on inflation will resemble a short-lived price increase—as in the simplest textbook model of tariffs—or a more sustained increase to inflation that may warrant tighter Fed monetary policy. When asked in May what will determine the answer, Fed Chair Jerome Powell cited three factors [archived PDF]: 1) the size of the tariff effects; 2) how long it takes to work their way through to prices; and 3) whether inflation expectations remain anchored. The insights shared above suggest the process from proposed tariffs to the prices set by firms is far from instantaneous or clear-cut, particularly when tariff policy is changing.

Sensing from businesses suggests that the impact of tariffs on their price-setting [archived PDF] has been lagged, but it is starting to play out. Nonetheless, it remains highly uncertain how tariffs will impact consumer inflation. The discussion above makes clear that firms are nimble and innovative in the face of challenge, and they are concerned about losing customers in the current environment, particularly consumer-facing firms. We will continue to learn from our business contacts and share their insights.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

China to Sustain Top-Down, Debt-Fueled Investment in Major Projects and Security Capacities, Ex-Official Says

Dong Yu, now at Tsinghua, says via state media that Beijing-decreed, central govt bond-backed construction will continue into the next five years.

[from the Center for China & Globalization’s Pekingology]

by Zichen Wang, 10 August, 2025

The key concept in today’s newsletter is 国家重大战略实施和重点领域安全能力建设, in abbreviation in Chinese as 两重 liǎng zhòng.

In English, it is translated officially as the implementation of major national strategies and building up security capacity in key areas, hereinafter referred to as “Two Major Undertakings.”

The concept first appeared in official policy documents in the Chinese Premier’s Report on the Work of the Government [archived PDF] in March 2024.

To systematically address funding shortages facing some major projects for building a great country and advancing national rejuvenation, it is proposed that, starting this year and over each of the next several years, ultra-long special treasury bonds be issued. These bonds will be used to implement major national strategies and build up security capacity in key areas. One trillion yuan of such bonds will be issued in 2024.

By the end of the year, the yuan tag, despite being approved by the national legislature, had changed by 300 billion. The People’s Daily newspaper reported in December 2024.

As of now, the 700 billion yuan in ultra-long-term special treasury bonds allocated for the “two major undertakings” has been distributed in three batches to specific projects.

In 2025, the following year, the Report on the Work of the Government [archived PDF] says,

A total of 1.3 trillion yuan of ultra-long special treasury bonds will be issued, 300 billion yuan more than last year.

735 billion yuan will be earmarked in the central government budget for investment. We will put ultra-long special treasury bonds to good use, increase ultra-long-term loans and other types of financing support, and strengthen top-down organization and coordination to ensure greater support for the implementation of major national strategies and security capacity building in key areas.

A simultaneous Finance Ministry budget plan [archived PDF] rounds up the overall central government spending for the Two Major Undertakings to 800 billion yuan in 2025.

In yuan terms, the much-touted new government subsidies to households pale in comparison with the two major undertakings.

Also from the 2025 Report on the Work of the Government [archived PDF]:

Ultra-long special treasury bonds totaling 300 billion yuan will be issued to support consumer goods trade-in programs. This represents an increase of 150 billion yuan over the previous year.

This week, China announced this week that the phased free preschool education policy will cover all children in their final year of kindergartens, saving families 20 billion yuan. Childcare subsidies unveiled in July amount to 90 billion yuan. 

As Joe Biden repeated over the years,

Don’t tell me what you value. Show me your budget, and I’ll tell you what you value.

The National Development and Reform Commission said last month:

In 2025, a total of 800 billion yuan has been allocated for the “two major undertakings,” supporting 1,459 projects in key areas such as ecological restoration in the Yangtze River Basin, major transportation infrastructure along the Yangtze River, the New Western Land–Sea Corridor, high-standard farmland, major water conservancy projects, urban underground pipeline networks, the “Three-North” shelterbelt program, and the renovation of hospital wards.

