Current Trade Matters - January 2023

Topics: Global risks for businesses, climate and the European Union, the U.S. debt ceiling
© Tom Fisk

Price Pressures as Top Global Risk

In a recent article by The Wall Street Journal* which encompasses a survey by the World Economic Forum, challenges for business and countries are outlined based on the largest risk they pose within the near future to the next couple of years.

The overview entails:

Highest on the list is the economic disparity and inflation, which is noticeable based on rising energy and food prices, as well as overall higher cost-of-living.

Geopolitical dynamics and changes pose a large risk for many stakeholders. These dynamics have ripple effects on everyday business, investment strategies and operations. The unpredictability of the global dynamics and the relationship between the U.S. and China are a source of concern. For Europe, the Russian war in Ukraine is ranked as one of the highest immediate risks causing political and security concerns, energy supply questions, and supply shortages.

The aforementioned risks are regarded as bringing negative social consequences such as polarization, disparities, and social unrest. Although, these social effects are considered to be issues that form on a longer-term basis, their impact is equally devastating.

In the same vein, most of the risks encompass one factor in common: climate change and the environment. Natural disasters and weather extremities are a large source of concern due to the scale of unpredictability, the long-standing impact and sweeping effects for everyday life for individuals, business, and governments.

AmCham Germany’s take:

As we head into the second year of the Russian war in Ukraine, considering Germany’s location it can be said that the country is experiencing the greatest upheaval in decades. One example under direct observation throughout the last months is the drastic increase in energy costs which has directly threatened Germany’s attractiveness as an industrial location.

There are vast challenges and risks as mentioned above. The extent of the challenges and efforts to overcome them are manifested in Germany in one word: The pronounced declaration by Chancellor Olaf Scholz: Zeitenwende. From our membership perspective, it is essential for transatlantic ties to be strengthened. A roadmap to ensure cooperation, especially considering the risks above is by enforcing transatlantic sovereignty. We regard the risks mentioned above as an interplay of diverse factors. To counteract these challenges AmCham Germany sees three goals to strengthen such transatlantic sovereignty: reduction of trade barriers, more cooperation, and common standards.

Climate and the European Union – Launch of the “Coalition of Trade Ministers on Climate’’

On January 19, 2023, during the World Economic Forum meeting in Davos, “The Coalition of Trade Ministers on Climate’’ was launched. The initiative is led by the European Commission, EU Member States, and 26 partner countries. The ministerial-level global forum is dedicated to addressing trade and climate, sustainable development through local and global initiatives. The goal is to build partnerships between trade and climate groups to find ways trade policy can contribute to addressing climate change. It will focus on promoting trade and investment in goods, services and technologies that can help mitigate and adapt to climate change. The coalition will provide political guidance and identify trade-related strategies to adapt to changing climate conditions and extreme weather, in line with UNFCCC, Paris Agreement, and Sustainable Development Goals and supporting ongoing efforts in the World Trade Organization (WTO).

AmCham Germany’s take:

AmCham Germany welcomes partnership to combat the challenges posed by climate change. As representative of transatlantic business and proponent of open trade, AmCham Germany welcomes the EU’s initiative to collaborate closely with other countries to improve trade strategies, strengthen international cooperation, and welcomes initiatives towards a more sustainable future. This initiative is complimentary effort to combat these challenges with other fora such as the EU-U.S. Trade & Technology Council.

In order to ensure a dependable and cost-effective energy supply and to propel the transition to carbon neutrality, we must collaborate more closely with our American partners, establish more common standards, and work together on sustainable fuels and technologies. Additionally, it is crucial that the process of gaining approvals for infrastructure projects, such as building a hydrogen-compatible LNG infrastructure, power lines and CO2 pipelines, as well as advancing low-carbon technologies, be expedited in Germany and Europe.

U.S. Debt Ceiling – What does it mean?

The past week, the U.S. reached a debt cap which amounts to USD $ 31.4 trillion*. The debt ceiling is a result of decades of both parties cutting taxes and increasing government spending. On average, the U.S. government has been running on a deficit of about USD $ 1 trillion per year for the past two decades. Both parties have approved large economic aid packages in the near past: for the 2008 financial crisis and the 2020 pandemic recession. Republicans in the House of Representatives have said they will not raise the borrowing limit unless President Biden agrees to significant cuts in federal spending. President Biden has stated he will not negotiate conditions for a debt-limit increase, arguing that lawmakers should lift the cap without conditions to cover spending that previous Congresses authorized.

Treasury officials estimate that the restrictive measures they began implementing last Thursday will allow the government to keep paying federal workers, Medicare providers, investors who hold U.S. debt, and other recipients of federal money until at least early June. However, economists warn that the nation risks a financial crisis and other immediate economic pain if lawmakers do not raise the limit before the Treasury Department exhausts its ability to buy more time. The cost of not raising the borrowing cap could be catastrophic, causing a deep recession in the United States and potentially prompting a global financial crisis.

A potential U.S. default could have severe effects on global financial markets. U.S. Treasury securities have long been considered a safe investment, but a default or uncertainty surrounding it could cause investors to sell U.S. Treasury bonds, weakening the dollar. This would affect the value of foreign currency reserves held in U.S. dollars, potentially leading to debt crises in emerging economies.

The Brookings Institution provides a concise overview of the debt ceiling.

AmCham Germany’s take:

Taking the U.S.’ economic challenges as well as Germany’s current economic context, it is crucial for governments to ensure stable frameworks for transatlantic business. It is essential to create spaces and strategies in a joint transatlantic effort that boost commerce and open trade. In a globalized world, economic turbulence has vast ripple effects for individuals, businesses, and countries. One principle is indispensable: The solution to current crises is not to reject globalization. Instead, we need to focus on cooperation.

Member companies of AmCham Germany, with their investments, jobs, innovations, and social initiatives, play a vital role in driving the globally oriented transatlantic partnership. However, the success of these companies depends on the political and administrative framework in place. A successful social market economy must strike a balance between regulation and competition. Even as the world undergoes significant changes, these principles remain crucial for success.

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For more detailed information please contact:

Heather Liermann

Head of Department

Membership Engagement & Development