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As the coronavirus pandemic appears to be subsiding in China, it's becoming clear that its targets for the phase one trade deal with the U.S. are unrealistic and there is so far no sign of a plan for renegotiation.

What's happening: White House National Economic Council director Larry Kudlow said Thursday the trade deal was "intact, and China has every intent of implementing it."

Chinese Premier Li Keqiang said Friday that Beijing plans to "work with the United States to implement the phase one China-U.S. economic and trade agreement."

Background: China agreed to buy $200 billion more in U.S. goods over the next two years than it bought in 2017. 

The deal paused further escalation in tariffs and helped spur bullish sentiment (even though it did not remove many of the already implemented tariffs).

Yes, but: While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall. 

Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019's levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.

The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped. 

By the numbers: Given the lull in imports during the January–March period, China would need to buy an "impossible" $2.9 billion of energy per month from April to December, Jason Bordoff, a former senior director at the U.S. National Security Council, writes in Foreign Policy.

"[A]t $30 per barrel (the U.S. government’s projected average price for 2020), that’s equivalent to about 3 million barrels of  oil per day, or the total of all U.S. daily crude exports in 2019."

"That China would buy every last drop of exported U.S. oil is unrealistic enough — but today, that oil is not even available, as U.S. oil exports are projected to fall this year along with the collapse in U.S. shale  output, which is projected to drop by roughly one-third over the next year."

One more thing: China also is facing renewed street protests in Hong Kong after passing a controversial national security law that Secretary of State Mike Pompeo called a “death knell” for Hong Kong's autonomy.

White House National Security Advisor Robert O’Brien said the U.S. is likely to impose sanctions on China if the law is passed.

China's Foreign Minister Wang Yi warned that some in the U.S. were pushing relations toward a "new Cold War."

Go deeper: Beijing says U.S. should give up "wishful thinking" of changing China

U.S.-China trade tensions are escalating again

The pandemic caused China to fall behind on its commitments.

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After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

Axios World

Sen. Josh Hawley (R-Mo.) will lambast China on Wednesday, arguing on the Senate floor that the existing international order must be ripped up to avert a future in which America takes “second place to the imperialists in Beijing.”

Why it matters: Hawley’s star has risen fast, and the 40-year-old freshman senator is often discussed as a 2024 presidential prospect. He’s betting that Trump’s populist nationalism and hawkishness on China aren’t passing phenomena, but the future of the Republican Party.

In the speech, which was shared with Axios ahead of delivery, Hawley will articulate his own vision of America First.

“The international order as we have known it for thirty years is breaking. Now imperialist China seeks to remake the world in its own image, and to bend the global economy to its own will.”

“Are we in this nation willing to witness the slow destruction of the free world? Are we willing to watch our own way of life, our own liberties and livelihoods, grow dependent on the policy of Beijing?”

“Now we must recognize that the economic system designed by Western policy makers at the end of the Cold War does not serve our purposes in this new era."

Between the lines: Hawley is one of a few prominent Republicans — among them Secretary of State Mike Pompeo and Sen. Tom Cotton (R-Ark.) — building intellectual architecture around the fire and fury of Trump’s foreign policy. 

Hawley also echoes the Trump administration in arguing that China’s “failures and lies” unleashed a pandemic onto the world, for which Beijing is directly responsible.

But Hawley has gone further than even Trump on trade, calling for the U.S. to withdraw from the World Trade Organization and introducing a joint resolution this month to make that happen.

Hawley’s proposal has little chance of passage, and an assortment of trade experts and pro-business groups have warned of dire economic consequences if it did.

But China hawks in Washington increasingly view Beijing’s admission into the organization in 2001 as the original sin of America's China policy.

Hawley argues in the speech that America cannot be prosperous and secure in a world where China's economy and influence come to dwarf America’s thanks to imbalanced trading relationships.

The bottom line: Beyond the WTO proposal, Hawley's speech is more ideology than policy. But this sort of rhetoric is likely to reverberate, at least among Republicans, even after Trump leaves office.

Go deeper: The "new Cold War" started in Beijing

Josh Hawley crafts the case against China

He's betting on populist nationalism as the future of the GOP.

