By Leela de Kretser
DAVOS, Switzerland (Reuters) -The European Union signalled its readiness to engage and negotiate with U.S. President Donald Trump on Tuesday, warning of the need to avoid a trade conflict that would hurt both sides and the global economy.
While Trump refrained from using his first day in office to launch tariffs on European goods he says are partly to blame for a persistent U.S. trade deficit, European officials are taking a "wait and see" approach to relations with his administration.
Speaking at the World Economic Forum's annual meeting a day after Trump's inauguration, European Commission President Ursula von der Leyen said a new era of harsh global competition had been developing over the past quarter of a century.
Von der Leyen did not mention Trump by name, but referred to the increasing use of sanctions, export controls and tariffs to safeguard national interests and which have ended the previous era marked by freer trade between economies.
"We will need to work together to avoid a global race to the bottom," she said.
"Because it is in no one's interest to break the bonds in the global economy. Rather we need to modernize the rules to sustain our ability to produce mutual gain for our citizens."
Trump said on Monday he wanted to reverse the U.S. trade deficit with the EU, either with tariffs or more energy exports.
In one of his first moves, he has directed federal agencies to investigate persistent U.S. trade deficits and unfair trade practices and alleged currency manipulation by other countries.
Germany - whose trade surplus with the United States is close to record levels - is a potential target for action.
However German Chancellor Olaf Scholz voiced cautious optimism after his first contacts with Trump's administration.
"The United States is our closest ally outside Europe. And I will do everything in my power to ensure that it stays that way," Scholz told an audience in Davos.
"My first good conversations with President Trump and also the contacts between our advisers point in this direction."
The euro single currency even managed a slight rise against the dollar on Monday, a likely relief to European Central Bank policymakers who are expected to go ahead with another interest rate cut to bolster the sluggish regional economy next week.
"Most of the (Trump) comments were related to 'America's first' policy, but the initial comments appear better than feared by the market," Mohit Kumar at Jefferies said, adding he expected ECB rate cuts this month and in March.