If America's economic woes drag on into next year, Bermuda had better "watch out" for possible changes to the US tax system that could impact on the Island's international business sector, warned a former US Commerce Secretary yesterday.

Mickey Kantor, who served in US President Bill Clinton's administration in the 1990s, was responding to a question from a diner at the end of his speech at the Bermuda International Business Association (BIBA) annual general meeting luncheon yesterday.

Some fear a change in the US tax code targeting offshore jurisdictions could damage Bermuda's competitive advantage.

And with Democratic Party presidential front-running candidate Barack Obama having repeatedly vowed to "close down the tax havens", concerns are growing in the international business community.

"I don't see that being a major issue in the next couple of years," Mr. Kantor told an audience of 270 business people at the Fairmont Hamilton Princess.

"But if we go into the middle of 2009 and unemployment is still going up, then it could be a problem. If you have a Democratic Congress with a big advantage in the House, then they will have to react.

"Barak Obama cares about fiscal discipline and knows a lot about the economy, as does Hillary Clinton, and either of them would try to put the brakes on Congress doing something that would not be economically productive.

"After all, we give tax advantages all the time in the US to corporations and nobody talks about it.

"There is great support for the companies that operate out of Bermuda. But you'd better watch out, if this slowdown continues to get worse."

In an interview with The Royal Gazette, Mr. Kantor said the US is already in recession and its economy will struggle through at least the first three quarters of this year.

"There are almost no home sales, construction has virtually stopped, even commercial construction has slowed down and unemployment is going up," he said. "Middle-class Americans are seeing their wages stagnate, while health care costs, education costs and interest rates have been going up. And while costs are going up their equity in their homes is going down. Consumer sentiment has dropped precipitously.

"I think our economy is going to have a difficult time through at least the first three quarters of this year." Bermuda companies would feel the effects of a global economic slowdown, he said, like everyone else.

"Europe and Japan are slowing down and the Chinese are seeing inflation, so they're having to put the brakes on their economy," Mr. Kantor said. "If Chinese growth slows down from 11 percent per annum to 9.5 or nine percent, we are going to feel that world-wide .

"Bermuda companies have global reach and they will be quite sensitive to what happens.

"Mr. Kantor did not believe the recession would linger on into next year and beyond.

"In historical terms, we are looking at a fairly shallow and short recession, but not without pain," he said. "It is hurting the balance sheets of a number of financial institutions and no doubt, it is going to be painful. But it's not going to be as deep as some people are saying. I don't think it will go into 2009.

"Bermuda was greatly admired, he said, and had a real impact on the world economy through its ability to run an efficient reinsurance industry and its innovative financial institutions.

Mr. Kantor, 68, is a partner in Mayer, Brown, Rowe & Maw LLP, a Chicago-based international law firm. He worked with President Clinton to conclude more than 200 agreements to expand trade. His aim was to generate new jobs through increased exports and markets abroad. He also chaired two Democratic Party presidential election campaigns.

He had involvement in the negotiations of the North American Free Trade Agreement (NAFTA) and its subsequent environmental and labour law additions. NAFTA was designed to lift trade barriers between the US, Canada and Mexico, forming the largest trade bloc in the world, by combined gross domestic product. In the heat of the Democratic Party presidential primaries, NAFTA has come under attack from Senator Obama, who claims it has cost one million American jobs, and even Senator Clinton, who has previously expressed support for NAFTA, is now ambivalent on its merits.

Mr. Kantor said he did not feel disappointment at their attitude to the trade deal he had worked so hard to extend.

"What they are saying is that they don't want to end it, they want to mend it," Mr. Kantor said.

"NAFTA has been largely successful, if you look at the effect it has had on trade, jobs and the standard of living. Has it been as good as I had hoped? No.

"There have been problems that I didn't anticipate at the time. But NAFTA is 18 years old and it's time to refresh it.

"Senator Obama is campaigning in Ohio ahead of the primary due to take place there next Tuesday and has claimed NAFTA has cost 50,000 jobs in that state alone. Mr. Kantor disputed his claim.

"It's much more to do with the progression of technology and the movement of capital," Mr. Kantor said. "Eighty-seven percent of the jobs lost in the US are down to technology, not trade.

"And the law of competitive advantage still applies. The shoe industry used to be based in Massachusetts. Then it went to Mexico, then to Indonesia, then to China, places where labour is cheaper. Capital moves to take advantage of that." He said affordable imports could be beneficial, as well as exports, because they allowed people to raise their standard of living.