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Europe Prepares for the Worst as Exemption Period Nears End

There is little prospect for a quick fix in the trade standoff between Washington and its allies after the Trump administration opened a new front on Wednesday by also threatening tariffs on auto imports
Economists predict on average that eurozone economy in May rebounded to a 13-month high of 1.6% from 1.2% in April.Economists predict on average that eurozone economy in May rebounded to a 13-month high of 1.6% from 1.2% in April.

With Italy in political turmoil, oil prices on the rise and North Korea tensions back on the burner, the last thing the global economy needs is a big lurch towards a trade war further clouding the outlook.

But that is exactly what the (US President Donald) Trump administration faces if it does not extend temporary exemptions on steel and aluminum imports from Europe that expire on Thursday, Reuters reported.

The Europeans have opportunities for last minute diplomacy when the Organization for Economic Cooperation and Development holds its annual ministerial council in Paris on Wednesday.

For his part, French President Emmanuel Macron is due to make the case for breathing new life into the international economic order in a speech before the OECD on Wednesday.

But there are few signs of US appetite for that ahead of talks between US commerce secretary, Wilbur Ross, and EU trade chief Ceclia Malmstrom on the sidelines of the OECD meeting.

“The question is how can we accept a situation where the Americans manage their dialogue with a rival like China the same way as with their allies without special treatment for being a US ally,” a senior French diplomat said.

Even before Trump raised the specter of import tariffs, trade flows faced an increasing number of restrictions as economies struggled to get back on their feet following the global financial crisis of 2008-2009.

EU Worried

Malmstrom has warned the bloc’s trade offers to Trump may never be enough to stop the United States from implementing trade tariffs on European steel and aluminum exports.

The US president decided to slap on 25% and 10% tariffs on steel and aluminum imports into the United States, but later granted an exemption to European firms. Trump had hoped to reduce the US’s trade deficit with Europe by opting to create favorable conditions for domestic firms.

The exemption period is due to expire on June 1 and EU trade negotiators have been scrambling around in order to work on a solution that can tempt Washington into making them permanent.

However, Malmstrom has raised doubts of whether any EU offer will ever be good enough for Trump. She said: “Discussions are continuing. Is this offer going to be enough? I am not sure, frankly.”

She revealed the US president was a hot topic for discussions amongst EU leaders at the recent Western Balkans summit in Sofia, enough for Washington to have a close eye on the meet-up.

EU member states are struggling to reach an agreement between themselves over how to handle the negotiations, with Franco-German relations being tested by differing opinions.

Economy Losing Steam

The prospect of a trade war is particularly a concern in Europe where the economy is already losing steam, complicating the European Central Bank’s return to more conventional monetary policy as rising oil prices drive inflation higher.

“In this context, the ECB now faces a classic stagflationary shock, with higher inflation and slower growth,” Oxford Economics Chief European economist James Nixon said in a research note.

“Nevertheless, we continue to believe the ECB will end quantitative easing this year in order to avoid the risk of second round effects at a time when there is clear evidence of increasing labor shortages,” he added.

Preliminary May eurozone consumer price data due on Thursday will offer evidence of how close inflation has come to the ECB’s just-below-2% target. Economists in a Reuters poll predict on average that it rebounded to a 13-month high of 1.6% from 1.2% in April.

Trade Restrictions

G20 economies have put up 1,400 new trade restrictions over the last decade against only 200 liberalization measures during the same period, according to an OECD tally.

OECD chief Angel Gurria said some governments were blaming globalization, and by extension the broader multilateral trading system, rather than fixing bad policies that have failed to address voters’ concerns about jobs going overseas.

“Globalization does not have a face, globalization does not have a neck from which you can hang it, so you use a proxy, the closest proxy is multilateralism,” Gurria told journalists.

There is little prospect for a quick fix in the trade standoff between Washington and its allies after the Trump administration opened a new front on Wednesday by also threatening tariffs on auto imports.

US Treasury Secretary Steven Mnuchin will likely take flak over trade threats from his counterparts from other members of the Group of Seven economies when they meet in the Canadian Rocky Mountains on Friday and Saturday.

 

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