The second half of 2018 saw some positive events: the signing by the United States, Mexico and Canada of the pact replacing the North American Free Trade Agreement; the opening of negotiations for a US/EU agreement; and the temporary truce called between the United States and China to settle their differences. More recently, however, in May and June this year, there was a fresh escalation in trade tensions between China and the United States. US tariffs on $ billion worth of Chinese product imports were raised from 10% to 25%, and the response by the Chinese authorities was to raise tariffs on US imports. At the G20 summit in Osaka in late June, the two countries reached an agreement to reinitiate trade negotiations. Yet despite this, and the fact that the United States subsequently announced the suspension of certain restrictions on US companies selling technological equipment to specific Chinese firms, August saw a new episode in the escalation of tensions in the trade war between the two countries. Moreover, the United States, which has accused the Chinese authorities of manipulating the exchange rate, has postponed until November its decision on potential tariff increases on cars and their components, a measure that would mainly harm the EU and Japan. 1  See Box 1.1, “The global impact of a hypothetical economic slowdown in China”, in the Annual Report 2018, Banco de España, and Box 2, “Economic policy room for manoeuvre in China”, in the “Quarterly report on the Spanish economy”, Economic Bulletin, 2/2019, Banco de España.

Reform headway is particularly slow as regards the elimination of obstacles in the provision of professional services and in the network industries, and improving the business environment by reducing the administrative burdens that hinder new start-ups. Greater efforts should be a priority in at least two areas. First, we must improve human capital and active employment policies to promote the rapid reallocation of workers towards the growth industries. Second, public and private spending on innovation must increase to create new business opportunities. Europe cannot stand on the sidelines as new  15  See P. Hernández de Cos (2019), “A framework for the Countercyclical Capital Buffer”, opening address at the Second Financial Stability Conference, Banco de España/CEMFI. 16 The reason for this is that supply-side expansionary policies tend to be deflationary. This limits their expansionary effects in a setting such as the present one in which the capacity of monetary policy to accommodate these inflationary pressures by means of further interest rate cuts is relatively limited. See Ó Arce, S. Hurtado and C. Thomas (2016), “Policy Spillovers and Synergies in a Monetary Union”, International Journal of Central Banking, 12(3), September, pp. 219-277. In addition, structural reforms may be particularly effective in the euro area economies where the private sector remains immersed in a deleveraging process; see J. Andrés, Ó. Arce and C. Thomas (2017), “Structural Reforms in a Debt Overhang”, Journal of Monetary Economics, 88, pp. 15-34. 13/16  technologies are developed and as the United States and China battle for technological supremacy.