The Coronavirus Could Upend Trump’s China Trade Deal

U.S. President Donald Trump’s multibillion-dollar trade deal with China could be yet another economic casualty of the spread of the novel coronavirus, according to a congressional report provided exclusively to Foreign Policy. 

The U.S.-China Economic and Security Review Commission, established by Congress two decades ago and appointed by members of both parties, said that stalled trade and depressed consumer demand in China from the virus “raises the possibility that implementation could be disrupted,” upending Trump’s efforts to end a two-year trade war with Beijing that he began in 2018. 

Trump administration officials and Beijing have insisted that the so-called phase one of the deal, which calls on China to buy $200 billion worth of U.S. energy and agricultural products, is set to move ahead as planned, even as the president himself took shots at Beijing from the White House podium over the weekend as the spread of the virus has now killed more than 40,000 Americans. 

Yet China could invoke a clause in the agreement that allows for fresh trade consultations between the two countries “in the event that a natural disaster or other unforeseeable event” postpones the ability of either party to verify that the clauses are being met, according to the commission report, a copy of which was obtained by Foreign Policy. 

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The stress to the trade deal from the coronavirus comes as Trump began to sharpen his attacks against China over the weekend amid news reports that the U.S. intelligence community is considering the possibility that the novel coronavirus may have accidentally escaped from a laboratory in Wuhan, where the first cases were detected. Trump had said earlier this month that he’d “love to have a good relationship” with China. 

“It could have been stopped in China before it started and it wasn’t, and the whole world is suffering because of it,” Trump told a White House briefing on Saturday. Trump ally Sen. Tom Cotton, an Arkansas Republican, also introduced legislation last week that would allow U.S. citizens to sue China for deaths and economic harm from the virus, and other lawmakers have called for the United States to consolidate supply chains for pharmaceuticals and other critical goods. 

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Even as Trump has scrutinized China’s role in the spread of the virus, he and his top economic advisors have offered up rosy predictions for the U.S. economy, saying the United States can quickly get back to business once the countrywide pandemic lockdowns lift.

“I think it will be months, I definitely don’t think it will be years,” Treasury Secretary Steve Mnuchin said of the economic recovery in an interview with CNN on Sunday. “Rightfully so, people are being cautious. On the other hand, as we get comfortable reopening the economy, I think we will see a big rebound.”

But the commission report offers up a smorgasbord of worrying data and statistics that point to long-term economic hardships for China—and painful knock-on effects for the rest of the global economy.

Despite the trade war, China remains the United States’ largest trade partner, accounting for nearly $740 billion in trade in 2018 alone, meaning China’s economic hardships are likely to reverberate across the U.S. economy.

“Because China is a global manufacturing hub, domestic supply chain disruptions sparked by COVID-19 have triggered shocks across the global economy and brought into sharp relief the risk of reliance on China as a source of intermediate and finished goods,” the report reads. 

Chinese consumer spending, a linchpin of the country’s economy, plummeted more than 20 percent in the first two months of 2020 compared to the same period in 2019. Labor shortages caused declines in production indicating “a manufacturing contraction in February 2020 below the lowest figure seen in the 2008 financial crisis,” the report says. And industrial output in China dropped 13.5 percent year on year—“the largest contraction on record,” the report says. 

“With thinner inventories, less cash on hand, and narrower supply networks, U.S. small businesses are particularly poorly insulated from supply shortfalls in China,” it says.

China is “falling back on state intervention” to spur economic growth in key industries, the report says, as Beijing-backed statistics marked a 7 percent drop in the nation’s GDP for the first quarter. To cut down on costs for its recovery, Chinese officials have said they’re targeting “new infrastructure” projects, such as the expansion of 5G networks that have raised alarms within the Trump administration. 

There has been an increased tit-for-tat in the battle for control of the coronavirus narrative, as the Ohio state prison system appeared to become the latest major U.S. hotspot for the disease on Monday. In recent weeks, China has expelled reporters from the Washington Post, the New York Times, and the Wall Street Journal, after the State Department kicked 60 journalists from Chinese state-owned outlets out of the United States.

The spread of the virus is also likely to have ripple effects on a closely linked economic relationship that extends to travel, shipping, and U.S. universities, wiping away billions of dollars in Chinese investments to American businesses, as the virus has shuttered factory floors and caused shipping bottlenecks. 

Trump had boasted about his administration’s efforts to slash the U.S. trade deficit with China in the weeks after signing the deal. But the coronavirus could put a wrench in those plans, the commission report said, with falling Chinese student enrollment in American degree programs likely to further chip away at $15 billion in U.S. service industry exports to China. 

“China’s policymakers made a trade-off in their preliminary response to COVID-19, shelving economic activity in exchange for stringent control measures to curtail the virus’ spread,” the report states. “Subsequent policy responses have been carefully sequenced and highly targeted to attempt to mitigate the disruptive effects such measures exerted on businesses.”

The overall trend indicates that the United States is likely to become stingier about keeping its supply chain out of China’s reach, especially in the defense industry—which Pentagon officials said on Monday will need a significant bailout in another stimulus package to offset the economic impacts of the virus. 

“We are going to get a renationalization of defense design and supply and manufacturing,” Kori Schake, the director of foreign and defense policy studies at the American Enterprise Institute and a senior State Department official during the George W. Bush administration, told Foreign Policy earlier this month. “That was probably going to happen anyway because of Chinese behavior, but it will certainly happen now.”