Concurrently, the unemployment rate edged up to 4.3%, the highest since October 2021, surpassing the expected 4.1%. These disappointing figures triggered a rush into government bonds, driving benchmark yields below 4%. After the data release, US President Joe Biden acknowledged the mixed signals: While inflation shows signs of easing, job growth is evidently slowing. This dual challenge paints a complex picture for policymakers juggling between fostering employment and curbing inflation.

The market’s reaction to the jobs data highlights the precarious balance that the US economy must maintain. As investors seek refuge in safer assets, the broader implications for growth and stability remain a pressing concern. The road ahead for the country’s economy is fraught with uncertainty, with market dynamics reflecting the underlying anxieties of a potential recession.

Tanking US tech stocks raise economic concern

Similarly, US stocks took a nosedive the next day, on August 3. They closed sharply lower after a weak July jobs report stoked fears about the softening economy. Technology stocks were hit particularly hard as they reeled from disappointing earnings reports. The Nasdaq Composite market index tumbled 2.4% and the S&P 500 fell 1.8%, while the Dow Jones Industrial Average slid 1.5%.

Each major index ended the week on a sour note. The Dow’s four-week winning streak came to an abrupt halt. Both the Nasdaq and S&P 500 marked their third consecutive weekly declines. Notably, the Nasdaq has slipped into technical correction territory, and now sits 10% below its July 10 record close.

The weak jobs report underscored the precarious state of the economy. It exhibited a picture of uncertainty, with employment gains failing to meet expectations. This dismal news, coupled with underwhelming earnings from tech giants, cast a shadow over the markets. Investors are left grappling with the dual challenges of a faltering labor market and lackluster corporate performance.

As the summer heat blazes on, so do concerns about the future trajectory of the US economy. The recent downturn in the stock market serves as a stark reminder of the volatility that lies ahead.

The Sahm Rule warns of an imminent recession 

The July non-farm data from the US has intensified concerns about the employment landscape, raising the specter of a looming recession. With the release of this data, the unemployment rate has surged by 0.6% from its low point earlier this year. 

This rise triggers the Sahm Rule, a principle introduced in 2019 by former Federal Reserve economist Claudia Sahm. According to the rule, when the three-month moving average of the unemployment rate increases by 0.5% or more from its lowest point in the previous 12 months, the US economy practically enters a recession.

The rule serves as an early warning system for the US government. It signals when a recession is imminent and enables timely policy interventions to support households through economic downturns. Its accuracy and reliability have made it a cornerstone in economic forecasting.

As the unemployment rate climbs, the pressing question becomes how the government will respond to cushion the blow for American families. The current data denotes the urgent need for strategic measures to mitigate the impact of a potential recession.

The latest US non-farm employment report has sparked two significant market concerns: fears of an impending recession and anxiety over a potential Federal Reserve policy misstep. Analysts now worry that the economy may be weaker than the central bankers at the Federal Reserve had anticipated. This could compel the Federal Reserve to make a sharp cut in borrowing costs in September, or even resort to an emergency rate cut beforehand to stimulate demand.

The sharp slowdown in payrolls in July and a more pronounced rise in the unemployment rate have made a September interest rate cut seem inevitable. This situation has increased speculation that the Federal Reserve might commence its loosening cycle with a significant 50 basis point cut, or an even more drastic intra-meeting move. With the economy seemingly teetering on the brink of recession, market expectations for Federal Reserve rate cuts are intensifying. Traders are now betting that the Federal Reserve will reduce rates by 50 basis points next month.

Rate cuts are a double-edged sword

Furthermore, the outlook for 2024 has shifted dramatically. Bets on total rate cuts for the year have reached 111 basis points. This growing speculation underscores the precarious balance the Federal Reserve must maintain.

The market’s trajectory hinges not only on economic data but also on how investors interpret potential interest rate cuts. These cuts are typically designed to stimulate economic activity, encouraging businesses to expand and consumers to spend. However, they can also indicate underlying concerns about the economy’s health.

