World Economy

A US trade war with EU puts world 'straight into a recession,' ITC chief says

Key Points
  • Arancha Gonzalez, the Executive Director of the International Trade Centre, predicts a global recession if the EU and the U.S. enter into a trade war.
  • A tariff battle would particularly hurt small agricultural producers and manufacturing businesses, says Gonzalez.
VIDEO1:3101:31
Continued tariff war will cause 'major recession,' ITC director says

The head of the UN agency responsible for promoting trade across the developed world has warned that a tariff war between the EU and U.S. would drag the global economy backwards.

"It means straight into a recession," Arancha Gonzalez, the Executive Director of the International Trade Centre (ITC), said in an interview with CNBC Wednesday after meeting with European Commission officials in Brussels.

"All of this is pointing in one direction. If we keep digging into that same hole, we will be looking into a major recession."

U.S. tariffs on $7.5 billion worth of European products are currently scheduled to take effect on Friday Oct. 18, after World Trade Organisation (WTO) arbitrators authorized the U.S. to take countermeasures against the EU to remedy decades of illegal government subsidies to the aircraft manufacturer Airbus.

The European Commission, which oversees trade policy for the EU, has repeatedly said that it would like to enter negotiations with the United States to settle the dispute, without resorting to tariffs.

Back in May, the EU had published its own preliminary list of American products, worth $20 billion, that could face future retaliatory tariffs. Earlier this month the EU's new designated trade commissioner Phil Hogan told European lawmakers in his confirmation hearing that the trading bloc must be prepared to "stand up for itself."

On Monday after the WTO's formal adoption of the arbitrators' ruling on Airbus, the U.S. ambassador to the WTO, Dennis Shea, said the Trump administration expected that it would only be after the enactment of the countermeasures on Friday that the E.U. would "agree to a genuine cessation of its WTO-inconsistent subsidies and the adverse effects that flow from them."

Gonzalez argues that - based on all empirical evidence - this is entirely the wrong approach.

"What we fundamentally know is that tariffs do not solve the underlining problem that exists in international trade," she told CNBC.

"What would make sense is everybody that produces planes sitting around the table to figure out how do they strengthen anti-subsidies rules, how do they ensure fairer competition in the aircraft sector - given that they all cheat at the moment."

VIDEO3:3303:33
Trade spats are better solved through talks, not litigation: WTO chief

Over the summer the European Commission proposed a new framework that would determine the way that governments subsidize the civilian aircraft sector. But earlier this month the outgoing European trade commissioner, Cecilia Malmstrom, said those new proposals had so far failed to elicit any meaningful response from Washington D.C.

The ITC's remit is focused most frequently on developing economies and small and medium-size enterprises (SMEs), and Gonzales expressed concern that trade spats between major economic powers have trickled down to businesses in even the most remote corners of the globe.

"Uncertainty is slowing down the economy," she said, citing recent growth predictions from the IMF and expected figures from the OECD. "It is the cholesterol that is basically blocking the arteries of the international economy and it's affecting every country in the world."

For small businesses in less advantaged economies that are already struggling to make ends meet, it is this uncertainty that she insists will have a "disproportionate impact on the weakest in our economies, those that are smaller."

Gonzalez acknowledges that the global framework for commerce, and in particular the WTO, requires adaptation and adjustment. But the choice for that reform process, she explained, is between allowing the "strongest to dictate," or else permitting all countries to forge fresh multilateral trade rules in an "inclusive manner."

"What we need is not strong islands in a sea of destitution around the world," she told CNBC, in reference to the U.S. and China in particular. "What we need is a strong world with all parts of the world being lifted."

"Any responsible policymaker any responsible politician today knows that for his or her country to be strong, they need the world to be stronger."

And when discussing the kind of retaliatory tariffs between the U.S. and the European trading bloc that could potentially escalate starting this Friday, Gonzalez highlighted the challenges such an escalation would create for small-scale producers on both sides of the Atlantic.

"Today is probably the Parmigiano producers in Italy, and olive oil producers in Spain, and winemakers all across Europe. But tomorrow, it will be apple growers in America, shirt manufacturers in Carolina, or orange juice produces in Florida."

"It's basically a loser's game."

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