Now that the 2025 money has been spent by July and China is drawing up its next Five-Year Plan for 2026-2030, will there be more such projects in the future?

In a column for the state-run China News Service this week, Dong Yu, previously Deputy Director-General of the Second Economic Bureau of the Office of the Central Financial and Economic Affairs Commission and, before that, an official at China’s National Development and Reform Commission (NDRC), pointedly said,

In the next step, during the formulation and implementation of the 15th Five-Year Plan, the “two major undertakings” will continue to occupy an important place, be organically incorporated into the new five-year plan, and form close alignment and sustained momentum with major national strategies, major plans, major projects, and key initiatives…

…Such a major strategy will be pursued with persistence—it will not remain rhetorical, nor will it be reversed abruptly.

He did not cite a source of information in his article.

Continuing with his lecturing style, Dong, now Executive Vice Director of China Institute for Development Planning, Tsinghua University, rebuked some unspecified market analysis that had observed the investments just were a one-time boost shot.

Some market institutions once analyzed that when China’s economy was facing short-term difficulties and challenges, the launch of the “two major undertakings” was mainly aimed at expanding investment in the short term to stabilize growth. Such a view clearly lacks a professional understanding of the decision-making intentions and logic, fails to properly grasp the relationship between the short term and the medium-to-long term, as well as between objectives and means, and inverts the proper order of priorities—a misconception that needs to be pointed out and corrected.

Dong also highlighted what he said was the unusual nature of the “strategic move,” including that central government debts fueled the investments, and they were selected “top-down,” rather than primarily relying on local government proposal or input.

The two undertakings were formally submitted for deliberation at the 2024 National People’s Congress after the central leadership made its decision and arrangements…

The central authorities have shown firm determination in this work, adopting the ultra-long-term special treasury bond—a macro policy tool that has rarely been used. Compared with several past issuances of special treasury bonds, the funding arrangement for the “two major undertakings” spans a longer cycle, has a broader scope of application, and will continue to advance in the next stage. It can be said that the scale and intensity are unprecedented. In 2024, a total of 700 billion yuan in ultra-long-term special treasury bonds was allocated, and in 2025, the figure is 800 billion yuan, all of which have now been fully disbursed.

The organization of the “two major undertakings” construction is top-down, completely different from the past practice in the investment sector where projects were determined through bottom-up applications. The purpose is to facilitate the smoother downward transmission of the needs of major national strategies. Relevant [central] government departments, by identifying shortcomings and weaknesses, specifying key areas, and refining project requirements, have ensured that the project list is no longer a collection of fragmented local items. Instead, projects are planned in an integrated manner by category and sector, with strengthened guidance for key regions, more targeted measures, and clearer standards.

Although an exhaustive list of the 1,459 projects does not appear to be available to the public, the “security capacity” build-up in the two major undertakings should be understood in broad terms, and Dong claims the investments put China on a sounder footing globally now that Donald Trump rules America again.

In recent years, the central authorities have emphasized security awareness and bottom-line thinking in development planning, a shift closely related to changes in the international situation. The closer China’s economy becomes intertwined with the global economy, the more comprehensive its considerations must be regarding issues such as food security, energy security, industrial security, and ecological security. The second “undertaking” in the “two major undertakings”—the strengthening of security capabilities in key areas—is precisely a forward-looking arrangement. The dramatic changes in the international environment since the beginning of 2025 have further underscored and confirmed the necessity of enhancing security capabilities, fully demonstrating that the central authorities’ thinking and deployment have been prescient and ahead of the curve.

Dong’s article via China News Service is fully translated below.

中央这一先手棋很不寻常

This Strategic First Move by the Central Authorities Is Highly Unusual

by Dong Yu, Executive Vice President, Institute for China Development Planning, Tsinghua University

The issuance of ultra-long-term special treasury bonds to support the implementation of major national strategies and the building of security capacities in key areas (hereinafter referred to as the “two major undertakings”) has become one of the hottest topics in China’s economy in recent years. Any observation of China’s present and future economic trajectory must include research and analysis of these two undertakings. More than a year has passed since the initiative was launched, making it both necessary and timely to evaluate its effectiveness, understand its operating mechanisms, and look ahead to its prospects.

