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Global markets 01 Oct 2019

Europe’s role in the US-China trade war

In recent months the world has witnessed an escalation of the U.S. – China trade war, with announcements of more restrictive and retaliatory measures. According to José Manuel González-Páramo, Executive Director and Global Head of Economics and Institutional Relations at BBVA, given this climate of global uncertainty, it is essential to build new bridges and establish areas for cooperation.

José Manuel González-Páramo spoke at the ‘Latin America, the United States and Spain in the Global Economy’, an forum held last week in New York. In this event, organized by the U.S.-Spain chamber of commerce and Spanish newspaper El Pais, experts from across the world gathered to analyze the current international economic scenario and its challenges.

Among the challenges discussed during the meeting were the new tariffs announced by the U.S. and China for the September-December 2019 period. There is yet to see whether any of the sides involved in this months-long trade war will emerge as a clear winner. For the time being, it has only resulted in more uncertainty and slower global growth.

Given this scenario of widespread economic tension, dialogue and understanding have become key tools for restoring global economic prosperity. As González-Páramo noted, in the European context, it is pivotal for the European Union to start focusing on developing policies aimed at offsetting potential adverse impacts.

And one of the possible solutions is to intensify its trade expansion strategies. José Manuel González-Páramo explained the vital role that international trade plays for the EU economy, with 31 million jobs depending on EU exports, and almost 40 percent of EU exports now taking place under free-trade agreements. In his opinion, given the current protectionist headwinds, the time is right for Europe to start building bridges.

In this sense, he reminded that Latin America is a crucial ally for Europe, as demonstrated by the EU-Mercosur Trade Agreement, the recently signed commercial accord signed between the EU and Mercosur (Argentina, Brazil, Paraguay and Uruguay). The agreement represents a huge step forward in the economic integration of the two regional blocks, as it will remove most tariffs on EU exports to Mercosur, thus contributing to drive competitiveness levels of EU businesses thanks to the €4 billion in savings that the agreement will enable.

The EU-Mercosur trade agreement will drive EU industrial exports. Up until now, many of these exports had been held back by significantly-high, if not exorbitant, import tariffs, as noted by González-Páramo. This will affect products such as cars, automotive parts, machinery, chemical products, pharmaceutical drugs, clothes and footwear, or knitted fabrics.

The same goes for the European agricultural industry, which will benefit from lower tariffs applied by Mercosur on EU imports, such as chocolate and confectionery, wine, spirits, alcoholic beverages and soft drinks.

José Manuel González-Páramo, Executive Director and Global Head of Economics and Institutional Relations at BBVA.

The role of central banks

One of the consequences of the commercial stress is a slowdown in economic growth, mainly due to the decline in industrial production, which translates into lower exports. Other symptoms, such as a decline in investments, are becoming increasingly evident.

Central banks have reacted to this scenario lowering interest rates, both in the U.S. and in Europe.

Despite the current context not fostering a very significant economic growth, thanks to the monetary policy implemented by institutions such as the Federal Reserve or the ECB, global growth is expected to remain at about 3 percent.

According to BBVA’s executive – who considers that while still acceptable, growth rates remain below expected levels, as a result of low interest rates, uncertainty in financial markets and the sustained worsening trends in risk scenarios – in this context, what remains to be seen is whether tax policies will be able to take now that the world seems to be running out of monetary policy options.

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