Project Syndicate (PS): You have often pointed out that inflation has been exacerbated by trade protectionism, which weakens the market competition that induces firms to keep prices low, and by immigration restrictions, which lock in labour shortages. At a time when a return to unfettered globalization appears politically unfeasible – as you recently acknowledged, new restrictions on exports to China have received bipartisan approval – which policy changes would have the most impact?

Pinelopi Koujianou Goldberg: First, it is important to remember that controlling inflation is not and should not be the only goal of policy. Sometimes, we must pursue imperatives that may generate inflationary pressures – for example, addressing climate change.

But let us focus on inflation for a moment. Taking into account political feasibility – and in addition to managing interest rates – I would suggest, first, easing immigration restrictions, especially for high-skill workers and in sectors where there are labour shortages, such as healthcare and transportation.

Second, greater efforts should be made to boost trade with and investment in economies other than China. India or countries in Africa come to mind. At the same time, Western leaders should adopt a more cooperative stance toward China, especially in the fight against climate change. For example, solar-panel manufacturing is three times more expensive in the US and Europe than in China.

Another useful step would be encouraging employers to adopt hybrid-work models – allowing for more remote work – to support job recruitment, boost retention rates, and generally stimulate the domestic labour supply. Workers worldwide have made clear that they value the added flexibility that remote work offers.

Finally, among the changes that would have the most impact would be bringing the war in Ukraine to an end. As long as the conflict rages, it will continue destabilising the world economy, with serious consequences for inflation and growth. But this is outside the scope of economic policy.

Q: A year ago, you argued that while the US and China had both been harmed by the “tit-for-tat exchange of protectionist measures,” bystander countries had benefited from higher exports. By September, however, you suggested that the Ukraine war had finally “stopped” globalization. Are “the big export winners of the trade war” still reaping benefits from proliferating trade restrictions among major powers? Could “deep” trade agreements that address tariffs and non-tariff barriers be the key to protecting smaller economies from deglobalization?

Indeed, I view the war in Ukraine as a game-changer, owing less to its direct effects on trade than to its indirect effects, as it reinforced the backlash against globalization.

In a December 2021 paper, my co-authors and I showed that, for many bystander countries, the trade war between the US and China boosted global exports. So, rather than contributing to deglobalization, it helped to spur a shift to “globalization 2.0.”

It is too early to say whether the same has been the case with the war in Ukraine, as the full export data are not yet available. But anecdotal evidence suggests that the war’s short-run economic effects have been mixed and uneven. Europe has been hit hard. As for developing countries, some – such as India – have secured cheaper oil imports from Russia. At the same time, however, several countries – including India – have been priced out of the natural-gas market.

It is hard to say what will happen in the longer run, as the landscape is constantly changing. Some developing countries are optimistic – perhaps too optimistic in some cases. In India, for example, some believe that their country could become the “new China.” But this is unlikely.

Our earlier research showed that the bystander countries that benefited the most from US-China trade tensions were already highly integrated into the global economy through extensive trade agreements. India is not in that group. Moreover, the US has not only turned on China; its attitude toward trade and globalization more broadly has shifted. It will not allow India to replace China in the global economy.

The same goes for developing countries better integrated than India into the global trading system, such as Malaysia and Vietnam. They will continue to export and prosper, but only as long as their growth does not challenge advanced countries’ labour markets and technological dominance.

Multilateralism may retreat, but there is renewed interest in using regional and plurilateral agreements to foster trade among like-minded countries. Examples include the Regional Comprehensive Economic Partnership, the African Continental Free Trade Area, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

There may still be scope for developing countries to participate in trade. They should not expect the rapid growth and poverty reduction associated with effective multilateralism and flourishing trade with high-income countries.

Q: Last July, you criticised the prevailing approach to tackling inflation in the United States, arguing that interest-rate hikes would be “insufficient to rein in inflation in the short run” and “likely [to] increase unemployment over time.” Since then, the US Federal Reserve has continued to hike rates, inflation has started to slow, and job growth has remained stronger than expected. Do recent data suggest that the Fed has done enough – or too much? How credible is its signal that the federal funds rate will exceed five percent by the end of this year?

To be clear, I did not argue that interest-rate hikes are not useful to curb inflation. Instead, I pointed out that interest rates alone would be insufficient to bring price growth under control. Interest rates target demand, but supply shortages have been equally important in the latest bout of inflation.

The good news in the United States today is that inflation has been reined in, and the labour market remains strong. But we are not out of the woods. The Fed recognizes this (and has repeatedly pointed it out). The central bank has been wise to pay close attention to the data rather than pre-commit to a specific rate-hike trajectory. I have no issue with its actions.

That said, if the Fed sticks with its long-run inflation target of two percent, further rate increases will be needed, with potentially adverse effects on the labour market. It would be advisable to raise the target to a more realistic level – say, to three to four percent. There is nothing magical about a two percent inflation target.

It makes little sense to cling to it at a time when circumstances – including the war in Ukraine, tensions with China, recession fears, and the climate imperative – make it untenable.