A vicious cycle of trade and COVID-19 warfare between the US and China?

06 Apr 2020
A vicious cycle of trade and COVID-19 warfare between the US and China?
Key points:
  • The COVID-19 pandemic is a catalyst for deteriorating US-China relations, although their bilateral tensions are part of a longer-term trend
  • Both countries have taken steps that have limited information flows at critical moments, and are engaged in a “blame game” that makes public health cooperation unlikely
  • Bilateral disputes over COVID-19 are likely to see a resumption in the US-China trade war, further weakening the global economy
  • The trade war and COVID-19 exchanges risk descending into a vicious cycle, where disputes in one domain amplify those in the other.
Introduction

The US and China have failed to collaborate in the fight against the COVID-19 pandemic. Rather than providing a common threat to prompt cooperation, it has proven divisive. The two superpowers have started a tit-for-tat, and at times petty diplomatic row that arguably makes the problem worse. The pandemic has revealed how much mistrust exists between the two Indo-Pacific great powers.

Broader trends feed into the current acrimony. In recent years, China has been more willing to assert its international leadership credentials, often portrayed in contrast to those of the US. Under Xi Jinping’s control, the CCP has also become more authoritarian at home. US President Donald Trump has preferred to direct a hawkish China policy from the White House rather than using conventional diplomacy. The US-China trade war, now three years running, has eroded confidence in what negotiations between the world’s two largest economies can achieve.

Deteriorating relations are a long-term trend, but the divisiveness of the pandemic is caused in part by Beijing’s and Washington’s insecurity about their own failures to protect their citizens and contain the virus.

Blame games and conspiracy theories

A political contest to shift blame for the rapid spread of the virus has begun. Sensitive to the fact that the virus first appeared within its own territory, China’s messaging abroad has sought to save face by calling attention to US shortcomings. Some Chinese authorities and state-media have insinuated conspiracy theories that the virus was engineered by the US military and deployed in Wuhan as a biological weapon, or that the virus originated in Italy.

The Trump Administration has eagerly participated in this slanging match. Some US officials, including Secretary of State Pompeo and President Trump himself, have ignored WHO naming protocols and referred to COVID-19 as the “Chinese” or “Wuhan” virus. The Chinese Foreign Ministry has retorted that this use of language is “immoral and irresponsible”.

A planned G7 communique on COVID-19 responses reportedly failed because the US insisted on using the term "Wuhan virus".

Early missteps in both countries fed mistrust and misinformation. The Trump administration reportedly cut staff working at its Centers for Disease Control and Prevention (CDC) offices in China, even in the months before the outbreak began. Staff cuts included epidemiologists who arguably would have provided better disease intelligence to the US government as the outbreak unfolded. In January, China ignored requests from US experts to observe the outbreak in Wuhan.

The Chinese government engaged in an early cover up of the virus, holding back critical information for weeks. Local health officials in Wuhan failed to report the first cases of the disease, afraid of backlash from the central government if they spread bad news. This rendered China’s well-designed early warning system, developed after the 2002 SARS outbreak, less effective than it may have been.  
Now the expulsion of journalists threatens to accelerate tensions and limit reporting on the pandemic. On 2 March, Trump Administration officials announced restrictions on Chinese journalists in the US, resulting in the expulsion of 60 state-media workers. China hit back on 17 March by revoking the credentials for American reporters working for leading newspapers.

In this atmosphere, it is hard to see the US and China setting aside their animosity to cooperate on solutions to the COVID-19 crisis. The US shows little interest in leading a global response. In its absence, China is afforded an opportunity to provide aid to stricken countries such as Italy, and downplay its initial failings. How US-China tensions might influence the ensuing economic crisis is another question.

Trade warfare won’t help the COVID recession

As public health measures to mitigate COVID-19 take effect, the epidemiological crisis is becoming overlaid by a profound economic crisis. Trade flows are collapsing, international value chains are seizing up, and the global economy will be tipped into recession.

There couldn’t be a worse time for a global trade war. Yet this is exactly where US-China economic relations are currently poised.

US trade grievances with China are long-standing, including accusations of currency manipulation and intellectual property theft. It was the Trump Administration that fired the first salvo in January 2018, imposing its first round of tariffs against washing machines and solar panels. China retaliated in April, and there has been an escalating tit-for-tat exchange of tariffs and counter-tariffs since.

The impact of these tariffs is profound. China Briefing reports the US has now imposed tariffs on $550 billion of Chinese goods, and China on $185 billion of US goods.  According to Chinese customs data, two-way US-China trade fell by 15 percent in 2019 as a result.

A short-lived peace emerged in 2019. The “Phase One” deal was agreed in October and signed in January this year. Under its terms, China would agree to buy an additional $200 billion of US goods (above a $186 billion baseline) over two years. In exchange, the US would cut some existing tariffs and suspend several more it had threatened. While not a long-term solution, it indicated that a landing point between the two was possible.

The COVID-19 crisis now threatens the deal: Some commentators, including former officials, argue that China will need to declare force majeure on many of its Phase One import commitments.

How the Trump Administration will respond to China failing to meet import targets remains an open question. As the ugly exchanges over the origins of the virus destroy what limited trust existed in the relationship, the prospects for a lasting trade peace become ever more remote.

Could the US-China trade war impair COVID-19 responses?

The COVID-crisis is already making the US-China trade war worse. It could spill over into the medical sector, hampering public health responses.

At no time in history has the demand for medical goods been higher. Given technological concentration in the industry, only a handful of countries produce and export these goods. Of the $157 billion of pharmaceutical and medical goods exports in 2018, the EU dominates, with the US, China and a few others playing prominent roles.

Pharmaceutical and medical goods exporters, 2018

Pharmaceutical.PNG
Source: Authors’ calculations, from UN Comtrade. Includes HS 3003, 3006, 9018.

Unfortunately, many governments are responding to pressures on medical value chains with counterproductive protectionist responses. Research shows that twenty-four countries have imposed export restrictions on these products. The group includes several EU members, as well as Australia and most countries in Asia.

The US is one of the few medical producers yet to restrict exports of these critical products. There is no evidence China has deliberately withheld supply to the US. Ironically, the principal barrier to US-China medical trade are Trump’s tariffs, which have been reduced, but not entirely removed, on many essential products needed by US hospitals to fight COVID-19.

Whether this remains the case is unknown. With broader relations between the two countries at a disastrously low ebb, there remains a temptation to ‘weaponise’ medical supplies in the ongoing trade war. If China is unable to meet its Phase One import commitments, or the US continues to blame China for the global epidemic, there is a real risk that the trade war spills over into a medical supply war.

This could create a vicious cycle in bilateral relations, where the virus dispute exacerbates the trade war, and in turn makes cooperation even more remote.
 

Authors

Kyle Springer
Kyle Springer
Senior Analyst
Kyle Springer is the Senior Analyst at the Perth USAsia Centre. He provides high-level program assistance and develops the think tank and external outreach programs of the Centre. Kyle also directs the Centre's Indonesia programs and convenes policy workshops focussed on Australia-Indonesia relations.
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Jeffrey Wilson
Jeffrey Wilson
Research Director
Dr Jeffrey Wilson is the Research Director at the Perth USAsia Centre. He provides leadership and strategic direction in developing the Centre’s research program across its publications, policy and dialogue activities.
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