The US and China relationship just reached its most dangerous point in history, and it couldn’t have come at a worse time

Pro-democracy protests in Hong Kong, December 1, 2019. Chris McGrath/Getty Images
  • After China passed legislation to allow its security forces to patrol Hong Kong, President Trump announced that the US would retaliate with a range of measures, from studying Chinese companies on US stock exchanges, to sanctioning individuals in Hong Kong and China who “erode Hong Kong’s autonomy.”
  • This is merely the culmination of months of heated action and rhetoric between the two countries since the coronavirus pandemic reached the US. And it is dangerous for the entire world.
  • To fight the pandemic on both domestic and global scales the US and China need each other now more than ever.
  • The US needs supplies made in China’s factories to fight the virus, and China desperately needs US markets open to rebuild its economy.
  • Neither country is adjusting its diplomacy to that reality. Hostility will continue to rise. Flashpoints are multiplying, and Trump intends to make China the boogeyman of his reelection campaign. Strap in, America.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

There comes a moment in all close relationships when both parties must decide whether they will work through their problems together, or if they will engage with those problems in a state of open hostility. The US and China – in the midst of a global health catastrophe and facing the worst economic crisis since World War II – have chosen the path of open hostility.

This week The People’s Republic of China irrevocably changed Hong Kong. It passed legislation to allow its security forces to operate there, a move condemned the world over as an encroachment on Hong Kong’s freedom.

On Friday the Trump administration responded to that by listing a slew of ways it would change the US’s relationship with Hong Kong and announced plans to investigate Chinese companies on US stock exchanges and sanction individuals involved in enforcing the new Hong Kong security measures.

After weeks of escalating tensions over the coronavirus, Chinese telecom company Huawei, Taiwan, national security and technological development – literally everything that matters between the two countries – these Hong Kong measures take the fight between the new countries to a new level.

Taken all together this means that right now the China and the US are living out a dangerous paradox. Never since China reemerged on the world stage in the 1970s has there been more vitriol between the two countries. But never in their history have they needed each other more than they do now.

China needs US money to get out of its coronavirus depression. The US needs Chinese-made medical supplies to specifically fight the coronavirus as well as China’s products for its consumers and business in general.

This necessity for cooperation is very real, but the capacity for it is almost nonexistent in both countries.

In the US both Republicans and Democrats have turned against the Chinese government. An extreme group of politicians within the GOP – led by Secretary of State Mike Pompeo – is still claiming, without providing evidence, that the virus may have escaped from a Chinese research lab in Wuhan.

China has met the US’s frustration with aggression and outright lies about the coronavirus’ origin. The world won’t stop asking questions about the country’s initial response to the virus – which was horrendous – and President Xi Jinping is encouraging diplomats to respond to those questions with something called “wolf warrior diplomacy” – a heightened public aggression against any Chinese descent from anyone anywhere.

Trump also on Friday announced that the US would no longer cooperate with the World Health Organisation because, according to Trump, China “has total control over” the organisation and the country pressured to WHO “mislead the world” about the virus. The rivalry between the US and China is eroding trust in the very institutions meant to bring us through this crisis. It’s a contest in which we all lose.

China needs our help with its money situation

China’s coronavirus lockdown absolutely savaged its economy.

Analysts at Societe Generale estimate that the country’s unemployment number sits between 70 million and 80 million people at the end of March. According to official figures, China’s GDP contracted by 6.8% in the first quarter, a historic drop.

It sounds horrible, but it may actually be too rosy a picture. China watchers like Charlene Chu, an analyst at Autonomous Research who is known for her deep knowledge of China’s financial system, find it impossible to square that GDP number with the rest of the stats that came out of China in the first quarter.

Here’s a rundown:

  • Retail sales -19.0% year-over-year in the first quarter
  • Fixed-asset investment -16.1% year-over-year in the first quarter
  • Exports -13.3% year-over-year in the first quarter
  • Industrial production -8.4% year-over-year in the first quarter

Chu thinks that China’s actual GDP drop in the first quarter was closer to -12%, but authorities would never publish that.

“This is the workshop of the world and if the world is just down, that has a devastating impact on China,” Chu said in an interview with Business Insider. “They can’t get back to normal themselves without the US and the world.”

