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ECB Says Protectionism Would Hurt Economy With US Hit Severely

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The European Central Bank repeated its warning that a rise in trade protectionism would undermine the global economy, and said the U.S. would bear the brunt of the damage.

“In the event of a significant increase in protectionism, the impact on global trade and output could be material,” ECB researcher Lucia Quaglietti wrote in an Economic Bulletin article published Monday. “The impact could be particularly severe in the U.S.”

Global risks such as tariffs are a concern for the ECB, which is witnessing the euro-area economy slow after the strongest growth in a decade in 2017. President Mario Draghi has warned that while the impact of already-adopted protectionist measures is limited, the prospect alone of a trade war between the U.S. and China can damage confidence and reduce consumption and investment.

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Escalating trade tensions would harm the economy via higher import prices, increased volatility in financial markets, reduced credit supply and eventually crippled productivity growth, according to the report.

“In a scenario in which the U.S. increases tariffs markedly on imported goods from all trading partners that retaliate symmetrically against it, the outcome for the world economy would be clearly negative; global trade and activity could fall relative to the baseline.”

Speaking on April 6, ECB Executive Board member Benoit Coeure described a hypothetical scenario in which the U.S. raises levies on all goods imports by 10 percentage points, with trading partners responding with the same measures. This would reduce American growth by as much as 2.5 percentage points in the first year alone.

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