The trade truce brought about by the signing of the Phase One trade deal was only five weeks ago but seems like an eternity.  That was to be the restart of US China relations.  The talk was of implementation and compliance of the deal.  Farmers were buoyed by guaranteed purchases.  Officials when asked about Phase Two downplayed immediate discussions suggesting that it might not come till after the election and that ensuring Phase One was working smoothly was the goal.

But since then the Wuhan Flu, formally known as Covid-19 has swamped all the news flow around China.  Whatever promises were made then, half of China’s population have hardly ventured outside in the past month.  Trade deals of whatever phase have become secondary to survival and ensuring the safety of populations, not just in China, but across Asia.  The impact of the virus, or at least the responses to the unprecedented measures enacted by China are having a global reach.  Queensland farmers can’t ship frozen meat to China because the ports in China are already full as nothing is moving off the quayside.  Countries around the globe have banned Chinese nationals from entering.  Regional neighbours like Korea, Japan, Thailand and Singapore too are finding their citizens barred or subject to quarantine restrictions by countries.  Singapore is even requesting details from citizens of not only past travel to China but of potential future visits to China in the coming five months!

Where then does the outbreak of the virus leave US China relations and Phase One?  There are growing doubts about whether China can keep to its buying commitments under the deal but that is hardly surprising.  For the initial few weeks following the deal signing the expectation was for a relatively short-lived virus impact on the economy following by extensive stimulus measures across the entire economy and that the whole year growth and performance would be largely unaffected.  That was certainly what the stock market activity was indicating.  Even with the stopping of the economy U.S. financial firm Oaktree Capital announced that it had secured a license to start participating in the vast Chinese non-performing loan and bad debt market, that was explicitly on the back of section 4 of the Phase One deal.  So at least something was playing out as expected.

Recent announcements from Trump about turning his attention to US European trade would also indicate that the US China relationship was at least not as problematic as it once was.  Trump had his signed deal to go into the election season with, for him it was job done.

Yet Covid-19 has not calmed the bilateral relationship.  There has been growing distrust as the outbreak of the virus has continued.  The Chinese authorities handling of the outbreak and the widespread distrust of how they managed the early stages of the outbreak have won them no friends in the US political elites.  Larry Kudlow has openly spoken about the disappointment the US administration has with China’s lack of information sharing and the inability of the US CDC to get the full access they want to the situation on the ground in China.  While still praising their trade deal Kudlow made no effort to hide his own frustrations with the lack of cooperation.  Other voices in the US have been more extreme with some openly suggesting this was a bioweapon gone wrong or that it the virus escaped from a lab in Wuhan.  While world experts dismiss the bio-weapons speculation the distrust around Chinese statistics and openness only helps fan such flames.  Chinese authorities certainly hid information from early to mid-January and clamped down on doctors who had concerns about a possible SARS like virus emerging in Wuhan.  With such a dismal track record when it comes to openness it isn’t surprising that the worst is often believed even if there is no evidence for it.

Chinese Foreign Minister Wang Yi has recently been encouraging nations to re-open their borders with China and allow people and goods to start flowing again yet while China itself quarantines and restricts the movement of hundreds of millions of its own people no one is buying what he is selling.  The Chinese must find it particularly harsh that a country like Singapore, which has become a key market for Chinese tourists and investment was one of the first to close the door to Chinese visitors.  Singapore’s government though won’t be swayed by a few remarks from Wang Yi or anyone else in the politburo.  Singapore will act firstly in its best interest; Chinese tourists aren’t coming back anytime soon.

Covid-19 is only one part of the ongoing US China relationship.  At the recent Munich Security Conference, MSC. both Secretary of State Mike Pompeo and Secretary of Defense Mark Esper had some very stark words for China.

“China encroaches on the exclusive economic zones of Vietnam, the Philippines, and Indonesia. And on that point, China has had a border or maritime dispute with nearly every nation bordering it,” Pompeo said.  He continued “And let’s talk for a second about the other realm, cybersecurity. Huawei and other Chinese state-backed tech companies are Trojan horses for Chinese intelligence”.

Esper was no less forthright and said Beijing was carrying out a “nefarious strategy” through Huawei but he also had a warning to the international community that it should “wake up to the challenges presented by Chinese manipulation of the long-standing international rules-based order”.

There is no sign there that the pressure on China is going away anytime soon Phase One implementation or not.  In response Wang Yi commented “The thing I want to say is that all these accusations against China are lies and not based on facts.”  The MSC is known for the open forum and debate which it brings so it was noteworthy that only Wang Yi refused to take any questions from the audience and that his speech was given to a far from packed room.  There is a basic distrust and disinterest in China’s words because the actions run counter to them.

