When Prices Become Relevant: The Effect of Surging Inflation on Trade Attitudes

• In Event: Determinants of Trade Preferences

Abstract

The intensive exploration of the relationship between international trade and inflation has highlighted various ways in which the former can mitigate the latter. Despite recognizing the significance of price levels in shaping trade attitudes, the trade preferences literature has not directly incorporated inflation rates as a potential determinant. This may be surprising, as inflation has been found to affect other economic policy preferences. This paper addresses this gap by investigating whether concerns about inflation influence attitudes toward trade. Within the framework of bounded rationality, leveraging the substantial increase in global inflation during 2022, the study posits that (H1) informing individuals that trade liberalization is expected to decrease prices and curb inflation leads to greater support for trade. Additionally, due to the heightened vulnerability of low-income individuals to the adverse effects of inflation, I hypothesize that (H2) information about the 'lower prices effect' of trade and its consequences for inflation will have a more pronounced impact on low-income individuals than those with higher incomes. The evidence from a survey experiment conducted in Israel during 2022, when inflation peaked, confirms both hypotheses. The findings indicate that steep surges in inflation are effective in mobilizing public support for trade liberalization when accompanied by messages emphasizing the impact on prices. This not only contributes to the theoretical and empirical discourse on the effects of price levels on trade preferences but also reinforces the understanding that preferences are context-dependent and malleable rather than static.

Author

• Bar Nadel