There has been an increase in protectionism in international trade, driven largely by US tariff increases and retaliatory measures by its trading partners. In the recent period, trade relations between the US and China have been the most affected but there is still a high risk of an escalation of protectionism involving more barriers and other countries.

To assess the potential effects of an increase in protectionism on world activity and trade, a scenario of a trade war between the US and all its trading partners is simulated. The US is assumed to raise tariffs on all its imports of goods - by about 10% - and the other economies retaliate by imposing tariffs of the same amount on imports from the US. The negative impact on the level of world gross domestic product (GDP) is 0.7% at the end of a three-year horizon. The impact on the Portuguese economy is similar. The reduction in world trade amounts to almost 3%.

In practice, the effects of an escalation of protectionism will depend on the barriers effectively imposed and the response of economic authorities. Therefore the impacts presented should be considered as illustrative.

For more details, see Box 5 “Macroeconomic impact of a rise in global protectionist tensions” published in Banco de Portugal Economic Bulletin, June 2018.

Prepared by Gabriela Castro and Cristina Manteu. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to info@bportugal.pt.