COVID-19 creates lull in US-China Trade War

SGI

In early 2020, the world heaved a sigh of relief when the US and China agreed to a truce by signing phase one of the ongoing trade war between the two countries.

COVID-19 creates lull in US-China Trade War

This led to a roll back on tariffs by both countries, with China agreeing to halve tariffs on USD 75 bn worth of US goods and the US reciprocating by slashing tariffs off USD 120 mn worth of Chinese goods. Even though this de-escalated the full blown trade war that had drastic repercussions across many countries, now the sudden emergence and virulent threat of the new COVID-19 epidemic is affecting global markets, with more serious results.

Lull in US-China trade war

For some time now, China has been in high profile news on a daily basis in almost all global news channels with the sudden outbreak of COVID-19, and other threats like the recurrence of the H5N1 avian flu virus. China still is reeling under severe constrains of the US-China trade war, despite ease in tensions from the earlier inflicted tariffs on USD 550 bn worth of Chinese goods, which China countered in tit-for-tat move with tariffs on USD 185 bn on US goods.

The Xi Jinping administration has indicated a flexible change in China’s domestic and international policies. In addition to loosening its monetary policy tactics to improve its economy, China has proactively cooled down on its earlier aggressive stance by making a commitment to the US to improve on several areas such as intellectual property, transfer of technology, and currency and foreign exchange manipulation.

What is notable is that China will increase its purchase of at least USD 200 bn worth of goods and services from the US in the next two years. This figure is higher than the USD 186 bn China spent on US products in 2017, including USD 78 bn on products in the additional production sector, USD 54 bn on goods in the energy sector, USD 32 bn on goods in the farm sector and USD 38 bn on service products.

What is special and a positive point in the US-China trade war is that China on February 14 officially lifted 50% off tariffs on 1,717 US products worth USD 75 bn. The tariff was reduced from 10% to 5% on some goods, and 5% to 2.5% on others. The response resulted in the US-China agreeing to phase one in the trade deal. On the same day the US also slashed 7.5% to 15% on some Chinese items such as crude oil, meat and tofu worth USD 120 bn in total. It is expected that the tariff on crude oil will be reduced further from 2.5% to 5%, on tofu from 27.5% to 30%, and tariffs on pork, beef and chicken will be decreased from 30% to 35%.

Although the US still continues to impose tax on USD 250 bn worth of Chinese products, the slashing of tariffs on several products has caused much ease in tensions in the US-China trade war that was being felt across the globe with a negative impact on the global economy, and disruption in the global supply chain. From an analytical point of view, when the slash in tariffs from both the governments takes full effect, the positive ripples will be felt in all global trade, especially on market psychology in general.

Effects of COVID-19

On the other hand, even as the world sensed relief in easing of tension in the US-China trade war, the sudden emergence and virulent and uncontrollable spread of COVID-19 has dampened international markets and brought about a sense of paralysis across the globe. Analysis of the effects of COVID-19 on global economy and trade activities is focused on two aspects.

First, because China plays a pivotal role in the global supply chain, this epidemic has badly affected movement of trade and supply of goods, with a slowdown in production and shortfall in the labor market. The high rate of infection and low controllability of the disease has increased labor costs by 150%, with a very low turnout of work force. This has slowed production of several essential items, causing a shortage of supplies across countries that are outsourced only in China in large volumes.

Second, it is most worrisome that the disease is becoming hard to contain, isolate or even identify. The virus is self-generating and spreading at breakneck speed across all countries, even those having a high level of medical facilities. Even though more and more patients are recovering to normalcy after catching the virus, that number is still too small compared with the growing number of infected cases, causing an unparalleled stress for the medical sector.

The Xi Jinping government has huge cash reserves. The fastest way is to relieve the monetary policy, increase credits, expand monetary supplies and reduce interest rates. From a positive viewpoint, China is a country with its nominal GDP among the top two in the world, and the Xi Jinping administration’s actual ability to drive the country’s economy has earned great trust among its people. Hence, it has come as a surprise that this epidemic has originated from the world’s most powerful economies with abundant resources to provide the best research facilities.

Impact on Vietnam

Unofficial news and unconfirmed information on social media have caused intense anxiety in the market and widespread concern about the COVID-19 epidemic, which has clouded the recent positive developments of the US-China trade war. People have become more anxious about tit-bits of news such as Chinese dealers refusing to accept hundreds of containers of farm produce items like watermelons and grapefruit.

In fact, Vietnamese farm produce has been among the sectors with the lowest growth rate over the past three years and now with the epidemic the losses will be difficult to face. In 2019, the agriculture-forestry-sea product sector saw a growth rate of just 2.01%, falling behind almost half of the 3.8% rate in 2018.

According to the World Bank, Vietnam's economy in 2019 rose by 7.02% due to major contributions from the industrial and construction sectors, which increased by 8.9%, while the service sector saw a rise of 7.3%. This growth also came about because of a significant rise in the number of middle-class people who spend more than USD 15 a day. This segment of middle class spenders is increasing by about one million people every year. Exports too saw an increase, especially exports to the US market.

Unofficial reports and varied information on social media has caused deep anxiety in the market and widespread concern about the surge in the COVID-19 epidemic, but there is a reprieve in the ongoing US-China trade war.
Although the farm produce sector is seeing slow growth due to the COVID-19 epidemic, the healthcare and pharmaceutical sector is surging positively. Even though GDP in the first quarter of 2020 was affected by certain decrease in demand, the needs of Vietnam's biggest and second biggest markets, namely, the US and the EU, have not slowed because of the epidemic. China is not the major market for Vietnamese exports.

The need for goods in the US and EU countries is much stronger and which has an effect on the growth of Vietnamese exports, one of the most important drivers of growth for the Vietnamese economy. The need for goods may seem less in shops and supermarkets because of COVID-19, but there has been a rise in the need to store large amounts of essential food products by households in case the epidemic worsens.

The Vietnamese government has prioritized industrialization rather than the agricultural sector, and 2020 will be a turning point. Vietnam's healthcare sector has so far shown that it is well capable of containing the disease and collaboration among relevant and related sectors has been highly effective.

The crucial decision to extend holiday period so that students continue to stay in their homes and hometowns is wise indeed. Added to this, businesses are receiving support with a slash down on taxes on those associated with the supply of necessary products to contain COVID-19 from spreading.

Great caution is being exercised these days to stop the spread of COVID-19, and all focus is on containing the virus. The positive sign in ease of tensions in the US-China trade war have been greatly overshadowed by fears of the rise and spread of the COVID-19 epidemic that originated in China.

This COVID-19 epidemic and the US-China trade war is seeing two opposite viewpoints on the economic scenario in 2020. One is of positive effects in global economy as a result of better relations between the two world economic powerhouses, and relief in monetary policies over large areas in many countries; while the other scenario brings fears and unpredictability with the virus gaining in strength and spreading rapidly across the globe.

Health concerns will only ease when the medical world can discover a vaccine and antidote to fight the virus that is causing panic and so much unrest across the globe.

Translated by Nguyễn Gia

Đinh Hạ Vân

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