The delicate balance the Federal Reserve must maintain becomes evident in times like these. On one hand, cutting rates can provide much-needed relief to a slowing economy, fostering growth and stability. On the other hand, such measures might be perceived as a red flag. They could indicate that the Federal Reserve is apprehensive about the economy’s robustness. Investors are acutely aware of this duality.

When the Federal Reserve signals a rate cut, the immediate reaction can be a mix of optimism and caution. The optimism stems from the potential boost to economic activity, while the caution arises from the implicit admission that the economy might be faltering. As the market digests these signals, the broader implications for economic growth and stability remain a pressing concern.

The Federal Reserve’s actions are under intense scrutiny, with every move potentially influencing market sentiment. The interplay between rate cuts and market perception reflects the complex dynamics at play, shaping the future trajectory of the US economy.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Horrific Jobs Report Suggests That a US Recession Now Looms appeared first on Fair Observer.

The EU initiated anti-subsidy investigations on Chinese EVs on June 12. From the moment these began, Germans from the government to industry insiders expressed opposition. Chancellor Olaf Scholz even publicly stated that the German automotive industry would be able to compete with Asian car manufacturers.

Typically, a company applies for an investigation. This time, the EU Commission initiated an investigation on its own. So why does European Commission President Ursula von der Leyen not even give the German automotive industry a chance for “fair competition?” The EU clearly had a pre-established position, and the results of the investigation are foreordained. It only targets China; one can only call it another witch hunt. 

The EU’s anti-subsidy investigation on Chinese EVs launched in October 2023. Von der Leyen warned that the vehicles would “flood” into Europe. This had the potential to destroy the continent’s automotive industry. It was a reasonable fear; from 2012 to 2013, China damaged Europe’s solar energy industry by selling and illegally dumping €21 billion (over $22 billion) of solar panels there.

Von der Leyen intended to use this new investigation to further transform the EU into a geopolitical institution, which has been a core goal of hers since she took office. Von der Leyen is running for re-election as EU Commission president, and if that fails, she could try for the position of NATO Secretary-General with French and United States aid. So she is simultaneously using the investigation to gather political support, as she presents herself as a hardliner against China in her campaign.

But at what cost is she doing all this? Perhaps the destruction of the Eurasian continent due to trade conflicts? That’s not her concern.

Right-wing protectionism attempts to protect European industry

There’s been a significant rightward shift in the EU’s politics, as evidenced by the results of the 2024 EU parliamentary elections. This change undoubtedly casts a heavy shadow over China’s tariff policy. Rising conservative European forces will inevitably use trade protectionism to defend their own industries and employment. In response, these member states have further strengthened their demands to protect their own automotive jobs. Currently, at least seven EU countries provide land subsidies for industrial investment and several more provide preferential loans to enterprises.

This move completely caters to right-wing populism. (What comes after the rightward turn? The last time Europe faced the storm of populism and trade protectionism was in Germany before World War II.) Given China’s cost and technological advantages in EVs and wind power, the EU’s restrictions will also delay its efforts in energy conservation and emission reduction. This further delays its goals to address global climate change, which is incongruous with the EU’s claims of leading global climate governance.

Trade protectionist policies initiated by the US have also propelled the growing protectionism within the EU. In 2022, the US introduced the Inflation Reduction Act, which provides up to $7,500 in tax credits for new EVs and loans for used EVs. This move raised concerns within the EU about the impact on its own automotive industry and has led to the adoption of trade protectionist measures.

Meanwhile, the US’s recent trade war and decoupling practices against China have intensified the EU’s concerns about its own industrial development and security. In May 2024, the US announced an increase in tariffs on Chinese EVs from the previous 25% to 100%. The European Commission immediately followed suit by firing at Chinese EVs. This was hardly a coincidence.

The EU’s discriminatory subsidies and weaponized tariffs

For a long time, China and Europe have maintained a “cold politics, hot economy” model of cooperation — ideological differences do not affect both sides as important trade partners. However, this new emotional prejudice will chill the few commonalities between China and Europe. Von der Leyen seems to have forgotten that it was Europe itself that initiated the subsidy era in the field of new energy.

