GLOBAL ECONOMY-Europe and U.S. lurch closer towards trade war

Leigh Thomas

PARIS, May 25 (Reuters) - 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 Trump administration faces if it does not extend temporary exemptions on steel and aluminium imports from Europe that expire on Thursday.

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

For his part, French President Emmanuel Macron is to 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 U.S. appetite for that ahead of talks between U.S. 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 U.S. ally," a senior French diplomat said.

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

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

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

"Globalisation does not have a face, globalisation 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.

U.S. 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.


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 labour shortages," he added.

Preliminary May euro zone consumer price data due on Thursday will offer evidence of how close inflation has come to the ECB's just-below-2 percent target.

Economists in a Reuters poll predict on average that it rebounded to a 13-month high of 1.6 percent from 1.2 percent in April.

Among other data on the horizon next week are U.S. non-farm payrolls on Friday for the month of May. Economists polled by Reuters forecast on average the world's biggest economy added 185,000 new jobs this month, up from 164,000 in April. (Reporting by Leigh Thomas; Editing by Toby Chopra)