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EU's dire warning that trade war is about to get worse


US President Donald Trump. Photo: AP Photo/Manuel Balce Ceneta

US President Donald Trump. Photo: AP Photo/Manuel Balce Ceneta


US President Donald Trump. Photo: AP Photo/Manuel Balce Ceneta

The global trade war is about to get worse, as the rules-based system of international commerce is poised to revert to an environment where the strong impose their will upon the weak, according to an internal memo circulated among European Union governments.

The disputes between the US and its closest trading partners are set to escalate "in the coming months, as more unilateral measures are threatened and imposed, leading, in some cases, to countermeasures, or to mercantilist deals," according to the memo drafted by the European Commission, which manages trade policy for the entire bloc.

The world will go back "to a trading environment where rules are only enforced where convenient and where strength replaces rules as the basis for trade relations", according to the memo.

The dire warnings come as the exports-based European economic model risks crumbling under pressure from US President Donald Trump, who has sought to narrow the US trade deficit at all costs, even if that means an unravelling of global rules.

After imposing punitive tariffs on steel and aluminium imports from Europe, Mr Trump now threatens a 20pc levy on European cars, in a measure that would deal a massive blow to the EU's auto industry.

The internal document, a copy of which was obtained by Bloomberg, singles out three main drivers of the upcoming trade apocalypse:

- Gaps in the rulebook of global trade "leading to distortions, many of which [are] associated with non-market policies and practices in major trading nations, that the WTO does not seem able to address adequately";

- Aggressive unilateral actions by the US targeting allies and foes alike with punitive tariffs;

- The US's decision to block appointments of members to the World Trade Organisation's Appellate Body that serves as the final arbiter in trade disputes.

"As more appellate body members leave office while the new appointments are being blocked, the dispute settlement system will soon fall into paralysis, rendering enforcement of the rules impossible," the Commission says in its memo circulated ahead of a gathering this week of EU leaders to discuss trade, among other topics. "That would equate to a 20-year step backward in global economic governance."

The EU, which shares some of the US concerns about shortcomings in the global trade order, is developing proposals to revamp WTO rules, as it seeks to save it from what it sees as an all but certain demise.

At a summit in Brussels starting on Thursday, the leaders of the world's largest trading bloc will invite "the commission to propose a comprehensive approach to improving, together with like-minded partners, the functioning of the WTO in crucial areas", according to a draft of their joint statement also obtained by Bloomberg.

The escalating trade battle between the US and the rest of the world is raising the risk of a meaningful slowing in an otherwise vibrant American economy.

So far the stock market seems to be taking the dispute largely in stride, perhaps in the belief that Mr Trump's latest threats are more of a negotiating tactic than a concrete plan of attack.

But economists say the panoply of additional measures being considered would take a perceptible bite out of gross domestic product if they go ahead.

Central bankers are taking notice. Federal Reserve Chairman Jerome Powell said last week that officials are beginning to hear that companies are postponing investment and hiring due to uncertainty about what comes next.

"Changes in trade policy could cause us to have to question the outlook," he said. The increasing tariff strife poses particular problems for the Fed because it's likely to both raise inflation and depress growth.


Irish Independent