Hawley. Photo: Carlos Barria-Pool/Getty Images

Josh Hawley

Politics

Reproduced from Panjiva; Chart: Axios Visuals

U.S. stocks fell sharply in the final hour of trading Wednesday after President Trump seemingly reignited the trade war, telling reporters the U.S. would be evaluating whether China has complied with the "phase 1" trade deal to buy an extra $200 billion a year of U.S. goods.

Why it matters: As the coronavirus pandemic continues to choke the U.S. and global economy, Trump is threatening to tighten the vice.

By the numbers: S&P Global Market Intelligence, Panjiva, finds that not only is China not making purchases on pace for a $200 billion increase, it is now $21.2 billion behind — not even halfway to its target on a monthly basis.

Further, data Thursday showed Chinese exports rose 3.5% year over year in April while imports fell 14.2%, bringing China’s trade surplus for the month to $45.34 billion — well above the $6.35 billion economists had predicted.

What's happening: Most had long expected that China would be unable to meet the terms of the deal as the novel coronavirus ravaged its economy, causing the worst quarterly economic contraction on record.

But it was expected the U.S. would look the other way, given the economic situation.

What we're hearing: "Trump is basically trying to distract the American public from focusing too much on the unemployment rate, employment figures and so on," Keith Wade, chief economist at Schroders, said during a recent webcast.

"If we do reignite the trade wars, and we see the ‘phase 1’ deal fail, I think it won’t just be China that loses, it will be the U.S. as well."

Between the lines: The nascent stock market rebound also could be threatened by revived tensions between the world's two largest economies.

“That’s probably the number one concern in the market when we talk to investors and sell-side analysts,” Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, told CNBC Wednesday.

Watch this space: The general public is starting to grow more wary of the tariffs. A new survey from CivicScience finds a record high 71% of Americans are concerned, and industry lobbying groups have ramped up messaging again opposing the trade war.

“Adding more tariffs during a time of economic crisis will only further punish U.S. companies, manufacturers, and farmers who are already struggling to survive," Americans for Free Trade spokesperson Jonathan Gold said in a statement earlier this week.

China is nowhere near meeting the "phase 1" trade agreement

It's not even halfway to its target on a monthly basis.

Concern about President Trump's tariffs on U.S. imports of Chinese goods hit its highest level on record in April, as the coronavirus pandemic caused more Americans to fear the their' impact on household finances, according to the latest survey from CivicScience.

Where it stands: The tariffs remain a massive tax on American businesses and individuals at a time when Congress and the Federal Reserve are expending trillions of dollars to offset the negative economic shock of the virus.

Trump said in an interview Sunday that he was considering adding further duties, which he called the “ultimate punishment,” and threatened to walk away from the "phase one" trade deal with China.

Reality check: The tariffs have wiped out the lion's share of average American households' savings from the 2017 tax cut, as Bloomberg noted in June.

And the president’s tariffs rank "as one of the biggest tax increases in decades," CNBC reported in May, citing data from the Treasury Department.

Go deeper: Businesses say China tariffs contributing to hand sanitizer shortages

American concern about tariffs hits new record high

Tariffs have wiped out the lion's share of average American households' savings from the 2017 tax cut.

Tariffs

An AP report finds that the shortage of medical supplies in the United States correlated with the drop in imports, mainly from China.

Why it matters: Emergency rooms, hospitals, and clinics are starting to run out of key supplies needed to protect health care officials and test potentially sick individuals, AP notes. 

The state of play: The Trump administration is considering lifting some of the tariffs against China with the support of U.S. businesses and health care officials, The Wall Street Journal writes. 

The latest delivery of medical-grade N95 masks arrived from China on Feb. 19, and 13 shipments of non-medical-grade N95 masks have reached the U.S. in the past month, per AP. These masks filter out 95% of all airborne particles.

Hand sanitizer and swab imports dropped by 40%. Swabs are needed for a variety of reasons, but they help test for the coronavirus as well.

Over-the-counter medical shipments have dropped, with only 5 shipping containers of medical thermometers arriving in the U.S during the last 30 days.

Thought bubble: Axios' Sam Baker says this helps explain why President Trump invoked the Defense Production Act, an emergency tool that allows the government to bolster domestic manufacturing. But it also makes it even more surprising that the U.S. has not actually used that tool yet.

Go deeper: China's coronavirus outbreak prompts congressional scrutiny of health supply chain

Report: Drop in medical supplies tied to decreased China imports

Medical supplies needed to protect health care providers are running out.

