Abstract: Under the impact of the novel coronavirus outbreak, the implementation of the phase one trade deal between China and the US may be delayed because of the decline in China's import demands, the pressure on its balance of payments, the Public Health Emergency state in the Unites States, and the blow to the global supply chain. However, the Trump administration may confront greater pressure from the public because of the delay and the tensions may further escalate. It is suggested that provisions on the purchase of medical supplies be implemented first in an attempt to enhance bilateral cooperation amid the epidemic.
The novel coronavirus outbreak has affected the Chinese economy. The service industry has been greatly impacted during the Spring Festival. Implementation of the first-phase trade deal between China and the United States which requires China to purchase an additional $200 billion worth of US goods and services in 2020 and 2021 may face a number of challenges.
I. Why it is difficult for China to make the purchase as required by the trade deal
1. China's economic growth rate falls and import demand has been affecTed.
Domestic airlines in China have been hit severely, with a significant reduction in passenger flow and number of flights. Airlines' operation and capital chain are challenged. As the epidemic has not been completely brought under control, a large-scale purchase of aircraft in the short term is unrealistic.
In addition, industrial production in China has not yet fully returned to normal, and the production progress has lagged behind compared to previous years. In a best scenario, even if production resumes in most regions in early March, there is one-month delay. It will take longer to resume production activities in the seriously affected areas. Therefore, China has to postpose its purchase of industrial machinery, electrical equipment, and energy from the United States.
2. China's balance of payments is under increased pressure in the first quarter, and procurement expansion will only further worsen the situation.
Though the epidemic has reduced China's import demand, it has exposed the country's export to a worse situation. In addition to production delay, China's manufacturing exports are facing considerable pressure due to supply chain disruptions, quarantine measures and block of people flow, shortages of protective materials, and possible losses of order.
Let's have a look at the situation during the SARS outbreak in 2003. China saw a trade deficit of $1.02 billion in the first quarter of 2003, which was the second quarterly deficit since data were available in 1994. As a comparison, the first quarter of 2002 saw a trade surplus of $7.27 billion. From the current statistics, China's trade surplus will decline sharply in the first quarter of 2020, and a trade deficit may even occur.
3. The US declared public health emergency for novel coronavirus, imposed embargoes, and suspended visa services, which will reduce channels for importing goods and services from the US.
China agreed to purchase an additional $12.8 billion of US services in 2020 on top of the 2017 US export numbers as part of the phase-one trade deal. Tourism weighs significantly in the service industry. According to data from the National Travel and Tourism Office (NTTO): Chinese tourists to the US peaked in 2017, and then fell 5.7% in 2018 and 4.7% in the first three quarters of 2019 due to China-US trade conflicts.
Because of the virus outbreak, the number of Chinese tourists to the United States in 2020 will continue to fall. In early February 2020, Delta Air Lines, United Airlines, and American Airlines suspended all flights from the United States to and from the Chinese mainland till the end of March or even the end of April. This will affect Chinese people's traveling to the US either for business or tourism. Assuming per capita spending of tourists to the US doesn't change, China's spending on tourism in 2020 will fall by 21.4% compared to 2017, which will reduce the country's purchase of tourism service from the United States by $7.55 billion. Meanwhile, it will also affect related financial services such as insurance. Apparently, this will make it much more difficult for China to fulfill its procurement commitments concerning the service industry, but this is mainly a result of US restrictions.
In addition, the grounding of passenger flights will also affect freight carried by commercial airlines, thereby reducing China's import of high value-added products from the United States, though the effect won't be big. However, if freight shipping by both air and ship is affected, China will find it difficult to fulfill the purchase commitment made in the trade deal.
4. Potential delay in supply: the deferred resumption of production activities in China has dealt a blow to the global supply chain, and US producers may delay goods delivery
Wuhan is one of the four major bases of passenger vehicle manufacturing in China, housing half of the world's top 20 auto part manufacturers. Moreover, a wide range of sectors across a big part of the country have delayed resumption of business, which has stricken the entire supply chain of the manufacturing sector in China.
The Germany-based Bosch Group has warned of disruption in its global supply chain should the epidemic last for a long period. As a matter of fact, Hyundai has already suspended the production of an important model, and is planning on suspending its assembly line in South Korea. Nissan is also going to give pause to some of its production lines. As for the United States, about 15% of its auto parts are made in China, while Chinese suppliers contribute to over 50% of parts of electronic products such as smartphones and laptops.
II. It is possible to delay the purchase from the United States
The phase one deal has provided for emergencies such as an epidemic outbreak. It stipulates that "in the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other." The novel coronavirus outbreak has generated uncontrollable impacts on the Chinese economy, and the United States has declared Public Health Emergency in response, which means that both sides have acknowledged the severity and uncontrollability of the crisis. Based on this consensus, the two countries can explore the possibility of delaying the deal's implementation.
The US government and public have been somewhat prepared for the delay. Media like the New York Times and Forbes have pointed out this possibility; on February 4th, Larry Kudlow, chief economic adviser to President Trump, said in an interview with Fox Business that "it is true the 'phase one' trade deal, the export boom from that trade deal, will take longer because of the Chinese virus."
III. Explore potential bilateral cooperation amid the novel coronavirus outbreak
China should try to prevent the bilateral tensions from further escalation because of the epidemic, and seek potential cooperation instead. Once the implementation of the phase one deal is delayed, the Trump administration may confront greater pressure from the US public as China's imports fall short of expectation. As a result, the bilateral relations may get more tense, making things harder for the two sides in the second phase of negotiations.
To this end, China can negotiate on postponing the implementation of the phase-one deal other than those provisions on the purchase of medical supplies and related goods according to its actual needs in the battle against the virus. Without impairing its fundamental rights and interests, China can work together with the US to promote technological collaboration and personnel exchange in relevant fields, turn the crisis into opportunities and expand bilateral cooperation.
