Welcome to Trade War Newsletter 16. Probably the most striking news this week was the unprecedented drop in China’s growth. In the first three months of the year China’s GDP fell by 6.8 percent, over the same period in 2019. This was the first recorded fall since China started releasing these figures in 1992, and likely in a much longer time.
And while unemployment is sure to be a major challenge for China at home this year, the global environment is looking increasingly daunting too: over the past week, the Trump administration signaled its clear intention to use anti-China sentiments as a key electoral strategy in the run-up to the U.S. presidential election in November.
Like I said…
“The scale and breadth of China’s economic contraction are staggering,” says Eswar Prasad, an economics professor and former IMF official. “There is little prospect of China driving a revival of global growth,” speaking to the Wall Street Journal’s Jonathan Cheng.
Financial Crisis X 2
The year-over-year decline in China’s GDP now is more than twice that seen during the 2008 global financial crisis. Here is a chart from the Peterson Institute illustrating the severity of the drop.
Service jobs vulnerable
While much attention has been paid to factory shutdowns and their impact on workers, employment in the service sector is likely to be hit even harder.
“The leadership will soon have to deal with its most severe challenge as China inevitably faces record-breaking unemployment amid an unprecedented pandemic,” writes Cary Huang in the South China Morning Post. "The bulk of job losses would take place in China’s service sector, which has helped absorb the country’s vast army of unskilled labour and currently employs about 180 million people.”
Goodbye global trade
“How big the trade losses will be in the future is uncertain, but a decline is inevitable given the initial supply shock from China, followed by a demand shock from Europe and America, supply chain disruptions, and rising restrictions on trade of “essential” goods such as medical equipment and food,” write Gary Clyde Hufbauer and Zhiyao (Lucy) Lu in a blog for the Peterson Institute.
”Global trade volume is expected to plummet by between 13 percent, if a sharp drop is followed by a recovery starting in the second half of 2020, and 32 percent under a scenario of prolonged and incomplete recovery. Contraction on this scale will devastate millions of people and businesses.”
Phase one ain’t happening
No surprise here, but China is far from meeting the ambitious purchase targets it agreed to as part of the “phase one” agreement with the U.S. “If China were on track to hit its target, exports of Phase 1 goods would have been $23b over the first two months of the year. Actual: $9b” tweets Bloomberg reporter Michael McKee.
Cusp of the impossible
“Despite some high-profile purchases of soybeans, pork, and wheat this year, it is unclear where China stands on meeting its commitments to purchase an additional $200 billion of U.S. goods and services beyond 2017 levels over the next two years,” write Wendy Cutler and James Green of the Asia Society Policy Institute.
“This target — a unique feature of the trade agreement — was already a stretch under the best of circumstances, but the coronavirus outbreak pushed this obligation to the cusp of the impossible.”
Who were those tariffs supposed to hurt again?
The Trump administration has announced it is temporarily suspending some tariffs in an effort to help struggling businesses like retailing, according to White House economic adviser Larry Kudlow, Bloomberg News reported. The move will not affect the tariffs on China.
In the announcement, Kudlow also conceded that tariffs hurt U.S. companies and to a degree consumers, something Trump has argued is not the case. “Yes, tariffs are paid by the companies importing, yes U.S. companies, with a minimum impact, frankly, on consumers,” said Kudlow.
“Clearly an admission that Americans pay the tariffs,” tweeted economist Mary Lovely.
Blame China strategy
“The strategy could not be clearer: From the Republican lawmakers blanketing Fox News to new ads from President Trump’s super PAC to the biting criticism on Donald Trump Jr.’s Twitter feed, the G.O.P. is attempting to divert attention from the administration’s heavily criticized response to the coronavirus by pinning the blame on China,” the New York Times reported.
The strategy may be complicated by the president himself however, with his clear admiration for China and its strongman leader Xi Jinping.
Notable/In Depth
A new podcast on the alarming news on Chinese economic growth:
Two trade collapses: the Trade Talks Podcast compares what is happening now to the earlier one in 2009.
Quarantine content:
The Myth of Chinese Capitalism is included in a LA Review of Books list of “Ten New Non-Fiction Books Not About Plagues.”
“This debut book by a veteran China reporter blends life stories, ethnography and economic analysis to explore the sharp and enduring rural-urban divide in Chinese society,” writes Jeffrey Wasserstrom. “It focuses largely on migrant workers, a key group in the pandemic story, given how many fan out across China on Lunar New Year trips home, and one whose general importance in China’s economic rise and current economic challenges is enormous.”
I will be talking about Covid-19 and China’s Future this coming Thursday 6 pm EST, via zoom, at the Overseas Press Club of America. Please tune in.