Now that the U.S. elections are over and the status quo has been maintained, the next big question facing the business world is how to avoid the looming ‘”fiscal cliff” comprising the expiration of Bush-era tax cuts combined with dramatic cuts in spending that would become effective Jan. 1.
If Congress cannot come to an agreement on a solution, the International Monetary Fund (IMF) has predicted that the U.S. will fall into a full-fledged recession, with a four-point drop in Gross Domestic Product — that’s the monetary value of all goods and services produced within the country’s borders, as defined by Investopedia, The Wall Street Journal reported.
Obviously, this would be bad news for everyone, in particular China, because the U.S. is China's second-largest trading partner, after the Eurozone, which is poised for a broad recession.
Should the U.S. be pitched over the fiscal cliff, the effects on China would be far-reaching, according to The WSJ. A drop in our GDP would likely result in a 1.2 percent drop in China’s GDP, according to the IMF.
Aside from the effect on global financial markets, a recession here would painfully impact China’s trade with the U.S., which amounted to $324 million in 2011, or just over 17 percent of its total trade, 4.4 percent of its GDP. At the time, the U.S. was second only to Europe, which received nearly 19 percent of China’s total exports, according to the paper.
More specifically, the fiscal cliff would be the result of implementing the Budget Control Act of 2011, as scheduled on Jan. 1, 2013. According to Barron’s over 1,000 government programs would experience hefty, automatic be cuts, while taxes increase two percent for workers, at the same time business tax breaks expire and additional taxes related to the new healthcare law come into effect.
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