shows what this means. according to bundesbank simulations, the measures that have been adopted or brought up could cut the output of both countries by more than a half percent over the medium term. world trade would be reduced by 1. 5 percent. having said that, there are legitimate concerns regarding economic relations with china. indeed, not only the us is pressing for changes. in a joint communication, the european commission likewise criticises the lack of reciprocal market access. china shields its domestic companies from competition through numerous measures. for example, european companies have to fulfil several preconditions to access the chinese market, such as transferring key technologies to chinese counterparts. so one thing is very clear : china ’ s state - led economy poses challenges for both the united states and europe. this is just one reason why bilateral negotiations are not enough. we need multilateral approaches and rules that ensure fair competition in global trade and investment. multilateralism is enshrined in the world trade organization. while its rulebook needs an update, the wto has fostered global trade and prosperity for 25 years now. a particularly important achievement has been its dispute settlement system. the recent ruling by wto arbitrators regarding trade in civil aircraft demonstrates that the system works. by contrast, a full - blown trade war between the united states and the european union could cost both sides dearly. the potential adverse effects might be considerably larger than in the case of the current trade spat with china. for comparison, the value of us exports to the eu is three times greater than the value of its exports to china. assuming in a purely hypothetical scenario that new tariffs of 25 percent were imposed on all bilateral trade flows between the us and the eu, a simulation by the bundesbank suggests that such a trade war could shrink the us output level by 1. 5 percent over the medium term. other countries would also be adversely affected, albeit to a lesser extent, and world trade would be diminished by 3. 5 percent. of course, such quantitative model exercises should be taken with the proverbial pinch of salt. however, one thing needs to be clear : trade is not a zero - sum game. erecting trade barriers means distorting the global economy and lowering its level of activity. retaliatory tariffs may affect the distribution of welfare losses across countries to some extent but will reduce overall output further. 4 the role of central banks ladies and gentlemen, the tariffs enacted since the

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