Protectionism could accelerate inflation and undermine the stability of the European economy

An attempt to reduce dependence on foreign suppliers and further stimulate domestic production in Europe may result not only in large expenditures during the “transition period”, but also in long-term negative consequences – from accelerating inflation to reducing the volume of global trade. This conclusion is contained in the ECB working paper: its authors model the consequences of the reorganization of production in the euro area – the replacement by local resources of part of the imports that are used to produce export products. According to the study, “uncontrolled” import substitution could reduce the competitiveness of European goods and the sustainability of the economy.

The working paper “Macroeconomic implications of supply chain reorientation”, prepared by a group of economists and published on the ECB website, examines the medium- and long-term effects of import substitution in Europe. Let us clarify that we are talking not so much about the forced replacement of imported goods as a result of the Russian military operation in Ukraine, but about attempts to reduce “excessive dependence” on trading partners – primarily from China and the United States, not named in the document, but implied, to whose economic policies European authorities still have questions (see, for example, “Kommersant” dated January 18, 2023). In response to the protectionism of Beijing and Washington, Europe hopes to further stimulate domestic production and gradually abandon some of the imported products – the legislative framework for this has already been deployed.

The paper models the reorganization of European production: the authors study the consequences of replacing some of the imported resources that are used in the production of goods for export with their own, in order to make the impact of policy on world trade more visible.

Among the most likely consequences of import substitution are a constantly accelerating rise in prices for the products of local producers, ensured by increased market power, a decrease in their productivity associated with the use of more expensive and lower-quality resources, as well as retaliatory measures from trading partners, which will seriously affect the volume of global production. trade.

In Europe itself, due to the loss of international competition, the quality of local production may suffer. At the same time, a significant amount of funds, which, as is already clear, will have to be spent on such a reorganization of output, will only increase over time – due to the expected acceleration of inflation, which the ECB, we recall, has been fighting for the last year and a half.

Economists see a logical option for implementing an import substitution policy as seriously limiting it: it is proposed to “extend” the policy only to those goods that, given the restructuring of supply chains, may actually not reach Europe in the required time frame. Another factor constraining massive state support in the document is its focus in relatively “successful” industries, that is, in those that already produce products that are not inferior to imported analogues.

Kristina Borovikova