2020.04 The Taiwan Banker NO.124 / By Matthew Fulco
Coronavirus Outbreak Widens US-China RiftBankers Digest
The US has chafed at Beijing's handling of the epidemic, which has inflamed underlying tensions in the shaky bilateral relationship. Hawks in the Trump administration are now looking further decouple the world's two largest economies. Henry Kissinger said last November that the United States and China were in the "foothills of a cold war." Speaking at a forum in Beijing, the former U.S. secretary of state warned that failure to deescalate tensions between the world's two largest economies could lead to catastrophic conflict. With the outbreak of the novel coronavirus, the chill in US-China relations has gotten much icier. The disease that first appeared mysteriously in the Chinese city of Wuhan during December has sickened more than 134,000 people and killed 4,984 globally. Most of the initial cases were in China, but the disease has since spread to every continent but Antarctica, striking South Korea, Italy and Iran especially hard. Cases in the U.S. surged in March, reaching 1,700 by the middle of the month. Washington has taken a dim view of China's handling of the outbreak. The main issue is trust. Just like during the 2002-03 SARS crisis - which was also caused by a coronavirus - local officials tried to cover up the outbreak at the onset, squandering the chance to contain its spread. In January, Wuhan authorities reprimanded a doctor who tried to warn his colleagues about a virulent, cryptic respiratory illness infecting people in the city. They detained him and accused him of "spreading false rumors." That doctor, Li Wenliang, died tragically after being infected by COVID-19. To stymie the virus's spread in America, the Trump administration on Feb. 2 implemented an entry ban on all foreign nationals who have been in China in the past 14 days and raised the China travel advisory for U.S. citizens to 4 - the highest level. "Do not travel to China due to the novel coronavirus first identified in Wuhan, China," the State Department said on its website. China's Foreign Ministry denounced the move as "truly mean." Singapore, Australia, Russia and Taiwan later imposed similar bans on foreign nationals with a recent China travel history. “We deplore and oppose those countries who went against [the] WHO’s professional recommendations and ICAO’s bulletins,” foreign ministry spokeswoman Hua Chunying said. Beijing's opacity - the ruling Communist Party prizes secrecy - has been particularly troubling during the COVID-19 outbreak. A senior Trump administration official told CNBC in February that the U.S. "does not have high confidence in the information coming out of China” regarding the number of coronavirus cases. The official also noted that China “continues to rebuff American offers of assistance.” Beijing eventually allowed U.S. health experts to join the visiting World Health Organization (WHO) delegation.That move was belated, coming long after the virus had become an epidemic within China. Beijing "impeded efforts of international researchers and failed to share information on the source of the virus or best practices," Republican Senator Marco Rubio told The Atlantic in March. As the crisis deepened in China, Beijing moved to tighten its grip over the flow of information. Chinese media outlets which at the onset of outbreak had been permitted more room than usual to report objectively were ordered to toe the party-state line: China's handling of the outbreak must be portrayed positively. U.S. media outlets, however, continued to report aggressively from the frontline. February reports in The Wall Street Journal, for instance, cast doubt on the accuracy of China's virus data and the ability of Wuhan's hospitals to cope with the outbreak. While few people in China could view the reports - they are written in English and cannot be accessed without jumping the Great Firewall - Beijing dislikes how they influence the global discussion about China's response to the virus. In mid-February, China abruptly expelled three of The Wall Street Journal's reporters, ostensibly in response to a headline of a recent commentary that described China "as the real sick man of Asia." Beijing finds the term, which was used in the past to describe a weak and divided China, offensive. None of the three journalists China expelled worked on that commentary. In fact, the expulsion of The Journal's reporters came shortly after the U.S. designated five Chinese state media outlets as foreign missions, requiring them to register their properties and employees in the U.S. Following Beijing's deportation of the three Journal reporters, Washington announced personnel restrictions on those organizations in the U.S. Effective March 13, the number of Chinese citizens permitted to work at Xinhua, CGTN, China Radio, China Daily and People’s Daily in the U.S. is capped at 100. There were about 160 Chinese citizens working at those media outlets in America before the limitations were imposed. "Our goal is reciprocity,” U.S. Secretary of State Mike Pompeo said in a statement. Decoupling dilemma Amidst the coronavirus outbreak, China hawks in the Trump administration are pushing for broader decoupling of the world's two largest economies. They point to the risks of dependence on China-based supply chains. Before the pandemic, they often highlighted the national security risks of depending on China for semiconductors used in military applications. Similar arguments underpin the U.S.'s bid to limit Chinese telecoms giant Huawei's role in 5G networks outside of China. As a public health crisis, the virus has