ECB: Tariff war derails recovery
Investor morale falls on protectionism fears, survey says
11 May, 2018
Protective tariffs imposed by the US in recent months have only had a minor impact on the world economy so far, but a significant escalation in tensions could derail the recovery in global trade, the ECB said last Monday. Retaliation and a full-fledged trade war could increase import prices, raise production costs and eat into households' purchasing power, negatively impacting consumption, investment and employment, the bank pointed out in an economic bulletin article.
Demanding more fair trade, the US has imposed some trade tariffs on China and asked Beijing to reduce its trade surplus with the US by at least €200bn. But it has so far exempted the EU from new tariffs on steel and aluminium. “In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require a higher compensation for risk. Heightened uncertainty could spill over more broadly, adding to volatility in global financial markets,” the ECB said, adding that over the longer term, protectionism would weigh on productivity and negatively affect the economy's potential output growth.
Hit by concerns about the possible introduction of US tariffs and a protectionist spiral, investor morale in the Eurozone deteriorated for the fourth month in a row this month to its lowest level since February 2017, a survey released last Monday showed. The survey of 974 investors was conducted by Sentix between 3 to 5 May. According to its data, Sentix's index for the Eurozone fell to 19.2 from 19.6 in April. The fall was due to both lower economic expectations and investors' slightly weaker assessment of current conditions.
US President Donald Trump has invoked a 1962 trade law to erect protections for US steel and aluminium producers on national security grounds, amid a worldwide glut of both metals that is largely blamed on excess production in China. A week ago, the White House announced that Trump had extended a temporary reprieve from the tariffs for the EU, Canada and Mexico until 1 June.
In the run-up to the deadline, Germany is urging its European partners to show some flexibility and pursue a broad trade deal that benefits both sides. But that puts Germany at odds with European peers such as France. A Sentix survey for Germany also fell for the fourth month in a row, hitting its lowest since September 2016.