Articles and Studies

The Impact of COVID-19 Pandemic on the U.S – China Trade War

An insight into the Trade War between US and China by Bashar Fteiha.

The mutual blame over the origins of COVID-19 between the US and China has led many to believe that the world’s two largest economic powers are at the verge of another trade war. The issue of economic ties with China arose as a paramount theme of Trump’s presidency. On multiple occasions, President Trump clearly accused China of intellectual property theft, forced technology, currency manipulation and state subsidies. One of the driving forces which sparked the trade war was China’s unprecedented ability to become, in a very short amount of time, an economic giant as well as the world’s main leader in artificial intelligence and telecommunications technology.

As soon as President Donald Trump took over the Oval Office in November 2016, he adopted a hostile approach towards China. Between July 2018 and May 2019, President Trump imposed tariffs on more than $360 billion worth of Chinese products with duties ranging between 10 percent and 25 percent. In response to US tariffs, China decided to retaliate by imposing tit-for-tat tariffs on some US products, ranging from 5 percent to 25 percent on US goods worth $110 billion. As this stage, it was clear that the two countries had entered into fierce competition, which resulted in countless rounds of negotiations, several amendments to the tit-for-tat tariffs and various technology restrictions. Such fierce competition generated trade tensions that almost led the world’s two largest economic powers to the brink of a full-blown trade war.

Following intensive rounds of back-and-forth negotiations, however, the US and China reached a ‘phase one’ trade deal in December 2019 , which took effect in February 2020. That trade agreement centred around the following issues: trade deficits, Intellectual Property and ‘forced’ technology transfer. According to ‘phase one’ of the trade deal, US and China agreed to reduce some of the tariffs each side had imposed with respect to the other in the period between July 2018 and November 2019. In particular, the US agreed to exempt Chinese products from a list of tariffs and reduce specific tariffs from 15 percent to 7.5 percent on Chinese products worth $160 billion. Meanwhile, China pledged to increase imports of services and industrial products from the US by $200 billion over the proceeding two years.

Given that the COVID-19 outbreak occurred only two months after signing the trade deal, there was a great deal of uncertainty over whether the commitments of the agreement would be upheld by each side during the pandemic. Despite the fact that China invested massive efforts to offer the US a package of trade policies such as the exemption of 79 American products from tariffs in an attempt to revive both their economies and the existing trade deal, the Trump Administration seemed to ignore all of these signs from China and continued with its aggressive attitude towards China. This can be clearly seen in Trump’s insistence that China must be held accountable for the ‘secrecy, deception and cover up’ that allowed the subsequent spread of the virus around the world. Indeed, President Trump continues to accuse Beijing of concealing substantial information about COVID-19, which could have prevented it from quickly spreading in the rest of the world.

President Trump has even threatened to adopt trade measures against China through the imposition of higher tariffs on Chinese products as a punishment for the spread of COVID-19. On 14 May 2020, the Trump administration decided to adopt its first measure against China and by banning the Chinese Company, Huawei, from using US software and hardware in strategic semiconductor processes. It is likely that such a measure will inflict serious harm on the Shenzhen-based company and limit its share in the global market.

With that being said, there is no doubt that Trump’s hostility against China and blaming it for the spread of the virus will jeopardise the trade deal reached earlier this year. The question that arises in this context is whether increased tensions will tear apart the current trade deal, and consequently lead the US and China to the brink of another full-blown trade war?

In this regard, will the dispute resolution mechanism adopted in the current trade agreement be utilised if another full-blown trade war develops? In short, it may, but it is unlikely to put an end to all trade tensions between the world’s biggest economies. Indeed, under ‘phase one’ of the trade deal, the resolution of any trade disputes should be conducted through a specific dispute resolution titled ‘Bilateral Evaluation and Dispute Resolution Arrangement’. However, this mechanism allows either Party to unilaterally withdraw from the deal if the dispute in question cannot be resolved in any way. Once that threshold has been exhausted, the US would, therefore, still be able to bring back its tariffs, and China would be able to refuse to be bound by the trade deal due to such actions from the US.

This scenario may be probable given that bilateral relations are strained with both the timing of these trade tensions and the current pandemic coinciding. However, given that the pandemic has already caused considerable damage to the global economy and left it in an uncertain position, the US and China may not wish to incur the severe financial crisis that would result from another full-blown trade war..

It is important to recognise that the increased tensions between the world’s two largest economic powers will certainly make it harder for the global economy to heal from the pandemic. As governments and business around the world scramble to find effective mechanisms to recover from the pandemic and its aftermath, it appears necessary for the US and China to understand that an escalation of these renewed tensions is in no one’s interest. This is because a new trade war between the US and China would mean that the two countries will have to enter into meaningless trade conflicts which will slow down the world’s recovery from the pandemic and hamper vital technological innovations that will foster global economic growth. Central in this regard, is that technological innovation is considered as one of the most effective mechanisms that will allow the global economy to recover quickly from the pandemic. The possible imposition of strict restrictions on technological innovations due to current trade tensions between the US and China will certainly play an important role in delaying the world’s recovery from the pandemic.

There is no doubt that the spread of COVID-19 will trigger a severe global financial crisis and is already causing significant damage to the global economy. It comes as no surprise that the global economy might collapse as economic activities around the world have had to be halted due to the lockdown restrictions that were imposed worldwide. In fact, the far-reaching impact of COVID-19 on the global economy is a reality that we all have begun to live with. According to the International Monetary Fund , it was reported in April that the world’s GDP has already declined by 3 percent, which suggests that the world could possibly slip into a great recession, one that could be much worse and more severe than the Global Financial Crisis of 2008.

It follows that the last thing the whole world needs during this exceptional time is another full-blown trade war between the U.S and China, which if it occurs, will shatter mush of the global economy.

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