Photo: Rich Graessle/Icon Sportswire/Getty Images

Health Care

Coronavirus

The U.S. faces a range of health care flashpoints — unaffordable drugs, opioids, vaping — as we debate whether to adopt universal care. For now, the Affordable Care Act is the law of the land, but Republicans want to issue it a final death blow.

Health

As the Trump administration mulls its plan to battle the impact of COVID-19 on the U.S. economy, scant attention has been given to a major source of potential stimulus: reining in its tariffs on China.

Why it matters: U.S. tariffs increase costs for American companies that import Chinese goods, and with fewer customers making purchases as the COVID-19 outbreak slows demand, the trade war "is going to be a bigger drag on the economy," Chad P. Bown, a senior fellow at the Peterson Institute for International Economics (PIIE), tells Axios.chevron.

The U.S. still has most of its tariffs in place on $360 billion worth of Chinese imports after the phase one trade deal it signed in mid-January.

The big picture: President Trump's trade war sent the U.S. manufacturing and transportation industries into a recession in 2019, and the coronavirus outbreak this year has further damaged global trade. 

While the trade war is no longer the top concern, if U.S. tariffs on China are left in place, the recoveries of the U.S., Chinese and world economies will likely all be slower and weaker.

Background: The Trump administration has provided tariff exceptions for certain medical products like masks and gloves, but Treasury Secretary Steven Mnuchin told a House committee last week the White House was "not considering" removing Chinese tariffs but would "look at all the options that we think are important to help."

That hasn't sparked much hope for a change in course. 

What we're hearing: "Given how slow publicly they’ve been to just react to ... the public health problems with the coronavirus, I’m not optimistic that they’re going to see the linkages to the trade war and make the connection," Bown says.

The trade war "is an important political thing for [Trump], and I’m not optimistic they’re going to want to be seen to change the terms despite it obviously being problematic for the U.S. economy."

Between the lines: Aditya Bhave, senior global economist at Bank of America Securities, pointed out in a recent note to clients that the impact of uncertainty shocks, like the trade war, "tend to be lagged, large and long-lasting."

Weak data early this year from Southeast Asia and the eurozone "suggest that trade-war related disruptions continued to weigh on growth,” he adds.

China is the major hub of the world's supply chain and the epicenter of the coronavirus outbreak, and the speed at which it can get its industry back up and running is paramount for the country, its trading partners and the United States.

Another group that would be greatly helped by a rollback in tariffs is farmers and the U.S. agriculture sector, which last year saw farm debt rise to record levels and bankruptcies increase 20%.

The industry was banking on the phase one deal's commitment of a $200 billion increase in purchases from China, which was in doubt when the agreement was signed and now looks even less likely.

Flashback: Trump has provided $28 billion in bailout funding for farmers and last year 40% of U.S. farm income came from trade assistance. That funding has expired.Reality check: "Most observers believed that the ag sector was hurt and would need an extraordinary year to make up for that. I don’t think they’re going to see it," Mary Lovely, a senior fellow at PIIE and economics professor at Syracuse, tells Axios.

"Couple that with the fact that the U.S. could very possibly be heading towards a recession, and it’s going to be a tough year for them." 

Go deeper: The next dominoes in the coronavirus economy

The trade war could weaken U.S. coronavirus response

Trade tariffs could slow the recoveries of the U.S., Chinese and world economies.

Donald Trump and U.S. Surgeon General Jerome Adams

U.S. Surgeon General Jerome Adams looks on as President Donald Trump speaks during a press briefing with the White House Coronavirus Task Force. Photo: Drew Angerer/Getty Images.

Vice President Mike Pence told CNBC Friday that "we'll see" if the U.K.'s decision to allow Chinese telecom firm Huawei to build part of its 5G network will impact forthcoming trade talks between the U.S. and U.K.

Why it matters: Striking a trade deal with the U.S. is one of Prime Minister Boris Johnson's top priorities post-Brexit.

The U.S. has repeatedly expressed concern over Huawei's technology, arguing that it poses a national security risk since the telecommunication equipment could be used by the Chinese government for espionage.

What he's saying: Pence said the U.S. is "profoundly disappointed" about the decision because he told Johnson in September that "the moment the U.K. was out of Brexit we were willing to begin to negotiate free trade arrangement with the U.K."

