The novel coronavirus outbreak has exacerbated tensions between the United States and China, driving bilateral ties to a nadir in the post-Mao Zedong era. The world's two largest economies are now fighting a cold war in all but name. Beijing has long accused the U.S. of having a "cold war mentality." That seems to be the case for both nations at this point.

Tensions between Washington and Beijing make cooperating to tame the economic fallout from the pandemic difficult. That does not augur good prospects for the global economy, which could contract at 3% this year - the sharpest downturn since the 1930s - according to the International Monetary Fund (IMF). "The Great Lockdown, as one might call it, is projected to shrink global growth dramatically," the IMF said in an April report.

The IMF reckons that the U.S. economy will contract 5.9% this year while China's economy will grow at just 1.2%. 1.2% sounds pretty good compared to what most countries will experience this year. However, while tepid growth is the norm in advanced economies, it is unheard of for China in the four decades since Beijing undertook economic reforms.

While China has eased its lockdown and moved to restart its economy, the expected slump in global demand from the pandemic could hit Chinese factories again, endangering many manufacturing jobs. China's economy may have shrunk up to 10% in the first quarter, analysts say.

Yet thus far, Beijing has refrained from the big-ticket stimulus measures rolled out by the U.S., Europe and Japan. “This time there’s much less appetite for major macro stimulus, even after the massive decline of GDP in the first quarter,” economist Louis Kuijs of Oxford Economics told Bloomberg in April.

Instead, the Chinese government has focused on providing credit lines to local governments and small banks. In April, Beijing said that it would extend an additional RMB 1 trillion in credit to small lenders. Also in April, China said it would boost the central government’s budget deficit ratio, issue more local bonds and sell special Treasury bonds.

In the 2008-09 global financial crisis, the U.S. and China coordinated efforts to support the global economy's recovery. China's massive RMB 4 trillion (US$586 billion) stimulus package helped the Chinese economy rebound almost immediately. Combined with the U.S.'s own significant stimulus measures, Washington and Beijing managed to prevent the recession from becoming a depression.  

"It is clear that China accepts its responsibility as a major world economy that will work with the United States and other partners to ensure global economic stability," then Treasury Secretary Hank Paulson told the National Committee on U.S.-China Relations in October 2008.

This time, the situation is very different. The U.S. and China remain ensnared in a bruising trade war. Each country has leveraged hundreds of billions of dollars in tariffs on the other over the past two years. A study by the United Nations published in Nov. 2019 found that the trade tiff signifantly cut U.S.-China trade and pushed up consumer prices. US tariffs caused exports from China to decline 25%, "inflicting a US$35 billion blow to Chinese exports in the US market for tariffed goods in the first half of 2019," according to the U.N.

The trade war weighed heavily on the global economy well before the coronavirus broke out in the central Chinese city of Wuhan in late 2019. The IMF warned in October 2019 that the trade tussle could cost the global economy around $700 billion by 2020.

Trade-war tension

 Nearly forgotten amidst the pandemic is the phase-one trade deal the U.S. and China signed in January. Had the the coronavirus never broken out, the media would almost certainly would have continued following the trade-war narrative. The virus has become a much bigger story though. 

Many observers wondered when the deal was signed if China would be able to fulfil its requirements for huge purchases of U.S. agricultural goods. Under the terms of the deal, China must buy US$200 billion in U.S. exports between January 2020 and January 2022.  That includes US$16 billion annually in agricultural goods.

Farmers in the American Midwest have been hit hard by the trade war. They are among U.S. President Donald Trump's most loyal constitutents.  

Unsurprisingly, Trump expresses confidence that China will follow through on its promise to ramp up purchases of U.S. agricultural goods. "I know President Xi [Jinping], who I like and respect, and I think he will honour the deal he made with us," Trump said in April.

China's U.S. Ambassador Cui Tiankai said in April that Beijing was committed to the phase-one trade deal. “As far as I know, we’re still doing our part of the deal,” he said on the PBS show GZERO World," which for China includes buying agricultural products from the U.S. and further opening its financial markets to foreign firms, he added.

It could be easier said than done. China's debt levels were already high before the pandemic - Chinese companies had about US$2 trillion in debt service obligations, according to the New York City-based research firm Rhodium Group - while the Chinese economy is in a shambles after an extended lockdown. Consumption is unlikely to pick up to the degree necessary for Beijing to make good on its purchasing promises in the phase-one trade deal.

Some stalwarts of the U.S.-China business relationship on the American side are pressing for an even more remote possibility: the lifting of all tariffs imposed since the trade war began. They include David Firestein, the president and CEO of the George H. W. Bush Foundation for U.S.-China Relations, Bob Holden, chairman and CEO of the U.S. Heartland–China Association, Mark Kirk, a co-founder and former co-chair of the U.S.-China Working Group in the U.S. House of Representatives, and Dan Slane, a former chairman of the U.S.-China Economic and Security Review Commission.

In an April commentary published in The Diplomat, they argue that leaving the tariffs in place will worsen the damage to the U.S. economy from the coronavirus outbreak. More ominously, if the tariffs remain, the U.S. may struggle to obtain equipment and supplies from China it needs to battle the virus. That could "possibly even threaten American lives."

Given current animosity towards China in Washington - in both the White House and Congress - it would be very difficult for the U.S. to eliminate the tariffs. The U.S. now has the most cases of COVID-19 in the world by far, with more than 630,000, and Washington largely blames China for the pandemic.

Jennifer Hilman, a senior fellow for trade and international political economy at the Council on Foreign Relations, has a more modest proposal. She suggests that G-7 and G-20 leaders agree to temporarily suspend all tariffs on needed pharmaceuticals, medical devices and supplies, as well as disinfectants and soap. U.S. tariffs have caused  imports of medical supplies from China to decline by more than $200 million—16%.

Hilman's recommendation is reasonable in the context of the pandemic. However, it requires a level of coordination among all of the world's major economic powers - not only the U.S. and China - that has not yet been seen during this crisis.

Meanwhile, a growing number of U.S. politicians are calling for China to pay indemnities to America for the destruction wrought by the coronavirus. Lawsuits have been filed in U.S. courts. "This is the Chinese Communist Party’s virus. This is Xi’s [Jinping's] virus. And he ought to pay for it," wrote Representative Mark Green (Republican, Tennessee), in an April National Interest commentary.

Under this scenario, the best we can hope for is that the U.S. and China stick to the phase one-trade deal as best they can, while avoiding any further escalation of trade tensions. Neither country has the wherewithal to do any better than that.