Stephen Olson

US-China partial decoupling is inevitable, and must be carefully managed to minimise disruption

In a US election year with the global economy battered by Covid-19, deteriorating relations between the two biggest economies have little hope of being mended

Given the political realities, constructive dialogue won’t be possible until after a newly elected US administration is inaugurated in January 2021

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US and Chinese flags are adjusted before the opening session of negotiations between US and Chinese trade representatives at the Diaoyutai State Guesthouse in Beijing in February last year. Photo: Reuters

Stephen Olson

Published: 1:00am, 27 May 2020Updated: 1:33am, 27 May 2020

As 2020 commenced, White House political calculations on trade, China and President Donald Trump’s re-election campaign appeared firmly on track. The three-step political strategy was clear. First, present China as a country which has broken trade rules for decades, taking advantage of the naivety of previous US administrations to achieve its unprecedented economic rise.

Second, after pursuing a “get-tough” policy, including substantial punitive tariffs, conclude a phase-one trade agreement that obliges China to significant purchases of US products. Third, as US exports to China surge in the run-up to the election, position the US-China trade relationship as yet another “problem” that had been “solved” by Trump, and reap the political pay-off.

The strategy was entirely plausible from a purely political point of view. But the coronavirus pandemic has now completely upset the political apple cart, forcing an abrupt change in course.

Despite recent increases in agricultural purchases, the global economic slowdown spawned by the pandemic will make it virtually impossible for China to fulfil its phase-one purchase commitments. The agreement calls for China to increase purchases of US products this year by US$76.7 billion more than its 2017 purchases – a highly ambitious target under the best of circumstances.

This would require a 41 per cent increase in US exports to China, but in the first quarter of this year, US exports to China actually dropped by 10 per cent compared with 2019.

Beyond the trade frictions, the pandemic itself is threatening to blow up the broader bilateral relationship. As the death toll and economic costs of the pandemic mount, unusually harsh recriminations have been on the rise.