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China- United States trade relations after COVID-19

Nowadays, over two million jobs have been provided by the US-China relationship in various kinds of industries. It is expected that Chinese middle class will continue to expand rapidly in the next decade, which provide US companies new opportunities. To start with, the two countries respond to the COVID-19 in a different way while attitudes towards the trade relationship between two countries has been similar. Besides, the tariff imposed by U.S. has impacted Chinese economy in a negative way and China has taken measures to handle this while the future impact still remains to be seen. What is more, the analysis of trade relations after COVID-19 needs to be based on several economic principles such as imperfect competition and comparative advantage. Last but not least, the trade relationships between the two countries will be influenced from many perspectives such as value oil price, value chain and tourism.

Responses

Response to COVID-19

The two countries respond to the COVID-19 in a different way. In the context of the new coronavirus outbreak, companies in China. were forced to shut down during the Lunar new year. Not only domestic consumption in China has been impacted, but also the exports in China has fallen by 17.3 % in the first quarter. However, this method has proved to be effective as China has relaxed a great number of restrictions concerning imported and exported goods (Mistreanu, 2020). On the contrary, it seems that federal government of United States responded to the COVID-19 in an ineffective way. It was not until March that the United states just started to close school and cancel event as well as encouraging social distancing. As a result, the government has been criticized for failing to formulate the effective pandemic response strategy due to the highest death toll of virus.

Response to trade relationship

The attitudes towards trade relationships has been familiar even after the COVID-19. It is stated by the head of Trade department that the trade relationship between two countries after the COVID-19 will still be usual. Tariff imposed on the goods which were produced in China has grown last year by the United states. However, in the context of outbreak of the pandemic, several Chinese products and services have been granted exclusions to tariffs ("The Impact Of COVID-19 On The US-China Trade Relationship - International Law - Worldwide", 2020).. For instance, the products which are necessary for fighting against the pandemic have been excluded from the tariff. This is illustrated in the guide issued by the customs of United States about how to implement these strategies. However, this cannot indicate that the federal government has adopted a different method to handle the trade relationships. There are still many tariff exclusion requests which have been denied by the Congress. It is not possible for the Congress to relax tariffs on Chinese products for many reasons. On one hand, development of domestic economy is supposed to be taken into account. On the other hand, those devices not related to fighting against the COVID-19 are also should be restricted. It was agreed by China in the 2019 Trade deal that over $77 million goods including agricultural products in total (Jonason, 2020). However, influenced by the COVID-19, there is possibility that the ability of China to purchase may be influenced due to the slowing economic growth. Besides, the uncertainty has been added by COVID-19 in the U.S. companies with Chinese branches. As a result, it is likely for China to halt the trade war hoping for the respite from trade frictions between the two countries.

Negative impact

Impact on China

Tariff imposed by the federal government impacted negatively on Chinese economy as foreign companies need to reconsider the cost of opening in China. This process will also be accelerated by this pandemic (Grossman, 2020). Not only have Chinese companies been unable to adjust their global value chain, but also the manufacturing industry in China has been greatly impacted. The main reason for trade war is that there has been a fall in unemployment rate of the U.S due to the development in China. As a result, the GDP growth of China has dampened as lots of companies have closed without receiving orders. Besides, high-technology companies such as Huawei and ZTE have also play the role of accelerating the recalculations of strategic decisions made on a national level. In all, despite the fact that this pandemic may force the federal government to relax tariffs on certain products, it is not expected that the White house can open up a new course with China in the long-term after dealing with the pandemic. In all, the tariff escalations have caused great economic damage to both countries especially to China. On one hand, there has been an increase in the price of consumer goods, therefore directly increasing the CPI. On the other hand, the producers are those who are influenced most as some intermediate inputs have been exempted.

Response of China

Numerous measures have been adopted by China to deal with the outbreak of COVID-19. To start with, a majority tariffs have been relaxed on certain products similar to the U.S in order to fight the outbreak of this pandemic. For instance, China has announced in its official files that the government will remove restrictions on certain kinds of goods which is called Tax exemption policy. Meanwhile, during the process of fighting with the outbreak of COVID-19, great effort has made by the Chinese government to implement the phase one of the trade deal. Besides, the rated for ad valorem was lowered last month in order to response to new deal made in the last round of countermeasures of US tariffs. Thar is to say, the process of implementing the trade deal has not been stopped by the COVID-19. Great economic loss was caused by this pandemic and it is difficult for China to realize the promises in the context of Phase one of Trade deal. As a result, the future impact remains to be seen.

