Protectionism complicates monetary policy

Thomas Jordan, Chairman of the Governing Board

Volkswirtschaftliche Gesellschaft des Kantons Bern, Berne, 31.10.2018

Switzerland owes much of the prosperity it enjoys today to open markets and thriving trade with many countries across the globe. In recent decades, free trade in goods and services, coupled with advancing technological progress, has delivered growth and prosperity on a global basis. Nevertheless, protectionism appears to be gaining ground again today. Trade disputes are jeopardising the global upturn. This situation harbours considerable risk for central banks: The flare-up in protectionism could have negative consequences for monetary policy.

Numerous studies demonstrate that the free exchange of goods and services improves people's standard of living. The main argument against free trade is that benefits are unevenly distributed. Although all countries that engage in free trade gain advantages from the unrestricted exchange of goods and services, this is not necessarily the case for every household and every company. Free trade also has its losers. However, the fact that certain companies and sectors flourish while others decline cannot be put down to international trade alone. The impact of technological progress in driving structural change is at least as strong.

In recent times, free trade has increasingly been criticised as not being 'fair'. The term 'fair' is applied here in different ways. It is used in assessing bilateral trading relationships, for example, or in connection with alleged violations of existing trade rules. Free trade is not a zero-sum game in which one side's gain is the other side's loss. The view that the bilateral balance of trade should always be in equilibrium ignores this reality. The accusation that some countries do not play by the rules and instead seek to gain advantages for themselves with unilateral measures is, however, not without justification.

The increased duties recently imposed by the US have already prompted the first counteractions from the trading partners concerned. If this spiral were to continue, it could develop into an all-out trade war, which would have drastic consequences for the global economy. Monetary policy would also be affected. Over the short term, tariffs and other barriers to trade have an inflationary impact and curb growth - provoking in effect a negative supply shock that causes production costs to rise. The optimal monetary policy response for a central bank is not immediately obvious. A significant role here is played by the expectations of producers and consumers. Longer-term inflation expectations in particular are an important factor for the monetary policy stance. Protectionism fuels uncertainty both in relation to the short-term development of the real economy and prices and with regard to the longer-term macroeconomic ramifications. This uncertainty makes it more difficult for a central bank to fulfil its mandate.

As a small open economy, Switzerland would be hit hard by a trade war. It therefore has a vital interest in strongly opposing protectionist tendencies and advocating effective trade rules at international level. Free trade is a key driving force behind our prosperity, and we should do our utmost to safeguard its achievements.