Assessing the possible impact of the Covid-19 pandemic on the U.S.-China trade relationship, Stephen Olson, Research Fellow at the Hinrich Foundation, said that while it was impossible to predict what will happen, there were three likely scenarios: cooler heads would prevail; the pandemic would reignite the trade war; or it would turn out to be a non-issue.
Olson explained that the outbreak had created hurdles for the Phase One agreement signed in January, in particular China’s commitment to buy US$2 billion of goods from the United States.
“The biggest challenge of the agreement is the purchase commitments, which even under ideal circumstances were always going to be very difficult for China to meet,” he said. While the agreement allows for flexibility in the face of unforeseen events, it also allows for the U.S. to introduce more tariffs if China does not meet these targets.
A more significant impact of the pandemic, Olson said, may be that the negotiations for Phase Two have been placed on the back burner.
“These negotiations would have at least begun to address what is, in my point of view, the real core fundamental issue dividing the U.S. and China – how do you reconcile two fundamentally different economic systems under a single set of global trade rules?”
Most of the recent conflicts have been related to the points of friction where these two very different economic systems bump up against each other amid China’s continued growth.
Olson also noted that, since the outbreak, both sides have voiced criticisms regarding the source of the virus, number of infections and death rates.
“This is important because, at some point, U.S. and Chinese officials will have to sit across a table from one another and recommence very complicated trade negotiations,” he said. “These harsh recriminations serve to poison the atmosphere and will make the discussions even more complicated.”
Looking at the possible impact of the coronavirus, Olson’s first potential scenario sees officials in both countries viewing the pandemic as a black swan event that should not interrupt the progress that has been made. Both sides in this scenario would work together and refrain from punitive actions.
Under the second scenario, the goodwill and positive momentum that had been created by the Phase One agreement would be replaced by increasing antagonism. For example, U.S. President Donald Trump has mentioned cutting funding to the World Health Organization and terminating the trade agreements reached so far.
The pandemic has also highlighted some of the problems of highly integrated economies, Olson added. “Certainly it has served to illustrate the risks and vulnerabilities of the U.S.’s reliance on China as a source for medical and pharmaceutical supplies.”
The bottom line under this scenario is that the pandemic could reignite the trade war.
A third potential outcome is that the outbreak could turn out to be a non-issue from the point of view of the U.S.-China trading relationship. Under this scenario, the differences between the two economies are so deep and so profound that even a global pandemic cannot alter the trajectory.
U.S. negotiators want to repatriate supply chains to reduce reliance on China. In addition, at least part of China’s motive is to buy time to build out its technological capability so it will not be so reliant on U.S. technology.
So, regardless of the pandemic, the U.S. and China were already moving towards a different trade and economic relationship. The phased negotiations would only provide a temporary truce.
Olson does not foresee a full-scale economic decoupling, however. This would not be possible and is not in either country’s interest.
“We’ve seen for the past two or three decades an uninterrupted increasing economic integration,” he said. “I think we will see that starting to reverse and a certain degree of economic dis-integration between the two countries, with decreasing trade levels and decreasing foreign direct investment.”
Besides these three scenarios, there is also a “wild card” in the form of the upcoming U.S. presidential election. The presumptive Democratic candidate Joe Biden is currently attempting to burnish his credentials as being “tough on China.” If this gains traction, it could limit Trump’s ability to be accommodative on China.
Speaking more generally about global supply chains, Olson said that there had been some movement of manufacturing out of China that had benefitted Vietnam in particular. However, China has huge advantages not just in scale but also its highly skilled workforce and sophisticated infrastructure that cannot be replicated.
Regarding Hong Kong’s role amid the trade disruption, he said that the city is a small economy, but it can continue to make a positive contribution by acting as a textbook case of the advantages of an open economy.
“Hong Kong has historically played an important role as a beacon for the benefits of free trade, integration and having open trade relationships with as a wide number of countries as possible.”