Future development

During the 2018-2019 period, the restriction of US on certain Chinese goods still shocks the market, so is the countermeasures. It is therefore necessary for companies in the two countries to adapt to the changes in the strategic external environment. Faced with new pressures brought by the COVID-19, both large listed companies and small private companies need to maintain the sufficient cash flow. It will be nine months before the presidential election while nobody know the winner (US congress, 2020). However, officials in both countries are all supposed to minimize the damages brought by the pandemic regardless of who wins the election. As it is expected that the pandemic will finish in six months, the two countries need to move above their differences. In this way can trade officials be able to conclude the phase two of the trade deal in the future.

Theories

Comparative advantages

The trade theory called comparative advantage can be used for explaining the trade war between the two countries. Based on the assumption that the market is totally efficient where comparative advantages are main drivers for the international trade. As a result, most companies can benefit from it. These are two most fundamental arguments of the free trade. Besides, it is predicted in two models that products in the industry with comparative advantage can be more likely to be imported (Atkeson, 2020). However, recent years have witnessed the changes in free trade patterns. The most critical issue is that there is an increase in the intra-industry trade instead of the trade across different countries (Mistreanu, 2020). That is to say, companies have developed the habit of trading similar products in the same industry. For instance, Yan (2020) states that the US tend to import cars from Japan, which also imports cars from the US (US congress, 2019). As a result, it is critical to support the free international trade theory based on the Comparative advantage theory. On one hand, great variety has been offered to consumers at a relatively low cost. On the other hand, different countries can be able to specialize and concentrate their production in specific sectors.

Imperfect competition

The intra-industry trade pattern can be explained on the theory called imperfect competition as well as the new trade theory. It indicates that there is output increasing by more than the proportional change of inputs. As a result, the country which specialized in producing certain kinds of products is likely to gain economies of scale. It is not predicted in any classical trade motel that trade between two countries tend to occur due to primitive factors such as high technology and low labor cost (Huang, 2018). Besides, in the perfect competitive model, the import subsidy will never be made up of the optimal trade policy for large countries such as China and the United States Therefore, the best policy to deal with the foreign monopoly is to use import subsidy as decisions made in the production process are irreversible. Besides, no trade policies have been permitted. Even in the context of the foreign monopoly, conventional outcomes of the optimal tariff will even reappear.

Channels

Oil price

This pandemic has impacted the trade relationships between two countries from different channels and the first one to illustrate is the oil price. As China has recovered from the COVID-19, there has been a significant fall in oil price as well as the negative expectation of future oil demand. The main reason for the negative future demand is that production facilities have been shut down by authorities in order to prevent the spread of the virus. Based on the oil market report by the IEA, the total oil demand of China is made up of over 15% global demand, which has been increasing due to the development of economy. Besides, it is still expected by the global that investment decisions in China tend to be influenced by the spread of virus, which also in turn lowers the oil price as well as the share index in American market (Amiti & Mary, 2017). Not only has this crisis prompted the two countries to consider cutting the production level by 600,000 barrels per day, but also the global demand for oil has been the worst performance of demand. In all, the decrease in oil price has impacted the trade relationship between the two countries and how it will recover depend on the strategies formulated to control the spread of virus.

Value chain

The value chain between the two countries has been disputed due to the pandemic. This is not beneficial for both China and the United States, which have strong value chain connections. However, this has been a special concern for some specific industries such as low-end manufacture industry. Those having limited participation in the global value chain will less likely to be influenced. Besides, the disruption to global value chain is likely to accelerate the fall in oil price due to the weakening demand of China.

Tourism and Travel

There is also possibility that this pandemic will reduce the tourism from China to America in two ways. The first one is the pull factor as travel restrictions are being imposed on China by the United States. Besides, it is implied by the slowdown in Chinese economy that there will be fewer tourists willing to travel to other countries including the United States. As a result, relevant industries such as catering are less likely to make a profit. Cities such as New York and Los Angles have seen the sharpest drop in tourists from China. It is expected that the impact of the pandemic will also continue in the future, therefore depressing the oil prices as well as trade relationships between the two countries.

References

Atkeson, A. (2020) What will be the Economic Impact of COVID-19 in the US ? Rough Estimates of Disease Scenarios. National Bureau of Economic research

Mistreanu, S. (2020). COVID-19 To Further Dampen U.S.-China Trade. Forbes. Retrieved 19 May 2020, from

https://www.forbes.com/sites/siminamistreanu/2020/03/13/covid-19-to-further-dampen-us-china-trade/#4856c593668b

Richard, B., & Eiichi, T. (2020) Think ahead about the trade impact of COVID19 Economy in the time of COVID 37(2) 66-72

Huang, Y. (2018) Trade linakges and firm value : Evidence from US and China Trade War. International management 24(2) 334-389

The Impact of COVID-19 on the US-China Trade Relationship | Perspectives & Events | Mayer Brown. Mayerbrown.com. (2020). Retrieved 19 May 2020

Amiti, C., Mary,B. (2017) How did China’s WTO Entry affects the US prices? NBER Working paper 28（2）279-287