In a paper released today, ECB noted that last year’s increased in trade tensions and the repercussions of the tariffs implemented pose only a “modest adverse risk” to the global and euro area outlooks. Also, impact of implemented tariffs and tariff announcements owing to uncertainty effects appears to have remained “confined to the targeted sectors” for the time being.
However, if trade tensions were to escalate once again, “the impact would be larger”. Model-based simulations indicate that the medium-term direct impact of an escalation could be “sizeable, compounded by heightened financial stress and a drop in confidence.” The longer-term effects would be “even more pronounced”.
ECB also warned that “although free trade is often seen as one of the factors behind rising inequality both within and across countries, winding back globalisation is the wrong way to address these negative effects.” “A retreat from openness will only fuel more inequality, depriving people of the undisputed economic advantages that trade and integration bring.”. The paper urged that “countries should seek to resolve any trade disputes in multilateral fora”.