But the bad news keeps coming.  The US Dept. of Justice added RICO charges to the ongoing case against Huawei.  The Racketeer Influenced and Corrupt Organizations Act or RICO which is normally used against mobsters but has over the years also been brought against corporates will allow for hefty penalties on the corporate entity not only on CFO Meng Wanzhou whose extradition case remains ongoing.  Targeting Huawei is an important part of the US strategy towards China, but it would be encouraging if they also continued to raise the issue of the two Canadians citizens currently held hostage in China by the Chinese government in retaliation to the Meng arrest.

Just this week the State Department labelled five Chinese state media organizations as “foreign missions” effectively branding them extensions of the Chinese state and partially treating them like embassies but without the diplomatic immunity that comes with it.  A large symbolic, and overdue move by the US.  Who didn’t know Xinhua was the Communist Party’s mouthpiece?  But in near immediate response Beijing expelled three ethic Chinese journalists, two Americans and one Australian from the Wall Street Journal’s office in Beijing.  The Chinese claimed the expulsions were in response to a headline from two weeks before which they found offensive but neither the headline nor the opinion piece was written by any of the three journalists.  By expelling ethic Chinese Beijing is trying to send a message to all ethnic Chinese everywhere that criticism of the PRC is effectively being a traitor to all Chinese and they should expect retaliation by the Chinese state.  A position which officially China will never admit to but which they continue to support in a low-level fashion.

So where is the post-trade truce goodwill in all of this?  The Chinese leadership may take some comfort of mixed signals coming from the administration when it had been suggested that the US would restrict sales of General Electric aircraft engines to China although Trump soon tweeted dismissing the idea and claimed that the US remains opens for business with China and the world, at least on terms Trump believes is favourable.  He even called out those who would use “national security” as an excuse to stop trading with China saying it was being used too lightly to justify restrictions.

With this list of issues just in the past month no one should think that somehow US China relations are back to normal.  After a lull over the past few months reports are starting to appear again around the Capital War and restrictions on China companies listing in the States.  Marco Rubio hasn’t gone away and there is no reason to think that there won’t be more efforts made to restrict capital flows to China and Chinese companies.

And the US election, now less than nine months away hasn’t even figured into the discussion yet.  The Super Tuesday Democratic primaries on 3 March could well give a clear Democratic Party candidate and then surely China and US policy toward it will become more central.  Sanders and Bloomberg seem to be the frontrunners, perhaps, it is still far from clear, and Sanders most certainly isn’t going to go lightly on China.  Bloomberg’s record has seen his company pulling stories which were negative to Chinese leaders and he has major business interests in the country but he can hardly run on the policy of China engagement.  The mood of the country has changed and unfairly the Covid-19 outbreak has tainted the image of the country and citizens.  China will not have an easy US election run.

Looking back over the past few weeks it seems incredible that the Phase One deal was signed at all.  Distrust between both parties remains as high as ever.  The virus has only exposed further the tensions between the two countries and even the dramatic actions which the Party has taken in China to try and stem the virus has caused as much horror as it has as admiration.  Americans and others are clearly seeing that the Chinese way is a very different way from theirs.

The virus highlights the real gulf between the two countries.  It shows exactly why the grand trade deal needed to be split into multiple phases because all the early talk about some all-encompassing deal with China was simply never going to happen.  The range of issues dividing the countries is large and, in some cases, unbridgeable.

At present it is still unclear how the virus will develop.  It clearly can spread easily although transmissions mechanisms aren’t fully understood.  Well over one hundred thousand are already infected, there simply is no way that China has been able to capture and identify every case and because of that there can be no certainty about the long-term consequences especially on the economy of China.  China does not have the fiscal and monetary luxury it enjoyed after SARS or the GFC to just pour money into the economy nor is it in some upward economic global boom.  China will respond as best it can, but it is still suffering the effects of the credit binge from the last stimulus.  Failing to meet Phase One buying commitments and already announced force majeure clauses by SOEs in commodity contracts will not be welcomed.  Chinese growth and demand have been seen as a given by many in the world, not least by the Chinese themselves.  If that was to dramatically slow and remain slow for an extended period, then Chinese leaders will find themselves in very uncharted waters.

Much of China’s global punch and reach is based on its economic might.  No one really thinks of the PRC as a friend or ally, but everyone wants something of their market.  If that was to stall, then China will need to reassess its priorities.  The optimists can hope for greater transparency and openness within the Chinese system, but no one should count on that.  Even if the economy recovers quicker it is hard to seen how Covid-19 doesn’t leave a long-term legacy, good or bad, in China and their relationship with the US.