On February 1, 2023, von der Leyen officially launched the Green Deal Industrial Plan. This relaxed restrictions on government subsidies to enterprises, which is usually prohibited by the rules of the EU single market. But under the current policy on batteries, EU member states can offer financial assistance to battery manufacturers.

This plan was originally intended to improve Europe’s competitiveness in the field of clean energy, but its actual implementation has created discriminatory subsidies. According to statistics, the EU has provided €3 billion ($3.2 billion) in subsidies to battery manufacturers.

This EU tariff investigation has exposed the division within the EU, with countries like Germany and Hungary expressing opposition. Meanwhile, countries that do not export their own cars to China, represented by France, support the EU’s imposition of tariffs. In fact, Paris plans to raise the threshold for Chinese EVs entering the EU market, forcing Chinese manufacturers to invest and construct factories in France. As early as May, French Finance Minister Bruno Le Maire publicly stated that he welcomes the automotive manufacturer BYD to build factories there.

Like France, those who support increasing tariffs on Chinese cars have communicated with Chinese officials and car companies, expressing their will to cooperate. These countries do not oppose Chinese EVs, but rather the fact that they cannot benefit from them. They hope the companies will cooperate to drive the development of Europe’s automotive industry.

Objectively speaking, this goal is not difficult to achieve. Before this tariff policy started, manufacturers such as BYD had already started building factories in the EU. However, if Europeans use tariffs as a weapon to force China to build factories on their soil, that is a different story.

Can the EU’s automotive industry really develop if Chinese EVs are kept away? The protective tariffs have achieved nothing but delaying the use of low-cost, low-carbon energy in Europe by a few years. The EU’s anti-subsidy investigations can’t solve the problems faced by the EU in related industries, but may further worsen the situation. European consumers welcome inexpensive electric vehicles as well as low-carbon energy; after the anti-subsidy investigation, the EU members may have to buy Chinese EVs at higher prices. The only group not grateful for the reduced carbon dioxide emissions because of China is the EU, which has chosen a tariff war.

Europe and China could cooperate

The cooperation potential between China and Europe’s automotive industries far exceeds their differences. With electrification and intelligentization — the use of artificial intelligence with decision-making capability — the proportion of the cost of chips in car prices will rise dramatically. Although the Netherlands has photolithography technology and Germany has polysilicon, the majority of the chip industry’s profits goes to the US and the non-European countries like Japan and South Korea.

In this regard, China and Europe have common interests. China must develop its own chip industry. With its production capacity, the chip prices will definitely be reduced followed by the increased proportion of its chips in the global market. This is already in effect.

From January to May 2024, China’s integrated circuit export amounted to 444.73 billion renminbi (over $62 billion), a year-on-year increase of 21.2%, even exceeding the 20.1% of cars. It became the country’s second-largest industry with year-on-year growth. China has already occupied the popular mature process nodes of 28-40nm. Most car chips use 28nm or 40nm chips, so cooperating with China to use its chips can greatly reduce the production cost. The two countries would gain a competitive edge over US and Korean cars.

If the European automotive industry can’t cooperate with China in this game, Europe cannot participate as a player. Rather, it would be more like a bargaining chip. Habeck’s visit to China is a signal that Berlin has reached a consensus with Beijing to “decrease the impact” while Paris is still facing choices.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Launching Tariffs Targeted at Chinese Automakers? Not Right, EU. appeared first on Fair Observer.

This April, in sweeping speech at Sorbonne University in Paris, he repeated his call for a more assertive Europe, a theme he has been spearheading since Russia invaded Ukraine in 2022. Macron articulated his vision for a reinforced and “sovereign” European Union. In his nearly two-hour speech, Macron conveyed his conviction that only a robust European power can salvage the continent from irrelevance in an unstable world. With the privilege of global dominance contested between the United States and China — and the former engaged in, if not distracted by, conflicts in Europe and the Middle East — Macron sees a strengthened EU as the linchpin for navigating these turbulent times.

The resurgence of Marine Le Pen’s right-wing Rassemblement National (RN) presents the starkest contrast to Macron’s vision for France and the European Union. With its nationalist rhetoric and anti-immigration stance, Le Pen’s party has tapped into disenchantment among vast swathes of the French electorate, particularly in rural and working-class areas.

