Economic fears deepen as US escalates tensions with China

Increased tensions between President Trump and China over the coronavirus pandemic are threatening to complicate a recovery from the worst global economic downturn in decades. 

Trump and members of his administration, including Secretary of State Mike Pompeo, have repeatedly attacked China, accusing it of hiding early information about the coronavirus. Tensions have flared further as U.S. states and hospitals continue to seek personal protective equipment (PPE) from China and the global race for a coronavirus vaccine raises the prospects that some countries will be left behind. 

The Trump administration is also reconsidering the “phase one” trade deal signed in January, which sought to reduce hostility by scaling back additional import taxes alongside an agreement from China to buy $200 billion in additional U.S. goods.

The Trump campaign is also attacking presumptive Democratic presidential nominee Joe Biden as weak on China ahead of the November election, adding fuel to the fire, while actions related to Taiwan and Hong Kong are worsening relations even more.

“There’s always a worry when tensions hit these heightened levels that there’s a possibility of there being a spillover effect,” said Matthew P. Funaiole, senior fellow at the Center for Strategic and International Studies’ China Power Project.

“I would certainly say that the danger is higher now than in recent history that there will be a spillover effect into the economy or another avenue.”

The U.S. is not the only country seeing worsening relations with China that threaten to spill over into the global economy. 

Australia angered China by demanding an independent inquiry into the coronavirus origin and sided with the U.S. in banning Chinese technology firm Huawei from supplying parts for its 5G network.

This week, China retaliated with an 80 percent tariff on barley from Australia, its largest barley supplier, a move that followed import suspension on some Australian meat companies.

But economists are especially worried about the relationship between Washington and Beijing after Trump pointed the finger at China for failing to stop the coronavirus from spreading globally and accused the World Health Organization of accepting what they say is Chinese misinformation on the disease — even as critics believe Trump is looking to deflect attention from the administration’s response to the coronavirus. 

The breakdown in relations comes at a time when the U.S. is seeing Great Depression levels of unemployment and while the economy has contracted the most since the global financial crisis and is projected to fall further. China has also been hit hard by the pandemic, seeing its worst economic growth since 1992.

Dean Cheng, senior researcher at the Heritage Foundation’s Asian Studies Center, says the COVID-19 crisis has served to amplify issues that already existed.

“The current U.S.-China problem didn’t start with COVID-19,” he said. “COVID-19 has opened a new set of issues, but if we take a look there’s been a generally downward trajectory in the last six years.”

Earlier in his administration, Trump imposed hefty tariffs on China, leading to countermeasures from the Asian country, though trade tensions eased somewhat with the signing of the phase one deal. 

That deal’s fate is now in doubt as the pandemic worsens relations between the two countries and as China is likely to struggle to meet the terms of the deal.

“I don’t think anyone who wrote phase one expected a global recession or depression to hit,” Cheng noted.

Earlier this month, Trump remarked that he was “very torn” about whether to end the phase one deal, raising the prospect of additional tariffs on China.

“I feel differently now about that deal than I did three months ago,” he remarked on Monday

More recently, Treasury Secretary Steven Mnuchin seemed to indicate that the administration was looking at a less aggressive response.

“I understand why Americans are angry, and they have a right to be angry, and it’s not just Americans, it’s the rest of the world,” Mnuchin said in a Thursday interview with The Hill.

“I think that China should be held accountable first, at least, by giving information on what went on,” he added.

Actions related to Taiwan and Hong Kong have only exacerbated the issue.

Secretary of State Mike Pompeo’s public congratulation to Taiwan’s President Tsai Ing-wen on winning a second term in office drew Chinese threats of “counter-measures” from China. The Trump administration also approved torpedo sales to Taiwan.

China is also reportedly seeking to impose tighter restrictions on Hong Kong, leading Sens. Chris Van Hollen (D-Md.) and Pat Toomey (R-Pa.) to introduce on Thursday a bill that would impose sanctions on Chinese entities for violating Hong Kong’s promised autonomy.

Analysts fear that these tensions will eventually fracture the already-fragile road to recovery given the immense trade ties to China.

“The Chinese could try to hurt our supply chains,” Cheng says, noting that they have restricted key materials such as rare earth metals in the past.

“They could impose export restrictions on PPE, which could slow down recovery efforts,” he added.

Whether China and the U.S. escalate into economic conflict or worse will depend a lot on Trump, according to Funaiole of the China Power Project.

“Personalities can be a major driving factor in the policy direction that any country takes,” he said.

Trump’s close relationship with Chinese President Xi Jinping has helped him navigate some of the choppier waters of the trade wars, but the relationship seems to have soured in recent months.

“That’s kind of changed, and I think that adds a new level of uncertainty into the equation,” Funaiole said.

And with Biden rising in national polls, as well as in some battleground states, Trump could be pushed to take a harder line on China during a time when the White House’s response to the pandemic is expected to be a central campaign issue.

“The Trump administration is also using its ‘blame China’ approach to deflect from its own shortcomings for how it addressed the virus, so there’s a domestic political aspect to this as well,” Funaiole said.