shifted the focus of this conversation to pharmaceuticals and medical devices. Most surgical and respirator masks in the U.S. are imported, with China as a main supplier. When the virus shut down China's factories, the U.S. was suddenly short of vital medical supplies. Problems will multiply as the virus spreads in America. The U.S. has more than 1,000 COVID-19 cases as of mid-March. China has an outsize share of the U.S.'s pharmaceutical ingredients market, according to the Council on Foreign Relations. That includes 97% of antibiotics, 95% of ibuprofen, 91% of hydrocortisone and 70% of acetaminophen. If China were to weaponize its stranglehold over those products, the consequences could be grim. While unlikely in peacetime, it could happen in the event of a military conflict.Rosemary Gibson, an author of a book published in 2018 about China's dominance over U.S. drug manufacturing, has warned that Beijing cutting off medicine exports and their raw materials to the U.S. would throw the country's healthcare system into chaos. Hospitals and military hospitals "would cease to function within months, if not days," she said on NBC News last September. White House trade advisor Peter Navarro is determined to mitigate that risk. He has been at the forefront of efforts to prepare an executive order that would reduce the ability of U.S. healthcare providers to purchase pharmaceuticals and other medical products from foreign suppliers. "As President Trump has said, what we need to do is bring those jobs home so that we can protect the public health and the economic and national security of the country," Navarro told The New York Times in March. As usual, Navarro has a different set of priorities than many U.S. multinationals. In its annual China business climate survey, the Beijing-based American Chamber of Commerce in China emphasized that its members "remain committed to the China market." Such statements are boilerplate for foreign business associations in China, appearing year after year in annual surveys. Foreign companies have been pledging allegiance to the China market since long before the trade war or coronavirus outbreak.What U.S. multinationals want is better market access to China and fairer regulatory treatment. They have spent years investing in and developing China operations and are loath to reduce their exposure to the world's largest consumer market. Only U.S. firms unable to escape the impact of tariffs are relocating supply chains to other countries. The trade war has eroded the profitability of some U.S. multinationals. 61% of respondents to AmCham's survey said they were profitable. That is a two-decade low and down from 73% in 2017 - before the trade war began. The COVID-19 outbreak will further batter their bottom lines. A Reuters survey of more than 40 economists forecasts that the Chinese economy will grow just 3.5% in the first quarter, compared to 6% in the quarter ended Dec. 2019. With the virus now a pandemic, the potential for a global recession in the first two quarters of the year is relatively high. Neil Shearing, group chief economist at Capital Economics, said in a March research note that he sees a "sharp but probably short recession" as current worst-case scenario. Recession concerns may act as a short-term brake on any further deterioration in U.S.-China relations. President Trump is unlikely to escalate trade tensions with China as he struggles to balance containment of the coronavirus in the U.S. and his re-election bid. The virus has already driven the U.S. stock market - Trump's favorite gauge of his presidency - into bear territory for the first time since 2009. The Dow industrials on March 12 fell 2,300 points, its worst day since the 1987 stock market crash. Trump's dismissive attitude towards the virus - he said that "it was very much under control in the USA" as cases began surging nationwide - has not gone over well with the American people. In a RealClearPolitics average of polls, his net disapproval rating more than doubled to +8.8 from +4.3 in the Feb. 26-March 10 period. Xi Jinping and his colleagues, meanwhile, have their hands full trying to restart the Chinese economy. Sparring with America may win them some nationalist brownie points, but not much else. They are aware that further depressing business sentiment in China would be unwise. Both countries should consider exercising more prudence on Twitter lest a provocative tweet spiral out of control. In March, President Trump retweeted a message from supporter Charlie Kirk calling the pathogen "the China virus," angering Beijing. The World Health Organization named the disease the neutral term COVID-19 to avoid stigmatizing any particular place or group of people.Beijing has responded by propagating a conspiracy theory that the U.S. brought the virus to China. This theory began circulating on the Chinese internet early in the outbreak, but in March, a Chinese Foreign Ministry spokesperson tweeted it out: "It might be US army who brought the epidemic to Wuhan. Be transparent!" wrote Zhao Lijian.In the long run, whether Trump wins re-election or Democrat Joe Biden is in the White House, the U.S. will need to develop a more coherent strategy for managing the difficult bilateral relationship with China. Whether we want to call it a cold war or not, the two countries now compete more than they cooperate. Their interests frequently clash. Their political systems are diametrically opposed. Under that scenario, the U.S. and China should focus on minimizing the chances of outright conflict. For both nations and the world, a cold war can be managed. In contrast, a hot war would be tragic.