American headache

Updated 06 January 2013
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American headache

It was a typical last-minute deal by politicians with a short-term relief while the original problems are yet to be solved.
Just hours before midnight, as people prepared to ring in the New Year, the Democrat-led US administration and its Republican counterparts struck the much-awaited deal.
Quickly the two houses passed the agreement by 257-167 votes thus averting automatic tax hikes and a freeze on some government public spending.
The deal was basically a political tradeoff between the two parties, who were keeping their eyes on their respective constituencies.
Accordingly, it will generate $ 600 billion in new revenue over a period that extends over a decade.
That is less than half of what US President Barack Obama was asking and hoping for.
He was also given part of his demand on raising taxes on the super-rich that constitutes only around 2 percent of the population.
But on the other hand, the deal averted any tough decision on cutting public spending on military, medicare and social security.
But that was not enough for two camps -— the typical conventional institutions the International Monetary Fund (IMF), who though welcomed the move to avoid the fiscal cliff, asked both the administration and the Congress to do more to put the country’s public finances in order at the time not to threaten the weak recovery gaining pace.
It actually recommended two specific steps to be taken — to check public spending and raise the public debt ceiling in a bid to boost market confidence.
From the market, a more stern warning came from the top two US credit rating agencies: Moody’s, and Standard and Poor.
They have indicated their unhappiness with the US deficit that has topped $1 trillion in each of the past four years.
That is why the two agencies, like the IMF, believe that more steps are required to first contain and then address this chronic problem, which has pushed the two agencies to lower the US ratings last year, while sticking to their outlook on the negative side.
The comments by the IMF and the credit agencies on the need to contain deficit appears to be a typical advice given to a typically troubled developing country lining up to obtain loans through some austerity programs.
Economic management is not an issue related to a country’s size or its global status. Eventually, it hinges on the way each country implements its economic policies.
When former President George W. Bush entered his oval office in the White House in 2000, he inherited a surplus budget from the previous Clinton administration.
As his administration gave priority to its war on terror and in some cases opted for a war by choice as the case with its invasion on Iraq, it quickly turned that surplus into deficit. As politicians raced with time to avoid the fiscal cliff, the deficit stood at $ 16.4 trillion and was waiting some lifting to allow for government to continue functioning.
The IMF and credit agencies used to release their observations and reports on the US economy — though they were not taken seriously by US officials.
But this time it looked different. The is because of the clear writing on the wall on the expected consequences of any failure to avoid the fiscal cliff, whether domestically or in relation to the economies of the rest of world.
China, however, welcomed the US fiscal deal as it will help boost its exports and help it reduce inflationary pressures on Beijing given the Chinese holding in US treasury bills and other investments that will be relatively secure now. Any failure in reaching a deal might have had a negative impact on the Chinese economy.
That could be partly a relief or a short-lived one.
Still, the coming months will be crucial. We will course of action the US economy will take and how domestic politics will determine the future not only for the US but for the rest of the world as well.


Merkel seeks united front with China amid Trump trade fears

Updated 22 May 2018
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Merkel seeks united front with China amid Trump trade fears

  • Merkel seeks common ground to ward off trade war
  • Plans complicated by US policy moves

Chancellor Angela Merkel visits China on Thursday, seeking to close ranks with the world’s biggest exporting nation as US President Donald Trump shakes up explosive issues from trade to Iran’s nuclear deal.

Finding a common strategy to ward off a trade war and keep markets open will be Merkel’s priority when she meets with President Xi Jinping, as Washington brandishes the threat of imposing punitive tariffs on aluminum and steel imports.

“Both countries are in agreement that open markets and rules-based world trade are necessary. That’s the main focus of this trip,” Merkel’s spokeswoman Martina Fietz said in Berlin on Friday.

But closing ranks with Beijing against Washington risks being complicated by Saturday’s deal between China and the US to hold off tit-for-tat trade measures.

China’s economic health can only benefit Germany as the Asian giant is a big buyer of Made in Germany. But a deal between the US and China effectively leaves Berlin as the main target of Trump’s campaign against foreign imports that he claims harm US national security.

The US leader had already singled Germany out for criticism, saying it had “taken advantage” of the US by spending less than Washington on NATO.

Underlining what is at stake, French Economy Minister Bruno Le Maire warned the US-China deal may come “at the expense of Europe if Europe is not capable of showing a firm hand.”

Nevertheless, Merkel can look to her carefully nurtured relationship with China over her 12 years as chancellor.

No Western leader has visited Beijing as often as Merkel, who will be undertaking her eleventh trip to the country.

In China, she is viewed not only as the main point of contact for Europe, but, crucially, also as a reliable interlocutor — an antithesis of the mercurial Trump.

Devoting her weekly podcast to her visit, Merkel stressed that Beijing and Berlin “are both committed to the rules of the WTO” (World Trade Organization) and want to “strengthen multilateralism.”

But she also underlined that she will press home Germany’s longstanding quest for reciprocity in market access as well as the respect of intellectual property.

Ahead of her visit, Beijing fired off a rare salvo of criticism.

China’s envoy to Germany, Shi Mingde, pointed to a “protectionist trend in Germany,” as he complained about toughened rules protecting German companies from foreign takeovers.

Only 0.3 percent of foreign investors in Germany stem from China while German firms have put in €80 billion in the Asian giant over the last three decades, he told Stuttgarter Nachrichten.

“Economic exchange cannot work as a one-way street,” he warned.

Meanwhile, looming over the battle on the trade front is another equally thorny issue — the historic Iran nuclear deal, which risks falling apart after Trump pulled the US out.

Tehran has demanded that Europe keeps the deal going by continuing economic cooperation, but the US has warned European firms of sanctions if they fail to pull out of Iran.

Merkel “hopes that China can help save the atomic deal that the US has unilaterally ditched,” said Die Welt daily.

“Because only the giant emerging economy can buy enough raw materials from Iran to give the Mullah regime an incentive to at least officially continue to not build a nuclear weapon.”