While 91% of Chinese companies have reopened, two-fifths of them are operating at under 50% capacity according to Chinese business surveyor China Beige Book. With the world shutdown there’s no one to sell to.

When global demand collapsed back in 2008 China’s exports fell by 30% and 23 million workers in export oriented jobs were suddenly out of work. Analysts at Societe Generale think we could see something similar happen this time around, which could push China’s unemployed up by 35 million in the second quarter. Supply is recovering, but demand is still extremely weak.

So yes, the situation is dire, but China’s policymakers are being extremely careful about what they do try to fix things. During previous economic crises in 2008 and 2015, China’s go-to response to stabilise its economy was spraying credit all over the place and loading the banks, corporations, and local governments with debt. This debt has made China’s financial system fragile and created a new flavour of economic instability – such as the mini-banking crisis in 2019.

Prior to the coronavirus, policymakers were trying to slowly deflate the debt bubble and are still reluctant to add to it. So while the rest of the world is taking extraordinary, historic measures to push money through their financial systems, China is taking it slow.

Naturally, the Chinese people want more help. But so far, China’s coronavirus economic stabilisation effort is both smaller compared to its efforts in the past and smaller compared to the rest of the world’s.

Global fiscal responses to coronavirus

“I think they [China’s policymakers] are still playing this gamble that the US and Europe will come back,” Chu said. “They’re thinking ‘instead of us going crazy and lifting the world we’ll let the rest of the world lift us.'”

The US needs all the PPE China can make

Of course, the rest of the world can’t do much economic lifting until the virus is under control. To get it there and keep it there the world needs supplies manufactured in part by China – facemasks and ventilators and all manner of equipment. Neither the US nor China has grappled well with that reality, revealing a massive leadership deficit in both governments and on the world stage.

In 2018 – the most recent year for which we have data – China supplied the world with 50% of its respirator masks and surgical masks, medical goggles, and protective garments. Once China started fighting the coronavirus in January and February, those exports plummeted, and they have yet to return to 2019 levels, according to data compiled by trade economist Chad Bown of the Peterson Institute for International Economics.

China exports of PPE 2020

With the whole world – and even individual US states – competing to buy these goods prices have gone up. According to Bown, prices for respirators and surgical masks surged 182% in March, compared to January and February, for example. China says that it has ramped up production of these goods, but it isn’t being particularly transparent about what that means. Meanwhile US hospitals still complain of PPE shortages, state governments are bleeding money building necessary stockpiles of equipment, and the White House’s own internal projections see cases of the virus increasing to 200,000 per day by June.

We don’t act like we need each other

It’s impossible to fault China for using the goods it manufactures take care of its own people first. So obviously managing this relationship in order to keep goods flowing to the US is not only a feat of detailed economic and logistical planning, but also diplomatic agility. The Trump administration has demonstrated none of that.

The US was caught unprepared for the coronavirus pandemic. President Trump’s response to the crisis has been slow, inefficient, and insufficient. Some of his administration’s biggest mistakes have been in its handling of the purchase of vital supplies for fighting the virus. But Trump will not acknowledge that.

Instead, in press conference after press conference, Trump has cast blame on China for the coronavirus. During a Fox News virtual town hall he accused China of trying to cover up the crisis. And in previous press briefings he’s accused the World Health Organisation of helping China in this cover up, damaging the organisation’s credibility when we need it most.

All this despite the fact that Trump has sporadically defended Xi Jinping’s leadership throughout this crisis in hopes of still negotiating a trade deal with China. If you are confused about where he stands here you have every right to be.

Trump’s cabinet and party have been more on message, though. The Trump campaign is turning China into an election issue, trying to paint Vice President Joe Biden too friendly to the country (Biden is similarly attacking Trump with the same accusation). Secretary of State Mike Pompeo is spouting his still-evidenceless theory about the origins of the coronavirus – claiming that it was from a Chinese lab – all over conservative media.

In the Senate, Republicans like Florida’s Marco Rubio and Arkansas’ Tom Cotton are calling for more aggressive restrictions on China from limiting investments in the country to blocking Chinese students from studying maths and science in the US.

Expect the rhetoric to ratchet up as election day nears too, and not just because of the US side. China’s diplomats are currently armed with a new mandate from Beijing to be as aggressive as possible, especially when it comes to messaging about the virus in keeping with something China is calling “wolf warrior” diplomacy.