Liberals lose ground to the Far Right in France and elsewhere

For Macron and his Renaissance party, the challenge lies in countering the RN’s appeal and rejuvenating the party base. The ongoing European Parliament elections that run from June 6 to 9 serve as a litmus test for Macron’s leadership and the viability of his pro-European agenda. Le Pen’s list, led by the emerging figure of Jordan Bardella, 29, is gaining momentum. The Renaissance list, headed by relatively unknown Member of European Parliament (MEP) Valérie Hayer, struggles to maintain relevance. As of June 3, Renaissance had slipped to a mere 15% according to voting intention polls presented by Politico. RN, on the other hand, held a commanding 33%. This shift marks a stark departure from the neck-and-neck competition witnessed in the previous European election five years ago.

The upcoming results of the EU election hold significant weight as this contest serves as the final scheduled national vote in France before the 2027 presidential election. Le Pen is poised to make her fourth and potentially most formidable bid for power. Only two years into his second term, Macron faces the specter of becoming a premature lame duck. He lacks a solid parliamentary majority domestically and faces the constant threat of no-confidence motions.

Moreover, Macron’s European influence is under threat as the European Parliament group to which Renaissance belongs, Renew Europe, faces declining support across European electorates. France’s stature further diminishes amidst chronic high budget deficits, something that should theoretically trigger an EU disciplinary procedure post-election.

Macron’s speech underscores the significance of the elections as a litmus test for his political standing and the future trajectory of his party. Macron is endeavoring to rally support and reassert his leadership in the face of stiff competition from right-wing adversaries. How Macron navigates these turbulent waters in the coming weeks will undoubtedly shape the political landscape of France and Europe at large.

Macron pushes for continental defense

In his recent address, Emmanuel Macron once again reiterated the “importance” of nuclear deterrence for Europe’s security, hinting at the possibility of broadening Franco-British nuclear cooperation to encompass other European nations. While such a move might appeal to a future UK Labour government, it remains a contentious issue in Germany and much of Eastern Europe. In recent months, Macron has explicitly talked about nuclear deterrence as a means of leverage required for European security.

In February, in response to reports that Ukraine was on the verge of defeat, Macron floated the possibility of France sending troops to the battlefield. In response, Russian President Vladimir Putin asserted that, in case of NATO engagement, Moscow would be prepared to utilize any arms, including tactical nuclear weapons. Macron in turn, reminded his audience that France is also a nuclear power and boasted: “We must first and foremost feel protected because we are a nuclear power. We are ready; we have a doctrine” for the use of nuclear weapons.

However, Macron’s initiatives have failed to dispel the perception that, rather than affecting the outcome of the conflict, they primarily fortify France’s military-industrial interests and prop up the diminishing influence of a mid-sized power. Macron must address these lingering doubts and ensure that his initiatives contribute meaningfully to collective European security.

Fiscal expansion of the EU

Interestingly, in his Sorbonne speech, Macron advocated a significant leap in Europe’s fiscal integration in economic policy. This would be accomplished by enlargening the EU budget, extending the post-pandemic recovery fund or reforming the European Stability Mechanism. However, Macron’s proposals overlooked the imperative of bolstering fiscal discipline at the national level — especially in France.

Even more daunting would be getting other Europeans to buy into the idea of granting expanded taxing authority to the EU. While Macron broke new ground by advocating for broadening the European Central Bank’s mandate to encompass growth and climate objectives, he fell short in addressing the necessary trade-offs and compromises to realize this ambition.

As Europe grapples with the complexities of economic recovery and transformation, Macron’s vision raises pertinent questions about the path forward and the concessions required to achieve meaningful progress. Macron presents a compelling vision for European integration. He advocates for a fortified single market and establishing a European industrial policy, while also championing deregulation and national flexibility. 

However, more than lofty speeches will be needed to get the job done. Macron must articulate a viable theory of change and confront the intricate political realities shaping Europe. For Germany, European sovereignty means prioritizing democratic processes over executive power. Back in 2017, Macron proposed “democratic conventions” across the EU to make European citizens more involved in their own governance. At the Sorbonne, Macron acknowledged the failure of this plan, underscoring the challenge of achieving unity amidst cultural diversity and countering the effects of identity politics centered on migration — to say nothing of the challenge of cultivating what remains a mythical European identity.

