IE 11 is not supported. For an optimal experience visit our site on another browser.

Coronavirus has potential to shake up China trade more than tariffs

"There's no better time right now to get the Chinese to play ball with you," said one economist.
Image:  Donald Trump Xi Jinping
President Donald Trump and China's President Xi Jinping meet business leaders at the Great Hall of the People in Beijing, China, on Nov. 9, 2017.Damir Sagolj / Reuters file

The coronavirus epidemic is having more of an effect on U.S.-China trade than President Donald Trump's long-fought trade war, some economists say.

“The spread of the virus is primarily a massive supply shock to the Chinese economy. Production across the country is severely affected by closed factories,” said Stefan Legge, an economist and trade expert at the University of St. Gallen in Switzerland. “We observe a hit on the demand side as well, with lower consumption and less private-sector investment,” he said.

Beijing would have had trouble fulfilling its phase one pledges to purchase large amounts of American agricultural and energy products anyway, and the economic hit it sustained — GDP is expected to drop below the government’s target of 6 percent — makes those goals even more elusive.

“The targets that were laid out in phase one were always wildly optimistic. You were dictating that China should start buying U.S. agricultural goods at a level higher than any moment in history,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.

“There's no doubt that this virus and the measures China took to contain it delivered a huge demand shock to the Chinese economy. Therefore, their need for many of these categories were not nearly, at least in the short run, as large as they would have been without the virus,” he said.

Jamie Cox, managing partner at Harris Financial Group, suggested that the impact on China’s economy could spur the White House to restart trade talks, reasoning that Beijing’s hand had been weakened.

“If you’re President Trump, there's no better time right now to get the Chinese to play ball with you, because they kind of need to,” Cox said. “I think the more likely scenario is the president uses this as a potential point of leverage to get the Chinese to agree to something more quickly.”

Some say the Trump administration would be foolish to risk injecting trade-related uncertainty to an already volatile market and risk spooking skittish investors further.

Others argued, though, that the Trump administration would be foolish to risk injecting trade-related uncertainty to an already volatile market and risk spooking skittish investors further — especially this close to the 2020 election.

“With huge uncertainty over future developments — as well as policy responses — I expect that negotiations about a phase two agreement will be delayed,” Legge said. “Aggressive moves against China create uncertainty and are unlikely to yield short-term benefits that Trump can present to voters as a ‘success.'”

As it is, the virus has the potential to be a significant headwind to Trump’s re-election bid, experts said. “The uncertainty is actually higher in the United States, or at least globally, than in China itself,” Kirkegaard said, since the most recent data indicates that the rate of increasing infection in China might have peaked. “China is probably over the worst. That is far from obvious in other parts of the world, including the United States.”

Analysts at the trade credit insurer Euler Hermes wrote in a research note last month that coronavirus is likely to keep the manufacturing sector in recession through the first half of the year, with electronics and computer manufacturers most vulnerable to supply shortages.

In other sectors, though, companies might have alternatives — ones they might already have been exploring prior to the outbreak. There are indications that some American manufacturers seeking to avoid trade sanctions got a head start decoupling their supply chains from China by proactively seeking out alternate suppliers for inputs or components, along with anecdotal reports that some manufacturers ramped up inventory ahead of the imposition of tariffs, leaving them with enough of a surplus to keep their facilities operational, according to a research note from analysts at Wells Fargo.

“The production shift may cushion the blow for U.S. manufacturers that in the past might have relied solely on China,” they said.

This has trade-related ramifications that could last far longer than the illness itself. “The coronavirus is not a China story anymore. It's a global story,” Kirkegaard said.