Dutch central bank leader warns of global tensions’ impact on trade

Increasing geopolitical tensions and trade restrictions between economic blocs and countries around the world are having a negative impact on free trade and investment. Klaas Knot, president of De Nederlandsche Bank (DNB), warned of this in a speech at the Eurofi think tank in Ghent on Friday. European politicians must therefore work to protect free trade and further strengthen the EU single market, said Knot.

Over the past five years, threats to free trade and investment have increased and resistance to globalization has grown, Knot stated. "International cooperation is in retreat. Brexit, ongoing tensions between the US and China, the Russian invasion of Ukraine and the Middle East conflict have put further pressure on globalization," Knot explained.

In response to these developments, countries and economic blocs are increasingly pursuing policies aimed at being less dependent on each other and protecting themselves from unfavorable developments in other parts of the world. While strengthening national security and mitigating economic risks is a "logical policy" in a world that has become more dangerous, the economic costs of these policies can be very high if not properly implemented, according to the DNB president.

Indeed, economies are much more interdependent today than they were a few decades ago, so the costs of fragmentation are much higher. “Global trade-to-GDP is now 60 percent compared to 24 percent during the Cold War. That tells us that this time the potential costs of fragmentation are much higher,” Knot said in his speech.

The fragmentation of economies in the form of increasing trade restrictions leads to higher import prices and reduced access to technology and knowledge, according to Knot. International political tensions also make inflation less predictable. In addition, a more divided world has implications for financial stability. During the 2008 financial crisis, policymakers around the world were able to respond quickly, thanks to the good relationships that had developed over the years. In a fragmented world, such a rapid response becomes increasingly complicated, Knot stated.