On January 15, Chinese Vice-Premier Liu He and US President Donald Trump met in Washington to sign a trade agreement that officially marked the first phase of the negotiations to end the economic dispute between these two giants. But the spread of the 2019-nCoV coronavirus has complicated the picture.
The Phase 1 deal certainly represented a crucial step toward a renewed juncture in the Sino-US relationship, but the future is still uncertain. Indeed, even if the deal achieved some results, it does not offer experts and business executives a reason to interpret too optimistically the trends that will affect the international arena in 2020. And that was so even before the virus outbreak.
According to the 94-page agreement, China will have to implement an action plan to strengthen intellectual-property (IP) protection, discipline online venders and enforce measures against counterfeit products; it will also be committed to eliminate equity caps on insurance and brokerage firms, and will open provincial licenses to let distressed debt investors to buy assets directly from banks.
The US, on the other side, agreed to cut tariffs on $120 billion worth of Chinese products to 7.5%, and to remove China from its list of currency manipulators. In addition, the US will export to China $200 billion worth of products over two years, ranging from pork, beef and rice to energy products and services, and manufactured goods.
The seven sections of the partial deal include articles focused on IP issues, technology transfer, trade in food and agricultural products, financial services, macroeconomic policies and transparency, and expanding trade, but they still appear insufficient to strike a comprehensive agreement that could provide a key to reading the dynamics that will impact the US and Chinese economies.
Commercial conflicts can cripple the global economy when the economic well-being of the majority of the countries engaged in trade are disrupted, benefiting only a few. The terms of trade change at the expense of exporters, but the implementation of protectionist policies does not create new prosperity within the national borders of the country that opted for them – in spite of some initial positive effects. This is translated into a chain of actions and reactions that could harm several states and could cause a reduction of the well-being on the global stage compared with a free-trade situation.
In a long-term perspective, facilitating a constructive dialogue to build a fair trade chessboard could be more advantageous for members of the international community, especially when the two main characters of the dispute are the United States and China, respectively the world’s first and second largest economies.
However, this deal missed the chance to pour foundations to build sound economic pillars that would have fostered a better competitive environment. It instead appears to have a political purpose to provide answers before the 2020 elections in the US for consumers and companies that have been paying higher prices. The lack of specific provisions to cover the role and influence of state-owned enterprises and the limitations to foreign investments in China leave room to consider the document a symbol of a victory for Beijing, whose leaders were not intimidated by Trump’s public posturing over the past 18 months.
But the Asian giant approached the new year managing pressures deriving from concerns over protests in Hong Kong, international criticism around the situation in Xinjiang, and the results of the elections in Taiwan. These events constituted difficult challenges for China, which was already dealing with the slowest GDP growth since 1990, as shown by data that highlighted how the Chinese economy grew by 6.1% in 2019, compared with 6.6% in 2018.
Companies, especially those operating in communication equipment, office machinery and chemicals, suffered deep uncertainties stemming from the conflict with the US, in spite of some fiscal and monetary measures put in place by the government and the People’s Bank of China. In this framework, the first phase of the trade deal has represented a way for President Xi Jinping to restore the health of his country’s economy.
Nevertheless, the Lunar New Year marked another obstacle for China, which is facing the spread of a deadly virus first detected late last year. The coronavirus’ epicenter is the city of Wuhan in Hubei province, where millions of people are isolated to contain the disease, while authorities are working toward the construction of a hospital, the treatment of patients and research for vaccines in collaboration with foreign partners.
The actions taken to curb the propagation of the virus – locking down people at home, suspending flights and tours, and closing shops, restaurants and schools – will have inevitable repercussions on national consumption and production, which in turn could impact the global economy.
The crisis makes supply chains more vulnerable, creating different degrees of disruption across businesses that must deal with an unpredictable scenario – even companies such as Starbucks, McDonald’s, Ikea, Toyota, Nissan, Apple and General Motors that have plants, suppliers and stores in China are experiencing the negative effects boosted by the ongoing emergency, which certainly marks how influential this market is in such a highly interconnected global economic system.
Specifically, with workers in quarantine, the manufacturing sector is dealing with serious risks that are shared with all those foreign partners that depend on deliveries from China. In addition, the spread of the coronavirus has hit oil demand in virtue of travel limitations while the slowdown of the industrial apparatus in the world’s second-largest oil consumer, as oil prices dropped below $60 per barrel.
In this delicate context, analysts question the ability of China to deliver the trade agreement’s targets. They would not be on the agenda of the country’s priorities at the moment, which probably hopes for flexibility on the part of the US. But what will be the impact on the Sino-US relationship in the coming months? The US, and the whole world, are looking to China, because a lot depends on how well the country responds to this crisis.