EU Trade Restrictions Would Hamper Productivity Growth, ECB Says

  • Exporting firms tend to be larger and more productive
  • Trade barriers would lead to less efficient input allocation

Trade restrictions in the European Union would lower productivity growth, the European Central Bank said.

Exporters tend to be the most productive and largest firms in their respective sectors, meaning that shocks that affect these companies can have aggregate implications, according to an article to be published in the ECB’s economic bulletin. Tighter regulation would lead to less efficient input allocation across firms, rendering them less competitive and thus less productive, it said.

The ECB study cites evidence that resource misallocation in Europe has been on the rise since the start of the millennium. Reducing trade barriers would generate higher competition in domestic markets and better utilize resources, while allowing more firms to attain the efficiency that is necessary to participate in trade.

The article follows recent discussions about the benefits of globalization, with a protectionist U.S. administration under President Donald Trump and populist politicians in Europe citing higher trade restrictions in their respective political agendas to boost domestic economies. Lower productivity growth as a result of such constraints could handicap a European economy that is struggling to build momentum and faces the challenges of an aging population.

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Policies that lower trade costs, such as reducing tariffs or trade-related infrastructure and logistic charges, would enhance the scope for export-related activities and firms’ ability to switch between domestic and foreign markets, the ECB said. Measures that support firm productivity, such as incentivizing research and development, would make it easier for a larger number of firms to access international markets, while loosening regulations in product and labor markets would foster better allocation of inputs.

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