SINGAPORE: Tensions between the US and China have been on the rise again lately.
While increasing bilateral antagonism is nothing new, particularly since US President Donald Trump took office in 2016, the latest bout comes at a time when the global economy is experiencing its darkest hour since the Great Depression.
To have these two countries, which together account for about 40 per cent of the global economy, bickering with each other is never helpul.
However, against the context of how every country in the world is trying to battle an unprecedented health crisis and an unforgiving economic slowdown, the additional geopolitical uncertainties can only rub salt into a deep wound.
HOPES OF A RECOVERY
Hence, whether the US and China can sort out their differences and achieve some semblance of normalcy again would matter a great deal in determining whether the global economy can indeed continue to at least eke out some recovery in the coming months.
As it stands, as much as we see hopeful signs of a nascent turnaround – as evidenced by the recent relative upticks in global manufacturing indices, for instance – the global economy remains in an extremely vulnerable state.
Should a major country see a resurgence of a viral outbreak - serious enough to warrant more lockdowns - would be an obvious risk.
The bubbling US-China tensions, with the potential of things boiling over, is another big risk factor that could trample whatever “green shoots” we see now back into the ground.
THE PHASE 1 DEAL
Still, despite the political bluster on both sides, we garner a sliver of hope that a path towards de-escalation is possible.
Specifically, even though it appears that the strain in the bilateral relationship can only get worse – with China’s enactment of Hong Kong security law and America’s retaliatory threats being the latest catalyst – the Phase 1 trade deal that both sides signed in late 2019 remains untouched.
While Trump openly suggested as recently as May 9 that he is “torn” about whether to end the deal, he has kept mum on it since. In his press conference on May 29, in which he addressed the Hong Kong issue, Trump was silent about the state of the Phase 1 deal.
It is a sign that Trump still views the deal as a cornerstone achievement of his presidential term.
There is, of course, the possibility that he may simply have been too caught up with the domestic social unrests across America to weigh decisively on the trade deal with China right now. Whatever the reason, Trump has nonetheless potentially offered an olive branch to China here.
If China remains serious about patching things up and preserving any normalcy in the increasingly fraught relationship, expect it to play ball and ramp up purchases of US goods considerably in the coming months. Here, a lot more buying would be needed to appease the Trump administration.
By our calculations, China is supposed to have purchased US$55.5 billion of American imports from January to April this year to be on track to fulfil the deal’s terms.
Under the Phase 1 deal, China agreed to undertake US$200 billion of additional purchases of US goods and services, from the 2017 actual trade flows before the trade war began, by the end of 2021.
It is way off the mark so far having bought just US$30 billion - even lower than the 2017 equivalent.
To be sure, the coronavirus outbreak has affected lives and businesses so much that slower trade flows between any two countries in general is hardly surprising. Indeed, the US trade deficit with China has gone down as well to US$53.9 billion in the first quarter – the narrowest quarterly trade gap since 2014.
This shows that even as China might have bought fewer goods from the US, the Americans have also cut down its purchases of Chinese goods over the same period due to China’s production disruption and a decline in US end-demand.
As such, even as China may not be able to ramp up its American imports quickly enough in the near-term in the current economic climate, the shrinking US bilateral trade deficit could buy it some time.
Even if the bilateral trade deficit level is not part of the Phase 1 deal on paper, it makes a difference given that shrinking the deficit has been one of Trump’s key objectives in the relationship.
GOING BACK TO THE TABLE
Another way this could play out is a potential re-negotiation of the terms.
Under the deal, there is a clause which allows the signatories to enter consultations with each other if “a natural disaster or other unforeseeable event outside the control of the parties delays a party from timely complying with its obligations.”
As of now, China has not yet publicly stated that it is planning to ask for a waiver or suspension of the extra US import obligations.
It is possible that China is waiting for a better negotiating position to start talking to the Americans about reducing the amount it has to import.
This could come in the form of a near-term forceful spike of purchases – to show that it is trying its best to rectify the underlying trade imbalances despite extenuating circumstances.
Here, it may come down to counting beans – literally.
While there were some reports suggesting that China has ordered its state-owned enterprises to stop buying soybeans from the US on Jun 1, these have since been refuted by the Chinese media.
US Trade Representative Robert Lighthizer was quoted saying on Jun 4 that China has bought US$185 million worth of US soybeans in the first two days of the month alone, refuting any suggestions that China is not living up to its commitments.
In the high stakes game of international diplomacy, Trump’s silent extension of his olive branch – by leaving the Phase 1 deal alone so far – has been reciprocated by China’s continued agricultural purchases.
Given that the tension between the two has already developed into a multi-front tussle - including the race to dominate the next technological wave and, now, the battle to discover a working coronavirus vaccine – a simmering of their trade spat alone might not be enough to turn the relationship around.
However, the alternative would have been a lot worse. If the Phase 1 deal – the only concrete black-and-white document that the two sides could agree on – comes asunder, it can only mean even dimmer hopes for cooperation in other areas that they cannot see eye to eye on.
Hence, in the months ahead, it will be especially important for us to watch the US-China bilateral trade data closely.
Hopefully, Trump can see enough American exports to China for him to call it “beautiful progress”. That would incentivise him to preserve at least some semblance of bilateral peace – economic or otherwise.
Wellian Wiranto is an Economist at OCBC Bank.