with caution, but they are useful to explain the different channels at work. to illustrate the potential effects of rising protectionism, i do not want to dwell on the specifics of the tariffs currently being discussed. this would miss the bigger picture. i rather want to consider a hypothetical scenario where the united states raises tariffs on all imports of goods by 10 percentage points, and its trading partners impose the equivalent on us exports. according to our model simulations, such a scenario would have significant adverse effects on the global economy, including, and in particular, on the economy that raises tariffs in the first place. specifically, real economic activity in the united states could be up to 2½ % lower than in the baseline in the first year alone. the reasons are essentially threefold : first, if domestic and imported goods cannot be easily and readily substituted, higher import prices increase firms ’ production costs and reduce households ’ purchasing power. these effects weigh on consumption, investment and employment, resulting in a material overall negative impact on gdp. second, in addition to the direct adverse price effects, the uncertainty about growth prospects is likely to cause consumers to delay expenditure and businesses to postpone investment. 4 see e. g. bloom, n. ( 2009 ), “ the impact of uncertainty shocks ”, econometrica, 77 ( 3 ) : 623 – 685. much will depend on how consumers and businesses react, but ecb simulations suggest that such uncertainty and confidence effects could account for around one - third of the overall effect in the first year. in addition, financial investors react to uncertainty by selling equities, reducing credit and demanding higher compensation for risk. this in turn reduces wealth, increases the cost of investing and further discourages demand. and third, economic activity declines as us exports are hit by the tariffs abroad, which is only partially offset by lower imports. 2 / 5 bis central bankers'speeches in short, even though one may argue about the relative contributions of each of these channels, and the overall effect on economic activity, qualitatively the results are unambiguous : an economy imposing a tariff which is retaliated by other countries would clearly be worse off. its living standards would fall and jobs would be lost. the effects on other economies would primarily depend on their size, trade openness and how much they trade with the tariff - imposing country. naturally, the economies that have the closest trade relations with that country would be the most negatively affected. but the effects

, issue 2 / 2017. barriers to trade would undermine this virtuous process and thereby cause both productivity and potential output to decline. the potential growth rate of advanced economies has already slowed over recent decades, reflecting a number of factors, including the ageing population, 9 see nerlich, c. and j. schroth ( 2018 ), “ the economic impact of population ageing and pension reforms ”, economic bulletin, issue 2 / 2018. as well as declining productivity growth. so to sum up, why does protectionism matter for central banks? first, because a “ trade war ” scenario would add to global uncertainty at a time when some central banks have only just begun the process of unwinding the unconventional policy measures put in place following the global financial crisis. and second, because a further adverse structural shock to productivity may lead us to be more often constrained in the longer term by the effective lower bound on nominal interest rates and to increase the need to resort to unconventional policy measures. conclusions let me conclude. 4 / 5 bis central bankers'speeches greater global economic integration has boosted living standards worldwide and lifted millions out of poverty. yet, its distributional impacts both across and within countries have not been adequately addressed, a fact that ultimately provides the political motivation for the protectionist moves we observe. winding back globalisation is the wrong solution to address these concerns. a retreat from openness will only fuel more inequality as import prices rise, goods become dearer and real incomes fall. it would deprive people of the undisputed economic advantages that trade and integration bring and thereby exacerbate economic hardship for the poorest in society. and it would breed distrust among nations, making for a more unstable international order. the distributional and social effects of greater economic integration should rather be addressed by targeted policies that achieve fairer outcomes. this requires a strong political and institutional landscape which can ensure that the geographical scope of policy action and political debates coincide with the scope of market integration. this is a landscape which in europe is best provided by the european union. by allowing member states to recover some of the state functions that have been eroded by globalisation, the european union is a vehicle that brings the benefits of economic openness to the greatest number of its citizens while protecting them against untrammelled global forces. it represents the most progressive model we have for taking back control of globalisation by addressing people ’ s concerns over open markets and fair competition – doubts that individual countries on