Kevin Lamarque/Reuters
- The coronavirus is jeopardizing China’s ability to meet obligations it agreed to as part of the phase-one trade deal with the US.
- China pledged to buy an extra $200 billion worth of US goods over the next two years, but the outbreak is harming the country’s purchasing power and demand for numerous imports, according to Stephen Roach, senior lecturer at the Yale School of Management.
- The pandemic also delays the face-to-face meetings needed to coordinate such large purchases, said Mary Lovely, an economics professor at Syracuse University.
- Chinese officials could ask the US for leniency in enforcing the deal’s timeline, but “we have no idea” how the Trump administration may respond, Lovely noted.
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The rapidly spreading coronavirus may have a new victim: the US-China trade agreement.
The virus has already wreaked havoc throughout China. Its death toll surpassed 360 people as of early Monday, with all but one of the them taking place in the country.
On the market front, Chinese stocks tanked the most in years on Monday after a multi-day trading halt. That prompted the People’s Bank of China to step in with 1.2 trillion yen ($174 billion) worth of money-market injections.
From an economic basis, government officials are now reportedly considering a cut to the country’s growth estimates as key industries face unexpected slowdown.
But the economic worries don’t end there. Experts tell Business Insider the increasingly widespread virus may also harm the newly improved trade relationship between the US and China.
The two economic superpowers signed a phase-one trade deal on January 15, ushering in the first major de-escalation in the global trade war. China pledged to purchase $200 billion worth of US goods beyond what it bought in 2017, with $76.7 billion in purchases set to arrive within the first year of the deal.
The latest coronavirus development adds to existing doubts from economists around China’s ability to fulfill the purchase obligations before coronavirus began spreading. The import commitment is “unrealistic” and may lead the deal to “be doomed from the start,” Chad Bown, a trade policy expert at the Peterson Institute for International Economics, wrote in a client note on January 21.
Widespread risks
Mary Lovely – an economics professor at Syracuse University specializing in Chinese trade – told Business Insider that the outbreak poses a new two-pronged threat to the phase-one purchases. She sees the hit to economic expansion cutting into China’s income growth, crippling its ability to raise imports above levels seen in 2017.
Chinese imports tied to leisure, retail, and travel sectors are at the greatest risk of not meeting purchase obligations, said Stephen Roach, senior lecturer at the Yale School of Management. Imports of manufacturing components and parts will likely be hit by the weeks-long closure of Chinese factories, he added.
The pandemic also hinders any face-to-face meetings between corporate representatives organizing the purchases, according to Lovely. Both countries are limiting travel to prevent the virus from spreading further. While some negotiations can take place remotely, valuable in-person meetings can’t take place until the outbreak is under control, she said.
“That is really going to slow the dealmaking that would underlie these purchases. That people-to-people connection is really important,” Lovely said. “Even given the fact that their income is lower, you can’t make the deals without contact.”
Many analysts have compared the coronavirus to SARS, using the 2003 pandemic to estimate how China’s economy will fare in the coming months. Yet the SARS outbreak took place while “China and the world economy were booming,” Roach noted, and the lack of a “cushion” will magnify any economic blows.
“It’s one thing to have an epidemic or pandemic in the face of a boom. It’s another thing to have it when conditions are much more precarious, bordering on weakness,” he added.
Untested options
Chinese officials are planning to ask the US for leniency in meeting the purchase obligations, sources familiar with the matter told Bloomberg on Monday. The phase-one deal includes a clause which allows either nation to renegotiate “in the event that a natural disaster or other unforeseeable event” impedes the agreement.
Yet the deal’s dispute-settlement chapter calls on both nations to directly consult each other, splitting from the conventional practice of using a third party for such talks. If the United States Trade Representative decides China hasn’t upheld its side of the agreement, the US can retaliate and ignite new tensions between the two countries.
“The Chinese can make the claim that this has impacted their ability to uphold the deal. The question really is, ‘how will the US respond?’ And we have no idea,” Lovely said, adding “none of this is going under rules or processes that have been tested before.”
It remains to be seen how strictly the Trump administration will maintain the deal’s original commitments. China has “no control over” the outbreak’s harsh economic fallout, and one would hope the world understands its difficult situation, Seema Shah, chief strategist at Principal Global Investors, said in an interview with Business Insider.
“In terms of how this affects the US-China trade relations, I don’t know if it necessarily should have a big impact,” Shah said. “One would expect there’d be some sympathy over how this is going to evolve.”
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