The “Two Major Undertakings” Are by No Means Ordinary Policy Measures

In terms of decision-making background and process, as well as policy intensity and scope, the launch and implementation of the two major undertakings stand out from other policies. They represent a top-level design initiative.

Understanding a policy starts with its background. From the sequence of events leading to the proposal, this was a proactive, historic choice. The two undertakings were formally submitted for deliberation at the 2024 National People’s Congress after the central leadership made its decision and arrangements. The timing was significant: the 20th Communist Party of China National Congress had laid out a series of major long- and medium-term strategic initiatives that needed concrete engineering projects to push forward. China was midway through two Five-Year Plans, yet strategic advancement could not wait. The central leadership thus introduced the two major undertakings as a groundbreaking initiative.

Strategically, the undertakings directly address the needs of advancing long-term objectives. From the outset, they have been aimed squarely at the goals of Chinese modernization. By breaking down these goals into specific tasks and identifying the most difficult bottlenecks, the undertakings found their points of focus. Some of these tasks might take decades for other countries to achieve, but China has chosen not to delay—tackling them head-on at the starting stage of the new journey toward modernization. This model is uniquely Chinese and has been proven by history to be a key factor in China’s remarkable development successes.

The undertakings are also highly forward-looking—a “first move” by the central leadership. In recent years, national development planning has placed greater emphasis on security and on guarding the bottom line, in response to changes in the international environment. The closer China’s economy is linked to the global economy, the more comprehensive its considerations must be on food security, energy security, industrial security, and ecological security, and other issues. The second “major” in the initiative—security capacity building in key areas—is an arrangement made in anticipation of future challenges. The sharp changes in the international environment since 2025 have only highlighted and validated the necessity of strengthening security capacities, demonstrating that the central leadership’s thinking and arrangements were ahead of the curve.

The undertakings also have a strong overall and systemic quality, constituting a key move in macroeconomic governance. They focus on areas of outstanding importance to economic and social development and have a high degree of relevance to the overall development landscape. The policy toolkit they employ integrates investment, fiscal, science and technology, education, social, and ecological policies. This comprehensive package embodies the use of systems thinking to drive development and will significantly impact all aspects of the economy and society.

A Manifestation of Central Will

Extraordinary measures are for extraordinary tasks. The strategic objectives of Chinese modernization are long-term undertakings, and the two major undertakings provide the foundational support through systematic design and substantial funding.

The central leadership has committed to this initiative by adopting the rarely used macroeconomic tool of ultra-long-term special treasury bonds. Compared with previous special bond issuances, the funding for the two undertakings spans a longer cycle and serves a wider range of purposes, with plans for continued implementation. In both scale and intensity, this is unprecedented: 700 billion yuan in 2024 and 800 billion yuan in 2025, all of which has already been allocated.

In terms of priorities, it vividly reflects the principle of “concentrating resources to accomplish major undertakings.” The focus areas include urban–rural integration, regional coordination, high-quality population development, food security, energy and resource security, ecological security, and self-reliance and strength in science and technology—all crucial to building a strong nation and achieving national rejuvenation. These require coordinated planning and advancement. In just over a year, the high-level requirements have been translated into batches of concrete projects, reflecting the efficiency of implementation.

Project selection is guided by the principle that only the central government can resolve these issues. Some involve urgent development bottlenecks with significant obstacles that cannot be overcome by conventional means, such as scientific and technological breakthroughs, high-standard farmland construction, and upgrading the quality of higher education. Others are long-desired but previously unachievable projects that lack local willingness or capacity to implement, such as major cross-regional infrastructure, cross-basin wastewater treatment, and urban underground utility upgrades.

