Protectionism may raise, not cut, trade deficits: ECB

Protectionist trade policies may increase, rather than reduce, a country's trade deficit, the European Central Bank said in a study on March 22, 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, Donald Trump's U.S. 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 with key partners Germany and China, which both sell more goods to the United States than they buy from it.

Indeed, the United States has already pulled out of the Trans-Pacific trade deal, asked for a review of the North American Free Trade Agreement and refused to reaffirm its pledge for open and free trade at the G-20 meeting last weekend, raising fears that global trade will take a hit.

Yet the authors of the ECB paper -- published in its regular Economic Bulletin - believe the opposite recipe is needed.

They said liberalizing 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. 

"Multilateral initiatives aimed at trade and financial liberalization 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 added.

The study also appeared to dismiss the U.S....