Protective tariffs imposed by the US in recent months have only had a minor impact on the world economy but a significant escalation in tensions could derail the recovery in global trade, the European Central Bank (ECB) said on Monday.
Retaliation and a full fledged trade war could increase import prices, raise production costs and eat into households’ purchasing power, negatively impacting consumption, investment and employment, the ECB said in an economic bulletin article.
Demanding more fair trade, the United States has imposed some trade tariffs on China and asked Beijing to reduced its trade surplus with the United States by €200-billion. But it has so far exempted the European Union from new tariffs on steel and aluminium.
"In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require a higher compensation for risk," the ECB said. "Heightened uncertainty could spill over more broadly, adding to volatility in global financial markets."
Over the longer term, protectionism would weigh on productivity and negatively affect the economy's potential output growth, the ECB said.