GP Insights # 350, 9 May 2020
On 8 May the Chinese Vice-Premier Liu He, the US trade representative Robert Lighthizer and the US Treasury Secretary Steven Mnuchin discussed the future of the phase one trade deal for the first time since the deal was concluded between the US and China in January this year.
The officials from the US and China "vowed to create favourable conditions to implement the phase one trade deal" and "despite the global health emergency, both countries expect to meet their obligations in a timely manner" while promising to keep meeting regularly, they mentioned the need to cooperate on public health.
What is the background?
Both China and the US had been unable to fulfil the terms of the deal due to the outbreak of the pandemic and agreed to use the slow reopening of their respective economies to create the infrastructure needed to fulfil the terms of the deal. The trade data in the first quarter of 2020 showed that China has not been able to meet the import targets due to this disruption in supply chains and had imported only 414 billion dollar worth of the US goods.
At the core of the US-China Phase One deal is the agreement that China will buy 200 billion dollar worth of the US goods and services, and in return, the US would suspend some of the tariffs that the US President Donald Trump had announced in January 2020. The announcement of the phase one deal in mid-January, 2020 marked a thaw in the tariff war between the two economies and easing of the trade tensions. At the same time, when the COVID-19 pandemic began to spread across China, strong restrictions on movement and trade had to be put in place.
However, in April, Trump threatened to place more tariffs on China if the latter fails to hold their end of the bargain. This was followed by several unsubstantiated statements from the US President and the Secretary of the State that the virus was confirmed to have originated from the virology lab in Wuhan.
What does it mean?
The discussion on phase one deal has come when a new wave of the trade dispute between the US and China seems to be emerging as countries continue to deal with the effects of the spread of the virus. The mistrust between the two parties amid the virus outbreak has made the phase one deal a liability.
The negotiators seem determined to keep the politics of the pandemic and the commercial interests with which the phase one deal was signed, separated as long as possible to ensure that the tensions do not reach the tipping point.
Keeping in mind the damage to the global economy in the past months from the pandemic, it is important for both to ensure that phase one deal does not fall apart with new tariffs. However, with the US elections in November 2020 and all campaign strategies scattered, it remains to be seen whether this trade dispute will join the domestic election narrative.