logo logo

Coronavirus may delay hard-fought US trade wins in China

New York Times | 3 February 2020

Coronavirus may delay hard-fought US trade wins in China

By Ana Swanson

WASHINGTON — The rapidly spreading coronavirus could claim one more victim : the United States-China trade deal.

The virus, which has killed more than 360 people and sickened thousands, is taking a heavy toll on China’s economy by halting factory work, grounding flights and disrupting supply chains. It is also likely to slow China’s progress in meeting the commitments it agreed to as part of the initial trade deal that the Trump administration signed with Chinese officials last month.

Under the terms of the agreement, China has pledged to purchase over the next two years an additional $200 billion of American goods, including soybeans, machinery and energy products. In order to reach those lofty sums, Chinese companies would soon need to begin purchasing large amounts of American products.

The Chinese government is also supposed to act quickly to open its markets for American agricultural and financial firms, making major reforms to those sectors within months.

But with factories and stores throughout China shuttered and government officials focused on containing the virus, Beijing will have less capacity to meet President Trump’s terms, analysts say.

“It could be problematic, particularly for manufacturers,” said Mary E. Lovely, a senior fellow at the Peterson Institute for International Economics.

She pointed to one example : Grounded flights and less tourism will weigh on Chinese airlines, potentially reducing their purchases of new American aircraft this year.

“How is the U.S. going to handle this ? We don’t really know,” she said.

Karthik Natarajan, a supply chain expert at the University of Minnesota, said the closing of cities and factories was severely affecting manufacturing and travel.

“Parts of the deal are set to go into effect by mid-February, but with the Chinese government intently focused on responding to the outbreak, developing action plans to meet the trade deal commitments might take a back seat,” he said.

One of the final sentences of the Phase 1 trade deal may prove to be key. The provision calls for consultations between the parties if “a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement.”

But even with a deadly disaster looming, China’s failure to meet its commitments may create some opposition in the United States, potentially returning the countries to their rockier relations before the signing of the trade deal.

Economists have predicted a drag on global growth from the virus, at least in the short term. In the United States, Goldman Sachs analysts estimate a 0.4 percentage-point reduction in first-quarter economic growth, though that effect is likely to fade.

Those costs could quickly outweigh the economic benefits of the trade agreement. While the Trump administration has touted big economic gains from the pact, economists’ forecasts have been modest, since the deal leaves tariffs in place on more than $360 billion of Chinese goods.

Privately, some Trump administration officials say that China may use the virus as an excuse to delay meeting its commitments, in hopes that Mr. Trump will ultimately be voted out of office this year.

Some in China have reacted negatively to the Trump administration’s decision to restrict travel between the countries, including barring entry to all foreign nationals who recently traveled in China.

In a note to clients, Ian Bremmer, the president of Eurasia Group, said that the Chinese government had found the American move to shut its borders “unnecessarily provocative, and it adds a sour tone on the back of the recently agreed Phase 1 trade deal,” he said.

Michael Pillsbury, a China expert at the Hudson Institute who advises the Trump administration, said he supported the emergency measures and that they might be escalated based on the situation.

He added that the administration would have to carefully weigh the potential consequences of the virus against upsetting the relationship with China.

“We need to balance a defensive concern with limiting a pandemic that can harm our own economy against the desire by some to be overzealous,” Mr. Pillsbury said. Such a response could “provoke paranoia among China’s hard-liners, who already claim that the U.S. is ruthlessly exploiting the health crisis,” he said.

Comments by some American officials have stoked those concerns. In an interview with Fox Business on Thursday, Commerce Secretary Wilbur Ross appeared to describe the virus as presenting a possible economic opportunity for the United States.

While Mr. Ross expressed sympathy for the victims of the coronavirus, he said it would probably facilitate the return of labor to the United States.

“It does give businesses yet another thing to consider when they go through their review of their supply chain,” he added. “So I think it will help to accelerate the return of jobs to North America.”

Ms. Lovely said the virus, like the American tariffs on China, has been encouraging companies to examine their supply chains and invest in manufacturing some of the same products outside China, so they are not completely dependent on one source. But often these factories are not returning to the United States.

“We see a pickup in trade shares from Mexico and from Vietnam, but also some higher-income countries like South Korea and Japan,” she said.

 source: New York Times