The world is moving in a direction where free trade can no longer be taken for granted and small and open economies like Estonia have the most to lose from protectionism spreading more widely. Being able to adapt quickly becomes particularly important in such circumstances. Businesses that can adapt and that can operate flexibly can find new opportunities in a changing world, but in the broader picture total independence is not a viable solution for national economies said Governor of Eesti Pank Madis Müller at a public seminar on the changing environment for trade.

Eesti Pank’s estimates show that an increase in trade restrictions in the global economy could reduce growth in the Estonian economy by around half a percentage point, even if the US tariffs have only a limited direct impact. The USA is a relatively small export market for Estonia, but the negative impact would reach the country indirectly through Estonia’s main export markets, which are themselves dependent on the US market. “In these conditions, flexibility, the ability to react quickly and the capacity to adapt to both risks and opportunities are a competitive advantage in corporate strategy”, said Mr Müller.

Having just returned from the annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington, Mr Müller reported that trade restrictions and tariffs were a topic of discussion in almost all of the meetings. This was a reason why the latest global economic forecast from the IMF downgraded the outlooks for economic growth for the USA and for a large part of the rest of the world. “Placing restrictions on trade is not a route that leads to stability or to economic prosperity, but rather one that leads to higher prices, weaker competition, and slower economic growth”, he observed. This is the case even if the tariffs do not last for long, as increased political and economic uncertainty affects decisions about investment and consumption.

Mr Müller drew a parallel between the current developments in trade and those in the electricity market in Estonia, where the need to increase local generating capacity has been recognised in order to ensure security of supply and price stability. At the same time there is a discussion about the need to develop cross-border connections with neighbouring countries so that the market can function effectively and the cost for taxpayers would ultimately be as low as possible. “Relying solely on an independent supply does not give the best results if the system works better through cooperation”, he explained. There is now a similar dilemma in trade policy as complete independence is not a solution, and an appropriate balance has to be found.

Mr Müller noted that using tariffs to raise the price of imported goods is certainly a way of supporting less efficient local production. However, if local production is then unable to meet demand, even relatively high tariffs will not be able to reverse fully the flows of goods. “This then means that consumers must pay higher prices and that the limited supply of local labour is directed into inefficient industry. The USA as a society and as an economy as a whole does not win from this”, he pointed out. He also explained why the status of the US dollar as a reserve currency means that the deficit on the US current account should not necessarily be seen as a problem.

Mr Müller argued that it would not be reasonable for Europe to respond to the US tariffs by imposing its own high tariffs. “Rather than rushing into a trade war, it would be more effective to make sure that other international trade relationships can operate as well as possible. This would allow businesses to find alternative markets and reorganise their supply chains to suit the new paradigm”, he said. Moreover, there are 450 million consumers in the domestic market of the European Union and a lot of unused potential. Mr Müller emphasised that the priority must be to make sure the economy can adapt quickly.

Further information:
Hanna Jürgenson
Communications Officer of Eesti Pank
Tel: 56920930
Email: [email protected]
Press enquiries: [email protected]