With the elections behind him, Barrack Obama is facing the impossible task of pushing up US growth in the broad framework of fiscal correction. That is difficult to achieve. US facing what has been described as a “fiscal cliff”. The US budget deficit has been running high. So much so that nearly two years back, the legislature had to pass a bill raising the ceiling on US debt. However, the Democratic Party did not have full legislative majority and as a result it had to come to an agreement with the Republications on a course of fiscal correction.

The fiscal correction agreement kicks in towards the end of the current year. This will involve cutting government spending substantially and raising tax rates. However, the conservative Republicans had made it a condition that tax rates on the rich and the corporate sector could not be raised too high. Will the brunt of the tax rate hikes thereby fall on the lower income brackets? That goes against the spirit of the Obama administration and his electoral promises.

On the other hand, drastic cuts in government expenditure including those on health benefits to ordinary people, cannot inspire confidence. Large scale government expenditure cuts cannot push up growth; it can rather pull down growth and the momentum of the economy. Thus, the choices before the re-elected president are not very attractive.

But that is a compulsion and the president will have to necessarily take calls on how to go about fiscal correction without altogether stifling the growth impulses.

On the other hand, the president will have to redeem his election pledges – or at least make efforts at it. What were these?

The Obama campaign had emphasised reviving US manufacturing industry. Over the last decade, US manufacturing had been wiped out in large swathes in the face of cheaper imports from principally China and other emerging economies. Take for instance, US automobiles industry. One after other large US auto makers, which were historic legacies from the days of Ford, were languishing. Obama had rescued the US auto industry valiantly when competition from Korea, Japan, Germany had battered it down.

But in case of other manufacturing industry, the country is nearly down and out in the face of cheaper imports from China. In meeting the Chinese threat, the US used some economic arguments rather than surging back with higher productivity. USA has maintained that the Chinese manipulated their currency to gain unfair advantage over US manufacturers. To a large extent the allegation holds fast, because Chinese managed its currency float in a manner that it had remained substantially undervalued vis a vis the US dollar.

However, the Chinese story goes further. China as such is not a market economy in the sense the US is. Wage rates are severely depressed; interest rates have no semblance to market; costing is opaque and often does not take in account real costs of production. China is therefore successful in exporting not only to the US but to the whole world. The EU for example has made similar allegations about cost manipulation as well as hidden subsidisation. India has also been at the receiving end of the Chinese offensive.

In meeting the Chinese threat, Mitt Romney had promised to declare China a currency manipulator and would have banned imports of most of Chinese products. That was during campaigning. Romney did not come to power therefore his implementing these actions do not arise. But can Obama really go ahead with similar action against Chinese imports to push up the prospects of US manufacturing industry?

Difficult. As a member of the WTO, US cannot take unilateral actions against China to curtail its imports from that country. Already, China has dragged US to WTO dispute settlement body on several complaints against US attempts to shut out its exports.

However, it is also a fact that many of the US initiatives to prop up its economy are not working because as an open economy its stimulus for its own domestic industry is leaking out to the aid of others. Thus, for example, if its programme of quantitative easing (that is, pumping more money into the economy to shore up demand and activity) results in higher imports, USA’s problems will not be solved.

Something similar is happening in reality. Despite rounds of QE, the US economy is at best growing at muted rates (last quarter was of course minus 2.4). Job creation has also been somewhat low, although the situation has improved recently. The big recovery in consumer confidence which alone can then result in hefty consumer spending has not come.

Thus, willy-nilly, USA will embark upon policies to push its own industries and clamp on imports. It is here that emerging countries like India will also get involved and our exports to the USA will face a more hostile market. How can the USA achieve this objective? The widely practised option today is to release a bag full of non-tariff barriers. This is because in course of trade liberalisation under the WTO, tariff levels on imports in general have come down to levels where these are no significant barriers.

Hence, countries are introducing non-tariff barriers like standards and requirements. Standards are being set which could keep out imports or make these go through difficult processes of verification and checks. Nominating ports for imports of designated commodities, thereby if a commodity lands at a port where it is not supposed to, the entire import consignment is returned. Many of these are widely practised by China as Indian exporters are familiar with.

May be, Barrack Obama may choose not to neo-protectionist. Hopefully his battery of economic think-tanks and top-class advisers will devise other ways to pull the economy out and launch it on a growth path. Whatever the US does, this will have deep ramifications for the rest of the global economy. This is because even today, USA remains one of the principal drivers of the global economy and it may well remain that for many more years. So USA should realise its impact strength and fine tune its measures not to hurt the prospects of the global economy and particularly scores of smaller countries which still have large poverty. (IPA Service)