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.”


Saudi Arabia, Russia and China give EU trade reforms thumbs down at WTO

Updated 45 min 10 sec ago
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Saudi Arabia, Russia and China give EU trade reforms thumbs down at WTO

  • China is suing US and EU at WTO
  • Kingdom warns new rules are concerning

The EU’s new rules against countries dumping cheap goods on its market got a rough ride at a World Trade Organization meeting, where China, Russia and Saudi Arabia led a chorus of disapproval, a trade official said on Thursday.

The EU, which is in a major dispute with China about the fairness of Chinese pricing, introduced rules last December that allow it to take into account “significant distortions” in prices caused by government intervention.

A Chinese trade official told the WTO’s anti-dumping committee that Beijing had deep concerns about the new methodology, saying it would damage the WTO’s anti-dumping system and increase uncertainty for exporters, an official who attended the meeting said.

China argued that the concept of “significant distortion” did not exist under WTO rules, and the EU should base its dumping investigations on domestic prices in countries of origin, such as China.

The EU reformed its rules in the hope they would allow it to keep shielding its markets from cheap Chinese imports while fending off a Chinese legal challenge at the WTO.
China said that when it joined the WTO in 2001, the other member countries agreed that after 15 years they would treat it as a market economy, taking its prices at face value.

But the US and the EU have refused, saying China still subsidises some industries, such as steel and aluminum, which have massive overcapacity and spew vast supplies onto the world market, making it impossible for others to compete.

China is suing both the US and the EU at the WTO to try to force them to change their rules.

Legal experts say the dispute is one of the most important in the 23-year history of the WTO, because it pits the major trading blocs against each other with fundamentally opposing views of how the global trade rules should work.

In the WTO committee meeting, Saudi Arabia said the new rules were very concerning, and it challenged the EU to explain how EU authorities could ensure a fair and objective assessment of “significant distortion.”

Russia said the EU rules violated the WTO rulebook and certain aspects were unclear and created great uncertainty for exporters. Bahrain, Argentina, Kazakhstan and Oman also expressed concerns.

But a US trade official said the discussion showed that appropriate tools were available within the WTO to address distortions affecting international trade.