Macron has charted out what he believes is a new path for European integration in a perilous future. We will know soon whether European citizens have found him credible.

[Liam Roman edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post The Monumental Stakes of the Upcoming EU Elections appeared first on Fair Observer.

Garcetti also highlighted a telling anecdote about a US shoe manufacturing firm bypassing India in favor of Vietnam for its production needs, citing Vietnam’s more conducive business environment. This story underscored the challenges India faces in attracting foreign direct investment (FDI) and highlighted the need for reform.

India has been hailed as the “America of South Asia.” As Garcetti pointed out, there is immense potential for economic collaboration between the two nations.

Garcetti emphasized the importance of reforming export policies and export controls as key steps toward bolstering the trade partnership between India and the United States. He called for dismantling bureaucratic, taxation-related, regulatory and federal system barriers. “We want the foreign direct investment from China to shift, but FDI is not flowing into India at the pace it should be. Instead, it’s going to countries like Vietnam. I would selfishly like to see more of that happening in India,” Ambassador Garcetti said.  Removing these impediments, he argued, would pave the way for increased job creation, prosperity, investments and overall strength in both countries. 

India’s challenging business environment

Nicknamed the “graveyard of foreign companies” in recent years, India’s notoriety for its challenging business environment is famous, particularly for foreign enterprises. Indeed,  opaque market regulations and unpredictable law enforcement practices characterize its regulatory landscape.

One of the primary concerns for foreign businesses operating in India is stringent tax inspections. Companies like Foxconn, Samsung and Walmart face hefty fines for alleged concealment of investments, tax evasion and falsification of accounts. The Indian government employs these tax issues as policy, using them toregulate and restrict foreign investment.

In June, Indian regulators slapped Amazon with a hefty $24 million (two billion rupee) fine for obscuring its investment in a retail group. Japanese and South Korean firms have faced similar probes. Last year, Foxconn was raided for concealing income and evading taxes. Regulators handed giants like Nokia and IBM exorbitant fines, and others like Vivo and Wistron have encountered hurdles in the Indian market.

Tax enforcement has become a tool for Indian authorities to regulate foreign investment. The phenomenon has even earned the moniker “tax terrorism.” India’s aggressive stance on tax compliance underscores its determination to safeguard revenue and scrutinize foreign corporations. However, critics argue that the heavy-handed approach could deter foreign investment and stifle economic growth.

The scale of these tax investigations and fines is leading to growing apprehension among Western nations and investors. Between 2014 and 2021, nearly 2,800 foreign firms operating in India terminated their operations, amounting to approximately one sixth of the total number of multinational companies registered in the country, as per Indian government data.  As India seeks to position itself as a favorable destination for foreign investment, addressing these regulatory challenges is imperative to fostering trust and confidence among international businesses. 

India must overhaul its business environment to attract foreign companies 

Despite India’s allure as a sizable and promising consumer market, the reality for foreign investors is fraught with uncertainties and obstacles. The exodus of companies reflects a growing perception among foreign firms that the risks of doing business in India outweigh the potential rewards. This sentiment raises concerns about India’s ability to fulfill its potential as a preferred destination for foreign investment and economic growth.

To reverse this trend, India must address the systemic issues undermining its attractiveness to foreign investors. This entails implementing reforms to improve market transparency, enhance infrastructure development, upgrade labor skills and foster a more conducive business environment. 

By addressing these challenges, India can regain the confidence of foreign companies and reposition itself as a competitive and sustainable investment destination on the global stage. As India aspires to position itself as a global economic powerhouse, it must address these systemic issues to foster an environment conducive to sustainable economic growth and foreign investment. Failure to do so will not only jeopardize India’s economic prospects but also undermine its credibility as a reliable partner in the global business community.

[Mitchelle Lumumba edited this piece]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post India’s Overbearing Regulators Are Choking Foreign Business appeared first on Fair Observer.