It’s a heightened state of aggression where Chinese diplomats attack anyone from anywhere who says anything negative about China. Chinese state tabloid the Global Times put it has described it as an end to the days when China could be put “in a submission position.” And reasoned that it is a logical response to The West’s “hysterical hooligan style diplomacy.” Wolf Warriors, it said, are a necessary byproduct of China’s rise.

That is to say, get used to it.

This new strategy is part of why China’s attempts at flexing its soft power by flying around the world with medical supplies for other nations early on in the pandemic devolved from hiccups to open hostility.

The stories of China’s bellicosity have come streaming at a steady clip from all over the world. Chinese diplomats spread rumours about the virus originating in the US and Italy, angering not just those governments but governments all across Europe too.

Angry French officials summoned China’s ambassador to the country after an online post from an unnamed Chinese diplomat claimed French healthcare workers were allowing COVID-19 patients to die in nursing homes. US intelligence officials believe that Chinese agents were behind fake government text messages that alarmed Americans about a coronavirus shutdown in early March. In China hostility to foreigners has resulted in racist attacks against Africans , a reality African diplomats have complained about only to be met with aggressive denial from Beijing.

China is doing precious little to show it can be trusted and its government’s attempts to bury the memory of the virus’ surge within its own country cast even more doubt on its official narrative. Take the case of a woman named Fang Fang, who kept a diary during her lockdown in Wuhan. At first it was welcomed on China’s internet as a true account of the chaos the virus wrought in an unprepared city.

But as the government attempts to make itself look like it handled the virus competently, Fang Fang is being systematically discredited. It’s clear the government is behind it too. Weeks ago she was attacked by the editor of the Global Times, Hu Xijin, a man known for being a megaphone for Chinese government propaganda. The attack went viral on Chinese social media, which the government has a firm handle on.

If the Chinese government is not interested in letting its own people rehash what happened, it will be even less interested in letting the outside world do so. Demanding accountability will only lead to more friction, which leaves the world’s two economic powers at an impasse.

A stoppable force and a movable object

All of this aggression is setting the world down a bad path. Trust is dissipating. There is little hope for cooperation in the near term. Global conflict is getting more likely. Potentially lasting pressure points are beginning to reveal themselves.

The fight over China’s handling of the virus is unlikely to go away. Here in the US even more moderate politicians are calling for a rethinking of our relationship with China. In the Washington Post GOP Sen. Mitt Romney of Utah, called for a commission to deal with China’s “predatory” behaviour, which runs the gamut from stealing intellectual property to putting Uighur Muslims in concentration camps. Congress is looking at legislation that could move this fight even more firmly into the financial realm, targeting Chinese banks. If Beijing thought it was friendless in Washington during last year’s Hong Kong protests, it likely feels even more abandoned now.

In an interview with the Centre for Strategic Strategic and International Studies, Professor Minxin Pei of Claremont McKenna – one of the world’s top China experts – said that this is putting China in a position it has never been in before.

President Xi Jinping has made China more assertive and expansionist and in doing so antagonized the United States in Europe. This was something the Chinese Communist Party had always said it would not do, vowing instead to focus on economic development.

“The party systematically forgot those precious lessons,” Pei said, referring to the lost focus on economic development.

But now economic development is at risk as well. The UK and Japan are rethinking their economic ties. Here in the US the Trump administration is working with countries like Vietnam, Australia and India to form an “economic prosperity network” that would think through how to move supply chains out of China.

Chu told Business Insider that over the next few years this is something China may need to worry about – a world where countries no longer trust it to be the maker of things. Pei put the country’s economic prospects in more stark terms. Its population is shrinking rapidly, debt levels are high, global trade is evaporating, and it’s unclear if Xi’s style of strongman leadership will be flexible enough to weather the storm.

“I think fundamentally… China today has a different political regime,” Pei said. “It used to have collective leadership. Now it has one man rule. The good thing about one man rule is that decisions can be made really fast. The bad thing about one man rule is that decisions can be made really fast.”

There is a sense that this is an unstoppable force meeting an unmovable object. Pei insists this is not the case. Regime change in either country could offer the opportunity for something of a reset – a redrawing of boundaries. But that will not happen as things stand now. There is no one to lead it.