The organization of the “two major undertakings” construction is top-down, completely different from the past practice in the investment sector where projects were determined through bottom-up applications. The purpose is to facilitate the smoother downward transmission of the needs of major national strategies. Relevant [central] government departments, by identifying shortcomings and weaknesses, specifying key areas, and refining project requirements, have ensured that the project list is no longer a collection of fragmented local items. Instead, projects are planned in an integrated manner by category and sector, with strengthened guidance for key regions, more targeted measures, and clearer standards.

A Combination of “Hard” and “Soft” Measures

From the start, the undertakings were designed not only to fund “hard” engineering projects but also to include comprehensive arrangements for “soft” institutional and policy measures—an important innovation.

The emphasis on soft measures is pragmatic. Given the high importance and public nature of the projects, long-term mechanisms must be designed to ensure smooth progress during construction and sustainable operation thereafter. This includes drafting specialized plans to provide strategic guidance, introducing targeted policies to improve funding efficiency, and innovating institutional arrangements to safeguard implementation.

The implementation process is thus also a process of improving the investment and financing system, updating project management approaches, and enhancing investment effectiveness. In some sectors, soft-measure experiments have had positive impacts, creating healthy interaction with hard investments.

For example, the healthy operation of urban underground pipelines depends on sound maintenance mechanisms. Some local governments have attracted long-term institutional funds into major pipeline projects through debt or equity investment plans, stabilizing private sector returns via operational rights, government subsidies, and tax incentives. Others have introduced province-wide upstream–downstream gas price linkage, set reasonable water supply return rates based on market profits, and advanced the marketization of gas and water prices—reducing losses for public utilities and encouraging private investment.

Similarly, in the quality undergraduate expansion program, mechanisms play a guiding role: schools effectively implementing expansion plans receive increased support, while those performing poorly see reduced support; universities without expanded undergraduate admission plans are generally excluded from special bond funding. Disciplines and programs are adjusted dynamically to align talent training with economic and societal needs.

Directly Relevant to Everyone

The nature of the undertakings is not determined by project size but by their strategic objectives and significance. As long as they align with major national strategies, they are included—whether as large standalone projects, such as high-speed rail along the Yangtze River, or as “project packages,” such as Yangtze River wastewater treatment composed of multiple treatment facilities. This flexible, problem-oriented approach allows better alignment with public needs.

As projects break ground and enter operation, their benefits to people’s livelihoods will become increasingly evident. Observers should not see the undertakings as distant from daily life; they will bring tangible improvements to everyone’s quality of life.

For example:

  • Urban underground pipelines: Upgrades to gas, water, and heating systems will greatly improve safety and resilience. Renovation of old gas pipelines is nearing completion, reducing accident rates by over 30%. Eliminating hidden risks in unseen places increases residents’ sense of security.
  • Food security: Gradually converting all permanent basic farmland into high-standard farmland will stabilize grain output and enhance food safety. Higher standards mean safer products, so people will eat with greater confidence.
  • Yangtze River protection: Building or upgrading over 60,000 kilometers of sewage pipelines in the Yangtze Economic Belt will greatly improve the river’s ecological environment and resolve long-standing public concerns.
  • Transportation: Creating the shortest Shanghai–Chengdu high-speed rail corridor (approx. 1,900 km) will connect the Yangtze River Delta, the middle Yangtze region, and the Chengdu–Chongqing area more quickly, cutting travel time nearly in half and boosting east–west connectivity.
  • Ecological security: Implementing the “Three-North” shelterbelt project over 130 million mu (93 million hectares), with good survival rates for trees, shrubs, and grasses, will safeguard northern ecological security and create new income opportunities.
  • Higher education: “Double First-Class” universities will see markedly improved conditions, with over 500,000 new standard dorm beds. Quality undergraduate enrollment will rise by 16,000 in 2024 and over 20,000 in 2025, giving more students access to quality education and ensuring basic living needs for those from low-income families.
A Bold Stroke in the History of Development

The two major undertakings are a major decision by the CPC Central Committee and the State Council, aimed at the overall strategy of building a strong country and achieving national rejuvenation. They play an irreplaceable role in advancing Chinese modernization.

