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Hello, and welcome back to Trade Secrets, from the US capital. President Donald Trump has just finished delivering his State of the Union address, in a mad week for American politics, which began with the Iowa caucus fiasco and will continue with today’s impeachment acquittal vote. No more drama, please, on Thursday and Friday! Mr Trump’s speech featured a predictably hefty promotion of his two big trade deals — the phase one China agreement and the USMCA — but very little else of any note.
In today’s column, I will be looking at the effect that coronavirus could have on the fragile truce between Washington and Beijing. Our person in the news will be Mike Moore, the former World Trade Organization director-general and New Zealand prime minister, who died this week, as a champion of open trade. Our chart of the day looks at liquefied natural gas exports from the US.
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‘The export boom from that trade deal will take longer’
“It is true the trade deal, the phase one trade deal, the export boom from that trade deal will take longer because of the Chinese virus.” Larry Kudlow, Trump’s chief economic adviser, let slip in an interview with Fox Business Network yesterday what had been increasingly apparent for some time: the health crisis that began in Wuhan could have big repercussions for the agreement reached last month by the US and China to pause the tariff war.
The agreement is due to take effect on February 14, at the end of next week, and its centrepiece is a pledge by China to purchase $200bn in additional US goods and services over the next two years. Chad Bown of the Peterson Institute for International Economics has pointed out that those targets were already unrealistic in normal times, and of course they effectively enshrine a regime of managed trade into a US trade deal that is a new break from America’s free market past.
But the coronavirus will make reaching those goals even more difficult, given the hit to the Chinese economy driven by the health crisis, which will inevitably damp demand for US products. This week, a USTR spokesperson said that China had not requested any flexibility on the purchase targets, so from Robert Lighthizer’s point of view, it seems that nothing has changed.
In fact, this only reinforces the difficulty of the situation and the dilemma facing the Trump administration in deciding whether, by how much, and until when it may be willing to show some leniency towards Beijing.
There is a clause in the agreement that could offer a path towards some kind of reprieve, as it provides consultations between the two countries in the event of a natural disaster or other unforeseen shock. But let’s not forget that the Trump administration made a big song and dance about how it would force China to live by its pledges no matter what, and would be willing to trigger the deal’s dispute settlement mechanism and even reimpose tariffs if it didn’t. On the face of it, it will not be easy for the White House to offer Beijing some breathing room so soon, and it could face criticism from China hawks on Capitol Hill and elsewhere if it does.
Wendy Cutler, former senior US trade negotiator, urged the Trump administration to accept that stopping the spread of the virus is China’s top priority © Bruce Yan/South China Morning Post/ Getty
Yet this week, Wendy Cutler, the former senior US trade negotiator now at the Asia Society Policy Institute, urged the Trump administration to take the high road. “US should recognize and accept that the . . . virus is going to slow down #China implementation of phase one trade deal. Living up to purchasing targets and other commitments will need to take back seat to taking care of sick citizens and stopping the spread of the virus,” she wrote on Twitter.
It is of course too soon to know how the coronavirus crisis will unfold from a medical and humanitarian point of view, and the economic ramifications are obviously trivial compared with the human toll the disease is taking. But it is very clear that even from a trade point of view, the outbreak has thrown a sudden and unexpected wrench into the phase one deal, further jeopardising any chances of a quick move to the second stage of deeper structural negotiations.
Charted waters
China’s purchases of liquefied natural gas from the US have dropped off in recent quarters while the EU and India have stepped up their purchases. China is supposed to buy an extra $52bn of US energy supplies, including LNG, over the next two years as part of the phase one trade deal with the US. Yet with China’s 25 per cent tariff on US LNG still in effect, the way ahead is not clear.
Person in the news
A champion of free trade, Mike Moore was the third director-general of the WTO from 1999 to 2002 © Jimin Lai/AFP/Getty
Who is it?
Mike Moore, the former WTO director-general and New Zealand prime minister
Why are they in the news?
Moore died this week at the age of 71. A champion of free trade, he was the third director-general of the WTO from 1999 to 2002, at a time when the anti-globalisation riots in Seattle were raging. He was prime minister of New Zealand for a brief period of two months in 1990.
Business leaders hailed Moore as a passionate believer in free trade, while New Zealand prime minister Jacinda Ardern said on Sunday: “The world lost a man with a huge intellect, and huge heart today.”
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Tokyo talk
The best trade stories from the Nikkei Asian Review
- Key Apple suppliers including Foxconn and Pegatron are bracing for severe labour shortages because of the coronavirus outbreak in a development that could hamper Apple’s plans to ramp up its iPhone production.
Read more - Is the US case against Huawei crumbling? A deep dive into the Chinese tech company and Canada’s awkward position in the middle of the US-China trade wars.
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Source: Economy - ft.com
