As worst euro fears fade, US fiscal cliff looms

Updated 26 September 2012
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As worst euro fears fade, US fiscal cliff looms

LONDON: The euro zone has stepped back from the brink of disaster for now, but the global economy could soon be staring into another abyss if US politicians fail to head off $ 600 billion in automatic austerity that all but guarantees a new recession.
The long-term fate of the single currency remains unclear, but nerves have calmed since the European Central Bank promised on Sept. 6 to act as the buyer of last resort for Spanish and Italian bonds.
Now, exactly six weeks before the US general election, fiscal gridlock in Washington is coming back on the global economy’s risk radar.
If opinion polls hold steady and prove accurate, US President Barack Obama, a Democrat, will defeat Republican Mitt Romney on Nov. 6. The House of Representatives is likely to stay in the hands of the Republicans, who have a chance of seizing control of the Senate.
On the surface, with power split, that could make it harder to avert $600 billion in spending reductions and expiring tax cuts, equal to 4 percent of gross domestic product, that will kick in at the start of 2013 unless a deal is struck to shrink the US budget deficit by at least $1.2 trillion over the next decade.
“The level of political partisanship in Washington is higher than it’s ever been, and that it is making it much harder to deal sensibly with some of the economic and other problems America is facing,” said Xenia Dormandy, a senior fellow at Chatham House, a think tank in London.
“The American system is designed to have checks and balances and that’s what’s happening. But it does mean that in times like this, when strong responses are needed, they’re not forthcoming,” she added.
The consensus among US and other politicians, policymakers and businessmen at a recent conference organized by Oxford Analytica, another research group, was that Washington would avoid plunging off the fiscal cliff — or at least falling all the way down.
But some were downright pessimistic that the political gulf could be bridged any time soon, with potentially ominous consequences for America’s growth and credit rating.
One European economist said he feared America as a whole was becoming like California — a dynamic economy suffering from political sclerosis.
“The dysfunctionality of democracy in the United States is the most important problem America faces in coming years,” he said. To encourage a frank exchange of views, reporters were not allowed to identify the speakers at most of the conference sessions.
A North American former politician said the US political system had astonishing powers of renewal. Deadlock would not last forever.
But he said there was global disquiet that the logjam was preventing America from capitalizing on its strengths in high-technology, science and advanced manufacturing.
“Brinkmanship is no way to run public policy,” he said.
Tightening on the scale envisaged is unprecedented in recent US fiscal history, and US Federal Reserve Chairman Ben Bernanke has said the shock would imperil an already fragile economy. The Congressional Budget Office has warned of recession.
Indeed, slowly and quietly, Congress is groping for ways to dodge the cliff plunge by putting off its own deadline for most of the major year-end budget and tax decisions.
Compromise is also the scenario seen by a number of banks — though they do not rule out an initial, limited cliff dive to concentrate politicians’ minds.
Economists at Citi led by Nathan Sheets expect lawmakers to delay tax increases and to recast spending cuts, resulting in fiscal drag of about one percentage point and a relatively benign near-term growth outlook.
“Nevertheless, with general government debt already topping 100 percent, this leaves the US dangerously exposed to an abrupt loss of market confidence and a fiscal crisis as near-term debt continues to outrun GDP,” they said in a study.
HSBC reaches a similar conclusion. On a muddling through scenario of some austerity and debt reduction, fiscal tightening would amount to 1.1 percent of GDP in 2013.
But that would still leave the budget deficit in fiscal year 2013 at 6 percent of GDP, one of the highest on record, Kevin Logan, the bank’s chief US economist, said in a report.
The prospect of continued political polarization would seem to bode ill for the two candidates’ promise to promote trade.
But a former State Department official noted that Obama managed last October to push through a trio of free trade agreements with Colombia, Panama and South Korea that had been bogged down for four years.
“If we’re on stronger domestic ground we might see a flowering of free trade with bipartisan approval,” she told the Oxford Analytica conference.
On China, there was widespread skepticism that Mitt Romney would make good on his promise as president to punish China by declaring it a currency manipulator on his first day in office.
Doing so would antagonize a country that is the biggest holder of US Treasuries and is now America’s third-largest export market, after Canada and Mexico.
Between 2000 and 2011, US shipments to China rose 542 percent, while exports to the rest of the world rose 81 percent, according to Andy Rothman, an economist at CLSA in Shanghai.
Like Romney, Obama has been tough on China during the campaign, launching a World Trade Organization challenge against Beijing’s subsidies on autos and car parts.
The two candidates are attuned to public opinion: the Pew Center found 59 percent of Americans regard China as an economic threat compared with 45 percent of Europeans.
While 67 percent of Americans say that international business ties are good for the US economy, this was the lowest level of backing for trade among 21 countries surveyed by the Center in 2011. The figure in France, a sometimes ambivalent supporter of free trade, was 83 percent.
“None of this will necessarily translate into protectionist actions by the next administration that could inhibit world growth,” the Pew Center’s Bruce Stokes said in an analysis.
“But it does suggest that Washington’s offensive efforts to promote trade my be met with public skepticism, while defensive actions may find public support.”


EU to respond to any US auto tariff move: report

Updated 23 June 2018
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EU to respond to any US auto tariff move: report

  • Trump threatened to impose 20 percent tariff
  • Shares in carmakers slip on trade war fears

PARIS: The European Union will respond to any US move to raise tariffs on cars made in the bloc, a senior European Commission official said, the latest comments in an escalating trade row.
US President Donald Trump on Friday threatened to impose a 20 percent tariff on all imports of EU-assembled cars, a month after his administration launched an investigation into whether auto imports posed a national security threat.
“If they decide to raise their import tariffs, we’ll have no choice, again, but to react,” EU Commission Vice President Jyrki Katainen told French newspaper Le Monde.
“We don’t want to fight (over trade) in public via Twitter. We should end the escalation,” he said in the comments published on Saturday.
The European Autos Stocks Index fell on Friday after Trump’s tariff threat. Shares US carmakers Ford Motor Co. and General Motors Co. also dropped.
“If these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the US Build them here!” Trump tweeted.
The US Commerce Department has a deadline of February 2019 to investigate whether imports of automobiles and auto parts pose a risk to US national security.
US Commerce Secretary Wilbur Ross said on Thursday the department aimed to wrap up the probe by late July or August. The Commerce Department plans to hold two days of public comments in July on its investigation of auto imports.
Trump has repeatedly singled out German auto imports to the United States for criticism.
Trump told carmakers at a meeting in the White House on May 11 that he was planning to impose tariffs of 20 or 25 percent on some imported vehicles and sharply criticized Germany’s automotive trade surplus with the United States.
The United States currently imposes a 2.5 percent tariff on imported passenger cars from the EU and a 25 percent tariff on imported pickup trucks. The EU imposes a 10 percent tariff on imported US cars.
The tariff proposal has drawn sharp condemnation from Republican lawmakers and business groups. A group representing major US and foreign automakers has said it is “confident that vehicle imports do not pose a national security risk.”
The US Chamber of Commerce said US auto production had doubled over the past decade, and said tariffs “would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war.”
German automakers Volkswagen AG, Daimler AG and BMW AG build vehicles at plants in the United States. BMW is one of South Carolina’s largest employers, with more than 9,000 workers in the state.
The United States in 2017 accounted for about 15 percent of worldwide Mercedes-Benz and BMW brand sales. It accounts for 5 percent of Volkswagen’s VW brand sales and 12 percent of its Audi brand sales.