US-China trade deal may fall victim to spiraling ties

Bloomberg

As US-China ties have deteriorated since the Covid-19 pandemic devastated the globe, the trade deal they signed in January has served as sort of a linchpin in the relationship. Now that also could be coming undone.
President Donald Trump, who has repeatedly blamed China for the virus’s spread ahead of the US election in November, said the phase-one trade deal “means less to me now than when I made it.” He spoke shortly after the US shut down China’s consulate in Houston for spying and theft of intellectual property, which prompted Beijing to retaliate by ordering American diplomats to abandon their Chengdu outpost.
“The phase-one trade deal between the US and China hangs by a thread,” said Eswar Prasad, who once led the International Monetary Fund’s China team, and is now at Cornell University. “China has an incentive to keep the trade deal with the US from crumbling, even as the bilateral relationship becomes more toxic, in order to try and limit damage to its economic recovery.”
The Trump administration has repeatedly upped the ante in its effort to pressure China, from imposing punitive tariffs to moving to kneecap Huawei Technologies Co to shutting down the consulate — one of the worst blows to diplomatic relations in four decades of relations.
Secretary of State Michael Pompeo has cast the fight in ideological terms, saying that “securing our freedoms from the Chinese Communist Party is the mission of our time.”
The heated rhetoric sparked panic buying in China on Friday, with the CSI 300 Index falling 4.4% at the close while the ChiNext Index dropped 6.1%, the most since February 3. China’s yuan fell to the weakest since July 8.
For China, the trade deal serves as important cushion for its own economic recovery. The truce agreed in January lifted the threat of higher tariffs on Chinese exports, which has been all the more critical given the collapse in shipments triggered by the pandemic. Both exports and imports improved in June, helping to solidify a broader recovery in the world’s second-biggest economy.
“China is working very hard to honour its promises,” said Jiang Yuechun, a senior research fellow with the China Institute of International Studies in Beijing, a research institute connected with the Foreign Ministry.
“We always say that economic relations are actually the ballast for China-US relations. Now the ballast is becoming weaker and weaker, and that is why now the ship of China-US relations is going up and down.”
At the January signing of the trade deal, in which China pledged to spend $200 billion to close the trade imbalance, Trump said the nations were “righting the wrongs of the past.”