The coronavirus pandemic could result in damage to the trade and financial relationship between the world’s two largest economies for years to come, according to a Congressional report into the cascading economic impacts of the pandemic published last week by the United States-China Economic and Security Review Commission.
A major throttling back of the “phase one” trade deal, an increase in Beijing’s market-distorting economic practices and significantly weaker Chinese demand for U.S. exports, including services like tourism and education, are just a few of the issues U.S. lawmakers will need to consider in the coming months, the report said.
China’s Problems Have Global Effects
In its review, the commission presented a wide range of troubling data and statistics indicating long-term economic hardships for China—and painful ripple effects for the rest of the global economy.
Chinese consumer spending, a key driver of the country’s economy, plunged more than 20% in the first two months of 2020 compared to the same period in 2019. Labour shortages caused the biggest decline in production since the 2008 financial crisis and industrial output in the country dropped 13.5% year on year—“the largest contraction on record.”
Despite the trade war, China remains America’s largest trade partner, accounting for nearly $740 billion in trade in 2018 alone, meaning China’s economic woes are almost certain to reverberate across the U.S. economy.
“Because China is a global manufacturing hub, domestic supply chain disruptions sparked by COVID-19 have triggered shocks across the global economy and brought into sharp relief the risk of reliance on China as a source of intermediate and finished goods,” the report states.
Expect Ongoing Supply Chain Shortfalls
Manufacturers outside of China are already experiencing output delays as they contend with product shortages and increased costs resulting from rerouted logistics and scrambled supply networks. China’s prominent role in the production of computer and electronics products, pharmaceuticals, and automotive parts leaves those sectors particularly exposed, the commission warns.
“With thinner inventories, less cash on hand, and narrower supply networks, U.S. small businesses are particularly poorly insulated from supply shortfalls in China,” the report says.
U.S. producers should expect that slow and uneven resumption of industrial activity in China will continue to create supply bottlenecks, according to the report. Disruptions to global shipping and strained air freight capacity will compound these bottlenecks, as the transport of intermediate and finished goods out of China becomes more expensive, driving up production costs.
Why It Matters
While President Trump and his administration are confidently touting the prospect of a “really strong” recovery for the U.S. economy in the fourth quarter and forecasting that 2021 will be “a tremendous year,” the Congressional report takes a far more sobering view of things.
Citing a recent forecast by the International Monetary Fund in 2020 predicting a 3% contraction in the global economy in 2020, the report warns this “could lead U.S. firms to delay investment, business expansion, and hiring, while households, fearing continued infection, cut back spending on goods and services.”
“Low business and consumer activity will stall U.S. economic growth,” the Commission bluntly concludes.
Also of importance to note, should implementation of the “phase one” trade deal be delayed significantly by effects of the pandemic (i.e., if changing economic priorities result in China stalling its purchasing commitments), the damaging bilateral trade war between the U.S. and China is most likely to be prolonged indefinitely, with U.S. importers being forced to continue paying billions in additional import duties in the meantime.
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