They are not short-term measures but focus on medium- to long-term development. Some market institutions once analyzed that when China’s economy was facing short-term difficulties and challenges, the launch of the “two major undertakings” was mainly aimed at expanding investment in the short term to stabilize growth. Such a view clearly lacks a professional understanding of the decision-making intentions and logic, fails to properly grasp the relationship between the short term and the medium-to-long term, as well as between objectives and means, and inverts the proper order of priorities — a misconception that needs to be pointed out and corrected.

Since implementation began, the undertakings have provided important support for economic stability. Although their starting point was not short-term growth, the resulting investment has boosted employment and consumption, helping to expand domestic demand and stabilize growth. In the next step, during the formulation and implementation of the 15th Five-Year Plan, the “two major undertakings” will continue to occupy an important place, be organically incorporated into the new five-year plan, and form close alignment and sustained momentum with major national strategies, major plans, major projects, and key initiatives.

They will also bolster the country’s core competitiveness. As foundational support for Chinese modernization, they will strengthen factor security and resolve long-term bottlenecks, with far-reaching significance for shaping China’s development prospects. In an era of intensifying major-power competition, they will provide stable expectations and significantly enhance China’s capacity to manage international uncertainty. Such a major strategy will be pursued with persistence—it will not remain rhetorical, nor will it be reversed abruptly.

Though implementation has only recently begun, the undertakings’ historic role will continue to grow over time. In the future, looking back, they will surely stand as an important part of the “China story” and leave a bold stroke in the history of the People’s Republic’s development.

“De-Globalization?”

The classic study of the “swirl of processes and events” that ended previous globalization episodes is the theme of Princeton Professor Harold James’ 2002 book, The End of Globalization: Lessons from the Great Depression.

“Globalization” is here. Signified by an increasingly close economic interconnection that has led to profound political and social change worldwide, the process seems irreversible. In this book, however, Harold James provides a sobering historical perspective, exploring the circumstances in which the globally integrated world of an earlier era broke down under the pressure of unexpected events.

James examines one of the great historical nightmares of the twentieth century: the collapse of globalism in the Great Depression. Analyzing this collapse in terms of three main components of global economics—capital flows, trade and international migration—James argues that it was not simply a consequence of the strains of World War I, but resulted from the interplay of resentments against all these elements of mobility, as well as from the policies and institutions designed to assuage the threats of globalism.

Could it happen again? There are significant parallels today: highly integrated systems are inherently vulnerable to collapse, and world financial markets are vulnerable and unstable.

While James does not foresee another Great Depression, his book provides a cautionary tale in which institutions meant to save the world from the consequences of globalization—think WTO and IMF, in our own time—ended by destroying both prosperity and peace.

Legitimate fears about “globalization reversal” have been well put by Zakaria:

Davos, Switzerland —

President Trump’s speech here at the World Economic Forum went over relatively well. That’s partly because Davos is a conclave of business executives, and they like Trump’s pro-business message. But mostly, the president’s reception was a testament to the fact that he and what he represents are no longer unusual or exceptional. Look around the world and you will see: Trump and Trumpism have become normalized.

Davos was once the place where countries clamored to demonstrate their commitment to opening up their economies and societies. After all, these forces were producing global growth and lifting hundreds of millions out of poverty. Every year, a different nation would become the star of the forum, usually with a celebrated finance minister who was seen as the architect of a boom. The United States was the most energetic promoter of these twin ideas of economic openness and political freedom.

Today, Davos feels very different. Despite the fact that, throughout the world, growth remains solid and countries are moving ahead, the tenor of the times has changed. Where globalization was once the main topic, today it is the populist backlash to it. Where once there was a firm conviction about the way of the future, today there is uncertainty and unease.

This is not simply atmospherics and rhetoric. Ruchir Sharma of Morgan Stanley Investment Management points out that since 2008, we have entered a phase of “deglobalization.” Global trade, which rose almost uninterruptedly since the 1970s, has stagnated, while capital flows have fallen. Net migration flows from poor countries to rich ones have also dropped. In 2018, net migration to the United States hit its lowest point in a decade.

