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Virus Reshapes China-U.S. Relations

Apr 03, 2020
  • Zhang Monan

    Deputy Director of Institute of American and European Studies, CCIEE

The COVID-19 epidemic is surging around the world and leaving a devastating trail unseen in 100 years, with more than 300,000 cases (as this article was being penned) in some 180 countries. The pandemic will trigger a butterfly effect that will change, in sweeping and fundamental ways, how human societies produce and trade and how countries interact with one other.

Our world is sliding into a “lockdown dilemma,” the result of measures taken to prevent escalation of the epidemic. The scourge has evolved into a pandemic that precludes a quick fix in the short term. More than 50 countries have announced states of emergency triggering travel restrictions, immigration controls and even border shutdowns.

In the wake of such measures, the flow of factors of production, personnel and cross-border engagements has been seriously restricted, resulting in a softening or outright suspension of production and trade on a scale unprecedented in human history. A public health emergency, coupled with the disruption of global production and a financial market meltdown, can only lead to a liquidity crunch and a downward spiral of the economy.

The global economy is headed for recession in 2020, but the pandemic’s depth of impact is not yet a foregone conclusion. If the outbreak lasts into the second half of the year or beyond (an internal White House briefing put the duration at 18 months or longer), the economic costs could be immeasurable, opening the door to a depression or a third global financial crisis.   

As the U.S. and Europe are coping with the early stages of the outbreak, an economic and financial storm is in the making. Since late February, Saudi Arabia and Russia have been embroiled in a oil production spat that has driven down the WTI crude oil price to $25 per barrel and sent shock waves across global financial markets. The unprecedented five circuit-breaker triggers within a single month in the U.S. and the consequent liquidity crunch provide ample warning.

In response to the punishing impact on the global economy, the U.S. Federal Reserve and other central banks, 27 worldwide, rushed to cut interest rates and effect quantitative easing schemes to shore up liquidity. The U.S. government and several others are launching stimulus programs to the tune of several trillions of dollars to counter the economic fallout of the pandemic. 

As things stand now, a massive fiscal stimulus by the U.S. government may not deliver much, considering the lagging effect of fiscal measures generally. It may not yield the much-needed immediate help for businesses hobbled by a cash and liquidity crunch. Air carriers are bearing the brunt — bringing down aircraft manufacturing companies as collateral damage —  because they are highly leveraged and asset-heavy. Once unemployment soars, it will take a toll on domestic consumption. Car loans, consumption loans and student loans will see a surge of defaults, bearing down heavily on the wider credit market.   

The deteriorating pandemic is reshaping the global trade order and poses a major test for China -U.S. ties. Yet, in contrast to the cooperation that came in the wake of the 2008 financial crisis, the G20 is today a shadow of what it once was and trust between China and the U.S., the foundation of bilateral cooperation, has been significantly undermined.

The outbreak has aggravated underlying tensions stemming from globalization, including that between supply and demand. China-U.S. relations have become more strained and intense, and it seems the crisis has not put major country competition to rest.

First, the U.S. side may escalate the trade war in a disguised and subtle manner. Albeit the phase one trade agreement has been reached, risks are still high. The agreement stipulates that the Chinese side should purchase American goods and service worth $200 billion in the next two years, which doesn’t take into account a force majeure scenario, such as the ongoing outbreak. Should China fall short of full implementation, the U.S. may retaliate. Recent reports have it that the Commerce Department and other agencies in the U.S. are working on new proposals to gradually escalate and intensify the restrictions on Chinese goods, technology and investments in the next few months. The Wassenaar Agreement, signed by 42 countries, extends export controls to computational lithography software, large silicon wafers and semiconductor substrates that could be converted to military use. It is apparent that these measures aim at China.

Second, the U.S. is increasingly shifting toward an endogenous circular economic model. The epidemic has spurred a structural reshuffle in country-to-country relations and forced the U.S. to reexamine how it is attached to “made in China” and it may accelerate industrial and supply chain diversions in the future. China is the key producer of penicillin, antibiotics, painkillers and surgical masks and equipment. In recent years, Chinese pharmaceutical companies have supplied 90 percent of antibiotics, vitamin C, ibuprofen and hydrocortisone and 70 percent of acetaminophen and 40 to 45 percent of the heparin consumed in the U.S.

Peter Navarro, trade assistant to Trump, and Senator Mark Rubio are working actively to promote the Buy American Act, requiring that Federal agencies to buy American-made medicine and medical equipment to reduce reliance on Chinese supplies. Now, Tesla, Ford and other automakers are converting their assembly lines to produce much-needed equipment and supplies, including ventilators. As the Federal government receives more requests for help from all sectors, it may federalize some companies to enhance national control over lifeline industries.

Third, China and the U.S. didn’t follow the same path to cope with the pandemic, inadvertently inviting comparison. The two countries have adopted categorically different approaches and showcased different aspects of strength in their governance models. The event has triggered profound economic and political changes that will emerge gradually in the near future.

The pandemic is a test of the leadership of major powers, primarily in the following three aspects:  domestic governance, provision of global public benefits and the ability to coordinate the global response.

Unilateral actions provide no answer for combating this common enemy. A global coordinated response is needed, and China needs to take on more responsibilities and rise to greater challenges. History will be on the side of the country that drives the worldwide response to the crisis, and that country will be in the driver’s seat in reshaping globalization. 

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