US-China war of words over the coronavirus crisis may well reignite the trade war
- As the White House moves to systematically reduce US trade dependencies on China, the pandemic is putting pressure on the implementation of the terms of the phase one deal even before the difficult phase two negotiations begin. The uneasy US-China truce is unlikely to last long
The coronavirus pandemic is reshaping the way the world lives, works and trades. The US-China trade relationship in particular is being disrupted in three distinct but closely intertwined ways: one, trade dependencies are being rethought; two, prospects for re-escalation of trade tensions are mounting; and three, mutual trust is deteriorating.
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.
Developing greater self-sufficiency in medical goods while minimising supply risk has begun to take on literal “life and death” connotations for many countries.
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Discussions are under way in the White House on strengthening “Buy American” requirements on pharmaceuticals and medical supplies. Prior to the pandemic, the US had already been considering withdrawal from the World Trade Organisation Agreement on Government Procurement, which limits “Buy American”-type policies.
Although debate in the White House continues, the onset of the 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 itself, 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.
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.
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 a reimposition 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.
Timeline of a coronavirus war of words between China and US
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.
The disintegration 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 dialling down of the inflammatory rhetoric would be constructive and welcome.
Stephen Olson is a research fellow at the Hinrich Foundation
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