The shift in approach can best be seen in the case of India. In 2018, Prime Minister Narendra Modi came to Davos to decry the fact that “many countries are becoming inward focused and globalization is shrinking.” Since then, his government has increased tariffs on hundreds of items and taken steps to shield India’s farmers, shopkeepers, digital companies and many others from the dangers of international competition. The Office of the U.S. Trade Representative recently called out India for having the highest tariffs of any major economy in the world.

Indian officials used to aggressively court foreign investment, which was much needed to spur growth. Last week, with India’s economy slowing badly, Jeff Bezos announced a $1 billion investment in the country. (Bezos owns The Post.) But the minister of commerce and industry scoffed at the move, saying Amazon wasn’t “doing a great favor to India” and besides was probably engaging in anti-competitive, “predatory” practices. Often, protectionist policies help favored local producers. Malaysian Prime Minister Mahathir Mohamad recently criticized some of Modi’s policies toward Muslims. The Indian government effectively cut off imports of Malaysian palm oil. In a familiar pattern, one of the chief beneficiaries was a local billionaire long associated with Modi.

The Economist notes that Europe, once one of the chief motors for openness in economics and politics, is also rediscovering state intervention to prop up domestic industries. And if you think the Internet is exempt from these tendencies, think again. The European Center for International Political Economy tracks the number of protectionist measures put in place to “localize” the digital economy in 64 countries. It has been surging for years, especially since 2008.

It’s important not to exaggerate the backlash to globalization.

As a 2019 report by DHL demonstrates, globalization is still strong and, by some measures, continues to expand. People still want to trade, travel and transact across the world. But in government policy, where economic logic once trumped politics, today it is often the reverse. Economist Nouriel Roubini argues that the cumulative result of all these measures — protecting local industries, subsidizing national champions, restricting immigration — is to sap growth. “It means slower growth, fewer jobs, less efficient economies,” he told me recently. We’ve seen it happen many times in the past, not least in India, which suffered decades of stagnation as a result of protectionist policies, and we will see the impact in years to come.

Nevertheless, today, nationalism and protectionism prevail.

This phase of deglobalization is being steered from the top. The world’s leading nations are, as always, the agenda-setters. The example of China, which has shielded some of its markets and still grown rapidly, has made a deep impression on much of the world. Probably deeper still is the example of the planet’s greatest champion of liberty and openness, the United States, which now has a president who calls for managed trade, more limited immigration and protectionist measures. At Davos, Trump invited every nation to follow his example. More and more are complying.

“The world is de-globalizing. Trump set the example.” The Washington Post, Fareed Zakaria

Students should sense that while history does not repeat itself, it sometimes rhymes and this is a major danger. It also might imply that coping with climate change will be all the harder because American-led unilateralism everywhere would mean world policy paralysis.

WANG Huiyao: To Save Global Trade, Start Small

[from the Center for China and Globalization]

by WANG Huiyao (王辉耀), Founder of the Center for China and Globalization

The global economy is being rocked by war, sanctions and spiraling commodity prices—not to mention the ongoing strain of the pandemic, geopolitical tensions and climate change. These compounding risks present a serious challenge to the system of open trade that the World Trade Organization was designed to uphold. But it also offers a chance for the beleaguered organization, which is holding its first ministerial conference since 2017, to prove its continuing relevance.

The WTO has traditionally focused on combating protectionism—measures designed to insulate producers from international competition. Now, though, the biggest threats to free trade come from policies meant to safeguard national security and protect citizens from risks, such as those related to health, the environment or digital spaces.

Former WTO Director-General Pascal Lamy has called this growing use of export controls, cybersecurity laws, investment blacklists, reshoring incentives and the like “precautionism.” It’s been on the rise since the start of the pandemic, when many countries moved to restrict exports of medical supplies and other essentials. COVID-19 has also raised concerns about the vulnerability of supply chains, particularly those dependent on geopolitical rivals.

