COVID-19 complicates US-China relations
9 April 2020
SHARE
Written by: Stephen Olson, Hinrich Foundation Research
Fellow
This article was
originally published in South China Morning Post on
8 April 2020.
The Coronavirus pandemic
is reshaping the way the world lives, works, and trades. In particular,
COVID-19 complicates US-China relations in three distinct but closely
intertwined ways: 1) trade dependencies are being rethought, 2) prospects
for reescalation of trade tensions are mounting, and 3) mutual trust is
deteriorating.
Rethinking China supply chain dependency
Long before any of us
heard the word “coronavirus”, a series of gradually escalating tariff rounds
between the US and China beginning in 2018 created significant disruptions in
what was then a roughly $635 billion trade relationship. Business executives
were forced to rethink and in some cases reconfigure supply chains in order to
avoid both the cost of the tariffs and the uncertainty created by the
ever-present threat of additional tariffs. Intermediary and finished
products which had been sourced from China began to increasingly enter the US
from Colombia, Vietnam, Mexico, and elsewhere.
Many of the Trump
Administration trade officials who authored the US’ more confrontational
approach to China did so out of a core belief that deep economic integration
between the two countries was a strategic mistake which had worked to the
advantage of China and to the detriment of the US. The implicit (and in some
cases explicit) rationale behind many of the US’ trade actions was to shift
supply chains out of China — if not back to the US, then at least closer to
home.
A pandemic changes everything
The onset of the
coronavirus has intensified these predispositions and added an entirely new
dimension: public health considerations are now front and center in trade
relationships. Developing greater self-sufficiency in medical goods while
minimizing supply risk has begun to take on literal “life and death”
connotations for many countries.
The massive stimulus package
just passed by the US Congress mandates the National Academies of Sciences,
Engineering, and Medicine to review the heavily China-dependent US medical
supply chain (ranging from drugs to equipment and devices) to identify national
security and public health risks. According to the Peterson Institute,
roughly half of the Personal Protective Equipment the U.S. imports comes from
China, and the figure for mouth-nose protective equipment is closer to 70
percent.
Discussion is underway
in the White House on strengthening “Buy American” requirements on
pharmaceuticals and medical supplies. Prior to the pandemic, the US had
already been actively considering withdrawal from the WTO Government
Procurement Agreement (which limits “Buy American”-type policies).
Although debate in the White House continues, the onset of coronavirus has
strengthened the rationale for buttressing domestic medical and pharmaceutical
production, while reducing dependence on imports.
As the full magnitude of
the pandemic continues to manifest, expect to see an even stronger impetus –
either by government directive or marketplace realities — to shift supply
chains away from China, along with calls for nationalistic industrial support
strategies.
A reignited trade war?
The Phase One trade
agreement signed by the US and China in January deferred the most consequential
and difficult issues to subsequent rounds of negotiations. Yet the pandemic —
and the associated economic slowdown — is threatening implementation of even the
comparatively “easy” Phase One obligations, especially those calling for
roughly $200 billion in Chinese purchases of US products.
To its credit, China has
recently stepped up its purchases of US wheat and LPG and has relaxed its
restrictions on three types of beef hormones, as called for in the agreement.
But they remain far short of the specified purchase levels, and despite
provisions in the agreement which call for consultations if unforeseen events
threaten implementation, it’s unclear how amicably any implementation
shortfalls can be managed. The US would be entitled under the agreement
to put tariffs back into place if China fails to meet its purchase
obligations.
Perhaps of greater
long-term consequence, the Phase Two negotiations which were intended to tackle
core fundamental issues such as Chinese subsidies and industrial policies
appear to have been put on indefinite “hold” thanks to the pandemic.
Unless substantive negotiations can successfully address these issues, disputes
will inevitably bubble to the surface again, and the prospect for re-imposition
of rolled-back tariffs or the application of new tariffs will be back on the
table.
The post-Phase One truce
we’re currently enjoying might eventually become another casualty of the pandemic,
and we could find ourselves once again in the midst of an escalating trade war.
Pandemic deepening mistrust
Any goodwill and
positive momentum that was generated by the Phase One agreement has been eroded
by harsh coronavirus-related recriminations that have flown back and forth
between the two countries. President Trump has pointedly insisted on referring
to the “China virus” (although for the moment he appears to have moderated),
and the Chinese Foreign Affairs Ministry has alleged that there is no evidence
that the virus originated in China, but was in fact maliciously planted in
Wuhan by the US military. This is against the backdrop of both countries
charging the other with a lack of transparency on infection rates, journalists
being expelled from both countries, and the passage of US legislation
supporting Taiwan which has been predictably viewed as highly provocative by
Beijing.
At some point, US and
Chinese officials will have to sit across the table from each other and resume
trade negotiations. The acrimony and mistrust spawned by the coronavirus
vitriol will make their already difficult job that much more difficult.
A complicated path forward
The dis-integration of
supply chains, the prospect for mounting trade tensions, and the antagonistic
atmospherics between the US and China are unfortunately mutually reinforcing
and will complicate the path forward. While both countries correctly
focus on the challenge of the pandemic, a couple of modest steps could help
limit the negative fallout on the trading relationship. An agreement to refrain
from additional tariffs during the pandemic peak, a strong statement on the
mutual commitment to undertake Phase Two negotiations as soon as is practical,
and a dialing down on the inflammatory rhetoric would be constructive and
welcome.
Related articles
By Stewart Paterson
7 April 2020
7 April 2020
Will China emerge from
the COVID-19 disaster with its global standing enhanced through careful use of
soft power and messaging?
By Alex Capri
30 March 2020
30 March 2020
COVID-19 will impact
businesses in the long-run by fundamentally changing the way multinational
enterprises (MNEs) run their operations.
By Stephen Olson
21 February 2020
21 February 2020
The coronavirus and its
disruptions might finally push the world to consider a new trading order.
No comments:
Post a Comment