06/29/2020
In January, the United States and China signed the Phase One trade agreement. China committed to increasing its purchase of American goods and services by $200 billion above 2017 levels over two years, enhance intellectual property and forced technology transfer protections, and liberalized market access for U.S. companies. The agreement kept in place most of the $360 billion of U.S. tariffs on Chinese imports. The deal was hailed as signaling a new chapter in the two-year trade war with China, while critics of the deal said it didn’t go far enough, especially in addressing Chinese industrial subsidies. 

But that was before the coronavirus pandemic hit, resulting in the shutdown of the Chinese economy in the first quarter, making it harder to follow through on the promised goods purchases, or at least providing a reason not to. It was also before the U.S. threatened to retaliate if China imposed new security laws on Hong Kong in response to the pro-autonomy protests, and publicly accused China of being less than forthcoming about the coronavirus. On June 1, Bloomberg reported that the Chinese government told its state-run agricultural companies to stop purchases of U.S. grains, one of the primary goods categories targeted for increased importation under the agreement and had shifted purchases of soybeans to Brazil. 

Despite these tensions, the administration insists that the trade deal remains in place, although the pace of Chinese purchases of U.S. goods this year has fallen behind the pace necessary to reach the 2020 goal. According to the Peterson Institute of International Economics, so far through April China has purchased $26 billion of U.S. goods, far less than the $58 billion needed to keep it on track to reach what it estimates to be the 2020 goal of $172 billion. China is estimated to be about halfway toward its full-year goal of grain purchases, but well behind on energy and other categories. Importantly, China’s new security law for Hong Kong is expected to be approved within days and take effect on July 1. How the U.S. responds remains to be seen, but it has threatened to rescind Hong Kong’s “special” trade status, instead treating it the same as the rest of China, jeopardizing Hong Kong’s global status as a center of finance and trade. 

China is not the only trading partner with which the U.S. has outstanding issues. Two weeks ago, the U.S. threatened to impose tariffs on an additional $3.1 billion of European goods in retaliation for France re-imposing its digital tax after the U.S. withdrew from the OECD’s global talks on digital taxation. The U.S. insists that the proposed revenue-based tax unfairly targets U.S. companies because of their size. The new threat follows the U.S. imposition of 10-25 percent tariffs on $7.5 billion of European goods last year pursuant to a decision by the World Trade Organization that the EU had unfairly subsidized Airbus, and subsequent retaliatory duties imposed by the EU. A parallel grievance filed by the EU regarding Boeing is expected to be decided by September. The U.S. had already imposed tariffs on European steel and aluminum and has long threatened to impose tariffs on European automobiles. Complicating the pursuit of a comprehensive trade deal with the EU is the need for the UK to negotiate deals with both the EU and the U.S. by the end of the year when Brexit becomes official. U.S. trade representative Lighthizer recently told Congress that it was unlikely that any deal with the UK would be presented to Congress before November. 

In a more positive note on trade relations, the U.S.-Mexico-Canada Agreement is scheduled to take effect this week, on July 1. 

The Coronavirus and the Economy 

Estimates of the economic impact of the coronavirus on the U.S. economy are staggering. The Federal Reserve forecasts a contraction of 6.5 percent in 2020. The International Monetary Fund (IMF) expects a decline of 8.0 percent. And the June Wall Street Journal monthly economic survey expects a decline of 5.9 percent. There is a great deal of uncertainty in these forecasts because so much remains unknown about the coronavirus, including how virulent it will prove to be, and if and when a safe and effective vaccine might be developed. A recent survey of global business executives by McKinsey and Co. highlights this uncertainty. Of the respondents, 36 percent expected the virus to re-occur, slow long-term growth, and a muted world recovery. Another 17 percent expected the virus to be contained and growth to resume. Another 15 percent expected the virus to be contained, but with significant sector damage and lower long-term trade growth, while another 14 percent expected the virus to re-occur, leading to slow long-term growth insufficient to deliver a full recovery. 

There is a lot at stake in the question of whether we will see a so-called second wave of infections. Some countries have done a better job of containing the virus, leading to a rise in confidence and likely a more robust recovery. For others the experience is mixed, including the U.S. McKinsey estimates that between now and the end of 2023 the difference in global GDP between a scenario where the virus is knocked down with near certainty and one where the virus persists but remains within the control of the healthcare system to be as much as $20 trillion, including up to $5 trillion in the U.S. Similarly, in its June Economic Outlook, the OECD (Organisation for Economic Co-operation and Development) forecasts a decline in 2020 U.S. GDP of 7.3 percent, falling to -8.5 in what it calls a double-hit scenario in which a second wave outbreak occurs. The point is that a potential second wave has meaningful economic implications, but they are assumed to be far less destructive than the first wave. Although we are still struggling to contain the virus in some places, we do now have a better, although still incomplete, understanding of the virus and what it takes to contain it. And a second wave is assumed to be less intensive than the first, although that too is uncertain.

Will There be a Fourth Stimulus Bill? 

It remains to be seen if there will be a fourth stimulus bill to help the economy recover from the pandemic. Although Federal Reserve Chairman Powell has endorsed the idea, Washington remains far apart. The House has already passed a $3 trillion package called the HEROES Act. Among its various provisions are $1 trillion for aid to state, local, and tribal governments; $200 billion to establish a fund for essential workers; $75 billion for testing tracing, and treatment; direct payments of $1,200 per family member up to $6,000 per household; employee retention tax credits; and extended unemployment benefits of $600 through January. 

The Senate has been more reluctant. Recently better than expected economic data, including the May jobs report, has led the Republican leadership to question whether another round of stimulus is even needed, and in any event, one not larger than $1 trillion. The White House has said it prefers a $2 trillion package built around payroll tax credits. There is clearly a lot of negotiating ground to cover, but it will be hampered by the Congressional calendar. Both houses are in simultaneous session for only nine days in July following the two-week Senate recess that ends on the 17th. Keep in mind, this is an election year, and the extended unemployment benefits are scheduled to expire on July 31, which could be a motivating factor to get something done, and sooner than later. Senate Majority Leader McConnell has said that any bill will come in July, and that it will be the last. 

Important Disclosures:
Sources: Factset, Bloomberg 

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