Which makes President Donald Trump’s recent threat of new tariffs on China — and suggestions from Beijing that it could counter with other, dramatic punitive actions — all the more troubling.
“Clearly, the timing of renewed trade tension could not be worse,” wrote economists from S&P Global Ratings in a research note earlier this month. “The threat of higher tariffs and the intensifying technology cold war could yet disrupt technology trade and investment, de-powering what still promises to be an engine for recovery in 2020.”
Unrealistic terms now made impossible
Even before the coronavirus outbreak became a pandemic, the trade ceasefire between the United States and China was fragile at best.
That would have been a tall order without the virus-induced slowdown: The value of that commitment was more than China was importing annually before the trade war started, and analysts in January called the deal “highly challenging” unless China made sacrifices elsewhere.
“The targets for purchases in the phase one deal were always unrealistic, and now they are impossible,” said David Dollar, a Washington-based senior fellow at the Brookings Institution’s John L. Thornton China Center.
According to the S&P economists, China would have had to increase its imports more than 6% each month for two years to honor the terms of the deal. Instead, US imports fell 6% during the first four months of 2020.
“With consumer demand down in the Chinese economy, it’s unlikely that Beijing will be able to commit to buying a lot more American goods,” said Alex Capri, a trade scholar and visiting senior fellow at the National University of Singapore Business School. “Or, if they do commit … they will renege later” because of the lack of demand.
Trump also does not have the next two years to find out whether China will honor its agreement. He faces an election in November, which analysts have explained as one reason for his increasingly harsh rhetoric toward Beijing.
“Look, I’m having a very hard time with China,” Trump said during a phone interview Friday with ‘Fox and Friends.’ “I made a great trade deal months before this whole thing happened … and then this happens, and it sort of overrides so much.”
An ‘internal rift’ in China
Experts who talked to CNN Business still believe that economic and trade officials in Beijing want to make the “phase one” deal work.
But Beijing’s challenge isn’t just about honoring impossible commitments. The pandemic — and who should be at fault for its global spread — has fueled a growing anti-US sentiment in China, making it difficult for the country’s leaders to capitulate to demands from the United States.
“There’s an internal rift on trade policy within China to be sure,” said Marshall Meyer, professor emeritus of management at the University of Pennsylvania’s Wharton School.
Earlier this month, Trump, who has claimed without providing evidence that the virus originated in a laboratory in Wuhan, hinted that the United States could enact more tariffs on China as punishment for the pandemic.
The tabloid has also called attention to more hawkish voices in China, reporting recently that some are calling for “a tit-for-tat approach over trade issues.”
Such reports could represent a “trial balloon” for Beijing to consider, according to Malcolm McNeil, a partner at the Washington-based law and lobbying firm Arent Fox. He said they could also be channeling a “vocal minority” that is pushing for more aggressive action on the part of the government.
However Beijing chooses to move forward, McNeil stressed that authorities there need to handle trade “delicately.”
“The coronavirus has become a worldwide phenomenon with the negative focus on China and its handling at the outset,” he said, adding that backtracking from January’s trade deal would worsen attitudes toward China.
Threat to economic recovery
If tensions continue to escalate, the dispute could morph into a damaging conflict that not only weakens the world’s recovery from Covid-19, but also risks slowing important technological innovations.
IMF Managing Director Kristalina Georgieva reiterated the danger of a trade war earlier this month.
“It is hugely important for us to resist what may be a natural tendency to retreat behind our borders,” she said during an event held by the European University Institute, when asked about US-China tensions.
“Covid-19 has wreaked unprecedented havoc on American businesses and farmers,” said Jonathan Gold, spokesperson for Americans for Free Trade. “Tariffs are the last thing that any company should have to worry about during this pandemic.”