1. Trust and Cooperation Between U.S. and China Hit New Lows
President Trump and other Administration officials are expressing increasing hostility to China, suggesting that China is at fault for the pandemic sweeping the United States. President Trump this week called it an “attack” that is worse than Pearl Harbor or 9/11. At least one U.S. intelligence agency has concluded with moderate confidence that China concealed the extent and danger of Covid-19 from the international community, and Administration officials describe China as “culpable” for the damage.
Particularly provocative is the suggestion advanced by the president and other senior officials (e.g. Mike Pompeo, Peter Navarro) that the virus is man-made, originating in the Wuhan Institute of Virology — a view not yet shared by U.S. intelligence services or many top scientists, including Dr. Fauci. The Administration is also investigating the University of Texas and its connections to the Wuhan lab. Notably, the Wall Street Journal (often aligned with President Trump) has called upon the White House to make the evidence public, “if they don’t want the issue to be dismissed as an anti-China campaign ploy.” Nevertheless, China has already become a key theme of the 2020 campaign. A GOP campaign memo published last month recommends that Republican candidates “attack China” and paint Democrats as China-friendly. An open question is whether the Trump Administration will impose new sanctions; one senior White House official said that Trump is not considering punitive measures.
Blaming Beijing for Covid-19 rhetorically, however, is only accelerating a generational deterioration of U.S.-China relations. In this week alone, Mike Pompeo said that Trump is trying to “correct 40 years of appeasement.” The new White House spokesperson described the bilateral relationship as one of “disappointment and frustration.” A former member of President Trump’s economic council said: “This is the start of a new cold war.” Another expert associated with Joe Biden opined that relations are at their worst point in 50 years. These positions are aligned with public opinion as well: According to a Pew poll, two-thirds of Americans now have an unfavorable view of China. Gallup published a similar result in March. China’s own intelligence services have reported that global anti-China sentiment is at its highest point since 1989.
With this challenging backdrop, the Phase One trade deal is highly likely to collapse. Even before the pandemic, many believed that China would struggle to purchase the $200 billion in new goods and services required by the deal — a key priority of the Administration. President Trump has even begun publicly to threaten to cancel the deal, if China doesn’t meet the purchasing targets. One report indicates that regardless of the future of Phase One, Covid-19 is is accelerating the Administration’s plans to rip supply chains out of China. We will be monitoring the first ministerial-level discussion next week between the two sides since the signing of the deal, for any signals of what comes next. The agreement provides a consultation mechanism if a natural disaster or other event outside the parties’ control prevents performance; thus far China has not invoked this clause.
This trend toward protectionism will continue to accelerate throughout the year: the White House continues to unveil measures to protect domestic industry, for example a new “Buy American” executive order to secure America’s bulk power system, a new investigation into transformer components, as well as an investigation into mobile cranes (which explicitly implicates German industry).
Congress will also continue filing ever more bills to challenge China. These proposals could be felt in Europe as well: Sen. Tom Cotton (R-Arkansas), for example, has drafted an amendment (aimed at the U.K.) that would prevent new U.S. aircraft from stationing in any host nation unless the Pentagon can certify that its 5G and 6G networks were not built using “at risk vendors.” This is likely a preview of things to come; not just the White House but also Congress will push allies hard to decouple from China.
2. Economic Update
The monthly jobs report to be released today by the U.S. Bureau of Labor Statistics (covering the period of March 15 through April 18) will show the full scale of the economic damage caused by the pandemic. The unemployment rate is expected to be in the range of 15-20 percent — comparable to the levels of the 1930s. The total jobless claims since mid-March now exceed 33 million, and the job losses in April alone are more than double the number lost during the financial crisis of 2009. Most concerning is the prospect that many of these job losses (42 percent according to one estimate) could be permanent. Illustrating the depth of the crisis: Treasury Secretary Steven Mnuchin had warned Congress in March that an unemployment rate of 20 percent would represent a worst-case scenario, if Congress failed to intervene. Congress has now spent some $3 trillion in rescue packages over the last eight weeks.
The last of the March economic data was published last week, offering a preview of grim statistics to come. The U.S. Department of Commerce (Bureau of Economic Analysis) announced that consumer spending had dropped a record 7.5 percent in March, and also announced signficant drops in both export and import volumes in March ($20 billion and $15 billion, respectively). The BEA announced that the U.S. economy contracted 4.8 percent in the first quarter of 2020, portending far greater contraction (as much as 40 percent) in the second quarter.
3.Transatlantic Trade Updates
- Boeing / Airbus. We have been monitoring whether Boeing would seek up to $17 billion in taxpayer rescue funds authorized in the CARES Act, believing that this would push the United States toward a settlement of the 16-year-old dispute with the European Union. Boeing, however, has decided instead to raise $25 billion through a bond offering, meaning that the company may be able to navigate the Covid-19 crisis without taxpayer aid. The company likely refused the aid based on the restrictions that would have attached to the company, including an equity stake to the U.S. government and loss of managerial control. Given Boeing’s decision, the U.S. Trade Representative has hardened its position, notifying the WTO that there is “no valid basis” to allow the E.U. to retaliate.
- United Kingdom. Trade talks between the United States and the U.K. have officially begun and will take place exclusively via teleconference. According to the U.K.’s own analysis, the expected gains from a free-trade agreement will be extremely modest. The U.K. also has less than seven months to conclude its deal with the E.U. to prevent a hard Brexit.
- Nord Stream 2. A Russian vessel has arrived in the Baltic Sea that could complete the Nord Stream 2 pipeline. The sanctions threat that Congress enacted six months ago created a chilling effect on Allseas, but presumably will not deter a Russian vessel from finishing construction.
4. Trump Vetoes Attempt to Restrict Involvement in Iran
Donald Trump has vetoed a resolution of Congress that would restrict presidential power to use military force against Iran. The Senate attempted to override the veto yesterday, but failed (by a vote of 49-44). This represents another case of modest bipartisan cooperation in Congress to restrain the White House — a fairly rare but not unprecedented occurrence during the Trump presidency. The most prominent such example took place in 2017, when Congress enacted anti-Russia sanctions with overwhelming majorities, counter to the wishes of the White House. Congress later tried (and failed) on a bipartisan basis to prevent Trump’s removal of sanctions on Oleg Deripaska, a Russian oligarch. Most other such instances also relate to foreign affairs; for example an attempt to block arms sales to Saudi Arabia, and an attempt to end support for the Saudi operations in Yemen.
5. Justin Amash Will Enter Presidential Race as a Third-Party Candidate
Rep. Justin Amash of Michigan has entered the 2020 presidential campaign as an independent candidate, to compete against President Trump and former Vice President Joe Biden. Amash will have no chance to win, but could weaken Joe Biden, particularly in Amash’s important home state of Michigan. While it’s impossible to know with certainty whether third-party candidates have “spoiled” previous presidential elections, it’s possible that Ross Perot (1992) and Ralph Nader (2000) played a substantial role in the outcomes of those races. Perot took substantial support away from George H.W. Bush, and Nader took support away from Al Gore.