The world’s two biggest trading nations, the United States and China, have both engaged in precautionism. The U.S. is actively pursuing a policy of “friend-shoring”—shifting trade flows from potentially hostile countries to friendlier ones. China’s “dual circulation” strategy aims in part to reduce dependence on foreign imports, especially technology, while its government has long imposed limits on data flows in and out of the country.

With Russia’s invasion of Ukraine, the momentum toward friend-shoring has grown. Meanwhile, food shortages and surging prices have triggered another round of precautionary measures: Since the war began, 63 countries have imposed a more than 100 export restrictions on fertilizer and foodstuffs.

While the impulse driving such policies is understandable, the trend could cause great harm if allowed to run unchecked. It will increase inflation and depress global growth, especially if it involves costly redeployment of supply chains away from efficient producers such as China. A recent WTO study estimated that decoupling the global economy into “Western” and “Eastern” blocs would wipe out nearly 5% in output, the equivalent of $4 trillion.

As a recent study by the International Monetary Fund points out, the way to make global value chains more resilient is to diversify, not dismantle them. Turning away from open trade will only make states more vulnerable to economic shocks such as war, disease or crop failures.

The WTO is an obvious vehicle to rally collective action on these issues. However, like other global institutions, it has been weakened by years of deadlock. At this week’s meeting, countries should start to build positive momentum with some small but symbolically significant breakthroughs to show the WTO can still mobilize joint action.

Given current threats to food security, at the very least members should agree not to restrict exports of foodstuffs purchased for the World Food Programme. A step further would be a joint statement calling on members to keep trade in food and agricultural products open and avoid imposing unjustified export restrictions. There should also be closer coordination to smooth supply chains and clogged logistics channels.

Another low-hanging fruit is finally securing a  waiver covering intellectual property rights for COVID-19-related products. This proposal has languished for over 18 months but has now been redrafted to address concerns from the U.S. and European Union. Signing it would go some way to expanding global access to vaccines, which are still sorely needed in many parts of the world.

Beyond this week, the WTO secretariat and members need to develop a work program to reform the organization. This should include developing a framework to ensure that if states do take precautionary measures, they do so in a transparent, rules-based manner that does not slide into more harmful forms of protectionism.

Reviving the WTO’s defunct dispute settlement mechanism is a clear priority. Twenty-five members have agreed to an interim arrangement that would function in a similar way. More members should join this agreement, ideally including the U.S., and start negotiating the full restoration of a binding mechanism. They should also set clear criteria for carveouts for legitimate precautionary measures related to national security, healthcare and environmental issues.

No one should expect big breakthroughs in Geneva. But practical agreements on immediate priorities such food security and vaccines would at least help to reassert the WTO’s relevance and show that the world’s trading partners are not simply going to give up on multilateralism. At this dangerous moment, even small victories are welcome.

Movies as a Parallel University: Cola Wars Movie

The 1961 fast-paced comedy, One, Two, Three starring James Cagney is extremely informative in a certain way if you get beyond the farcical and “manic-jocular” tone and atmosphere.

The story takes place in West Berlin. Communism and Nazism are still “in the air,” although Germany has of course been defeated in 1945.

C.R. “Mac” MacNamara (James Cagney) is a high-ranking executive in the Coca-Cola Company, assigned to West Berlin after a business fiasco a few years earlier in the Middle East (about which he is still bitter). While based in West Germany for now, Mac is angling to become head of Western European Coca-Cola Operations, based in London. After working on an arrangement to introduce Coke into the Soviet Union, Mac receives a call from his boss, W.P. Hazeltine, at the Coca-Cola headquarters in Atlanta. Scarlett Hazeltine, the boss’s hot-blooded but slightly dim 17-year-old socialite daughter, is coming to West Berlin. Mac is assigned the unenviable task of taking care of this young whirlwind.

The undiscussed and “latent content” of this zany comedy is very serious.

