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

capital requirements need longer time series. less than one year after the introduction of basel ii in germany, the database is still very narrow. it is not yet possible to make a detailed assessment of whether the minimum capital requirements are becoming binding and therefore acting in a procyclical manner. knee - jerk responses, such as the general introduction of additional general capital buffers by means of pillar 2 are therefore, as we see it, not appropriate. what is, in fact, called for is a close monitoring of developments and a careful analysis of the incoming data. it is important, first of all, to gain a deeper understanding of the complex mechanisms of banks ’ capital management and of basel ii ’ s impact over an adequate period of time. the banking supervisors are working very hard on this. their findings, as well as others, can then be used to assess any systemic effects of the prudential requirements. if procyclical effects exist on a significant scale, they should then be taken into account in a system - oriented supervisory approach. now, i have already indicated that the fundamental issues concerning procyclicality also have to do with accounting. fair value accounting leads to valuations fluctuating along with market prices. this evidently heightened the financial market turbulence. with a mark - tomarket valuation of the paper, losses result in falling asset values, making the reduction of risk positions seem advisable, thus triggering a further wave of selling. computer - controlled procedures for automatically limiting losses can give further impetus to this procyclicality. conversely, rising asset values in an upswing make additional investment possible, which can drive market prices up even further. nevertheless, by means of “ prudential filters ” the banking supervisors have ensured that these fluctuations in the balance sheet items do not impact fully on the regulatory capital. this means that the nexus of falling market prices for assets, declining own funds and restricted ability to lend in a downswing is dampened. in an upswing the reverse applies. this prudential correction mechanism therefore limits only part of the effects of fair - valuebased accounting, namely its impact on the potential supply of credit. iv conclusion ladies and gentlemen in conclusion, let me return once more to the beginning. after well over a year of financial market turbulence and following the experience of the past few days, i firmly believe that stabilising the financial system cannot consist solely in working through “ to do ” lists with their recommendations for action, however