Protectionism may increase national trade deficits, says ECB study

Protectionist trade policies may increase, rather than reduce, a country's trade deficit, the European Central Bank (ECB) said in a study on Wednesday, just days after finance chiefs of the world's top 20 economies dropped their commitment to open trade.

Seeking to reduce a large trade deficit, Donald Trump’s United States administration has proposed a series of protectionist measures, such as new import duties.

The White House also wants to revisit some of its trade relationships, including those with key partners Germany and China, which both sell more goods to the US than they buy from it.

Indeed, the US has already pulled out of the Trans-Pacific Partnership trade deal, asked for a review of the North American Free Trade Agreement and refused to reaffirm its pledge in favour of open and free trade at the G20 meeting last weekend, raising fears that global trade will take a hit.

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Yet the authors of the ECB paper, published in its regular Economic Bulletin, believe the opposite policy is needed. They said that liberalising global trade and importing cheaper intermediate goods improves competitiveness, helping firms keep their cutting edge over international rivals and lifting a country's exports.

“Adopting policies that facilitate innovation and reduce protectionist barriers may help to improve an economy’s competitiveness,” the ECB paper said. “Multilateral initiatives aimed at trade and financial liberalisation may also reduce an economy’s external imbalances.

“Participating in global value chains may give an economy a temporary competitive edge that results – in order to smooth consumption over time – in a rise in its current account balance,” the ECB said.

The study also appeared to dismiss the US administration’s claim that countries running big current account surpluses may be using unfair trade practices. Instead, it argued that countries will view their competitive edge as temporary, behaving with caution as they expect others to liberalise trade to improve their own efficiency and restore competitiveness.

“As a consequence, in order to smooth consumption over time, part of the income gain in the domestic economy will be saved, which improves the current account balance,” the ECB said.