There are three fundamental choices for a country:

  1. Class war (Communism, Eastern Bloc, Russia).
  2. Race war (Nazis, Germany, fascism).
  3. Cola war (Coke versus Pepsi, USA, business civilization).

The implicit message of the movie, which constitutes a kind of ultimate political science lesson, is that cola wars (i.e., corporate competition for sales and profits and markets worldwide) is the best choice, no matter that it seems manic and empty, since the alternatives on the list of three options are impractical nightmares which lead to calamities and historical catastrophes.

The basic book describing the cola wars factually is: The Cola Wars: The Story of the Global Battle between the Coca-Cola Company and PepsiCo, Inc., J.C. Louis & Harvey Z. Yazijian, Everest House, October 1, 1980.

Germany-Watching: Economics (U.S. Money Market Fund Reform)

from Deutsche Bundesbank Eurosystem’s Bundesbank Research Centre:

You Can’t Always Get What You Want (Where You Want It): Cross-Border Effects of the U.S. Money Market Fund Reform [PDF]

Authors: Daniel Fricke, Stefan Greppmair, Karol Paludkiewicz

Non-technical summary
Research Question

Money market funds (MMFs) are an important part of the growing segment of non-bank financial intermediaries. This paper contributes to this literature by analyzing the cross-border effects of the 2014 U.S. MMF reform, which was implemented several years prior to the EU Regulation. We study whether euro area MMFs received inflows as a consequence of the reform and investigate the (unintended) economic effects on the basis of the non-synchronized implementation dates of the regulatory changes in the U.S. and the EU.

Contribution

To the best of our knowledge, we are the first to examine the cross-border effects of the 2014 U.S. MMF reform. Prior work has shown that the reform led to a substantial decline of the institutional prime segment in the U.S. (MMFs that invest primarily in non-sovereign debt instruments). Moreover, these funds increased their risk-taking due to the increased competition and newly imposed liquidity restrictions left these funds more prone to large outflows (run risks).

Results

We document both positive and negative effects of the U.S. reform on institutional MMFs in the euro area. These funds, particularly those from the prime segment, experienced substantial inflows from foreign investors around the implementation of the U.S. reform and we show that these cross-border flows were largely motivated by the search for money-like instruments. While euro area MMFs reduced their risk-taking, the industry as a whole has become more concentrated and possibly more exposed to run risks. This risk materialized in the COVID-19 induced stress period during which these funds faced large outflows by foreign investors.

Read the full discussion paper [archived PDF].

India-Watching

ICRIER Working Paper № 407

India’s Platform Economy and Emerging Regulatory Challenges

by Rajat Kathuria, Mansi Kedia and Kaushambi Bagchi

Abstract

The phenomenal rise of the platform economy has reshaped how economies operate across the world. The importance of digital platforms has never been more evident than in combatting the ongoing coronavirus (COVID-19) pandemic. Even with the threat of a global recession looming large, technology companies are witnessing a surge in demand for their services. Platforms distinguish themselves from traditional markets by demonstrating speed and scale of innovation and fostering efficient and productive interaction between buyers and sellers. Enterprises using platform-based business models have expanded beyond social media, travel and entertainment to sectors like financial services, healthcare, logistics and transportation. With the objective of building evidence for policy-making in this sector, this study undertakes an in-depth analysis of the impact generated by the platform economy in India, by estimating consumer surplus from the use of platforms, analyzing its impact on traditional businesses either by transformation or disruption. The estimated consumer surplus is Rs. 438.75 per individual per month, amounting to a collective annual surplus of Rs. 3620 billion for India. At current exchange rates this would amount to $47 billion. 

The growth of platforms has also been accompanied by global concern against their anti-competitive practices, the spread of fake news and harmful content, political bias, etc. The paper discusses regulatory changes and areas of concern for market competition, labour and employment, fake news and misinformation, consumer protection, counterfeit goods and data privacy in India.

[Read full article, archived PDF]

[Executive summary, archived PDF]