‘Protectionist policies may increase country’s trade deficit’

PROTECTIONIST trade policies may increase, rather than reduce, a country’s trade deficit, the European Central Bank (ECB) said in a study yesterday, just days after finance chiefs of the world’s top 20 economies dropped their pledge for open trade.

Seeking to reduce a large trade deficit, US President Donald Trump’s administration has proposed a series of protectionist measures, including new import duties.

The White House also wants to revisit some of its trade relationships, including 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 Agreement, asked for a review of the North American Free Trade Agreement and refused to reaffirm its pledge for open and free trade at the G20 meeting last weekend, raising fears that global trade will take a hit.

Yet the authors of the ECB paper believe the opposite recipe is needed.

They said liberalising global trade and importing cheaper intermediate goods improves competitiveness, helping firms keep their cutting edge over international rivals and lifting the country’s exports.

“Adopting policies that facilitate innovation and reduce protectionist barriers may help to improve an economy’s competitiveness,” the ECB paper said.