"But we just don’t believe that utilizing the assets and technologies of Huawei is consistent with the security or privacy interests of the U.K., of the U.S., and it remains a real issue between our two countries," he added.

The big picture, via Axios' Jonathan Swan: The Huawei debate has become one of the most urgent foreign policy priorities of the Trump administration and one of the more serious tests of the U.S.-U.K. relationship in recent times.

It could ultimately lead to the U.S. government curtailing the intelligence it shares with its closest ally, U.S. officials told Axios.

U.K. allows Huawei to build part of 5G network

Huawei threatens America's closest relationship

Pence: "We'll see" if U.K.'s Huawei decision threatens trade deal

That deal is one of Prime Minister Boris Johnson's top priorities post-Brexit.

Huawei

Brexit

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

China will halve tariffs on about $75 billion of imports from the U.S., effective Feb. 14, the country's finance ministry said in statements posted to its website Thursday. 

Why it matters: This is another sign of tensions easing in the prolonged trade war between the U.S. and China that's brought major uncertainty to the markets and hurt the U.S. manufacturing industry and farmers.

By the numbers: The Chinese government will cut tariffs from 10% to 5% on some U.S. goods and from 5% to 2.5% on others to "advance the healthy and stable development of China-U.S. trade," according to the ministry.

The big picture: The ministry announced on Saturday it was suspending tariffs on some U.S. and Canadian imports that could be used to help combat the novel coronavirus outbreak.

President Trump and Chinese Vice Premier Liu He signed "phase one" of a trade deal between the two countries last month.

Go deeper: U.S. and China sign "phase one" trade agreement

China to cut tariffs on $75 billion of U.S. goods

It'll cut tariffs from 10% to 5% on some U.S. goods and from 5% to 2.5% on others.

resident Donald Trump stands with Chinese Vice Premier Liu He, before signing the phase 1 of a trade deal between the U.S. and China

Chinese Vice Premier Liu He and President Trump at the White House on Jan. 15. Photo: Mark Wilson/Getty Images

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French President Emmanuel Macron on Tuesday tweeted that he and President Trump  held a “great discussion” on a tax on digital services considered by Paris and pledged to work on "a good agreement" with Washington "to avoid tariff escalation." 

Why it matters: Macron and Trump agreed to avoid increasing tariffs and continue negotiations on the digital tax during until the end of the year, CNBC reports.

Context: France in July enacted a tax on companies that profited from digital services in the country.

The White House in December issued a report concluding that France's tax discriminated against U.S. digital companies and announced that it was considering tariffs as high as 100% on up to $2.4 billion worth of French products, including sparkling wines, cheeses and handbags.

The announcement came hours before Trump was headed to the World Economic Forum at Davos, Switzerland, and days after Trump signed a reprieve in the 18-month trade war with China. 

U.S. and China sign "phase one" trade agreement

Macron and Trump call ceasefire on digital taxes and wine tariffs

Macron and Trump agreed to avoid increasing tariffs until the end of 2020.

Macron and Trump on Dec. 3, 2019. Photo: Ludovic Marin/POOL/AFP via Getty Images

France

President Trump's former chief economic adviser Gary Cohn said on CBS's "Face the Nation" Sunday that he thinks the president's tariffs on China "totally" hurt the United States, and that he doesn't believe they have helped achieve a different "outcome" with China.

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BRENNAN: Can the president say, 'Look, people may not like my tactics, but I got this done?' Was he ultimately right? Were you wrong?

COHN: They can say that. I don't think we would have gotten to a different outcome. I don't think the tariffs helped us get to any different outcome.

COHN: I think it has hurt the U.S. I think it's totally hurt the United States. 

Driving the news: President Trump and China signed 'phase-one' of a deal this week meant to ease tensions stemming from a two-year trade war.

Axios' Dion Rabouin notes that while the limited agreement will roll back some U.S. tariffs on Chinese goods and see China increase purchases of U.S. goods and services by $200 billion over two years, experts say it leaves more questions than answers.

For example, the agreement does not spell out what goods China will buy or how it will reach the targets of $200 billion of increased spending on agriculture, energy, manufacturing and services.

The backdrop: Many speculated that Cohn, who favors free trade and was often at odds with the populist factions of the Trump administration, resigned over Trump's steel and aluminum tariffs. Cohn didn't confirm that's why he left, but told CBS that he "didn't think the steel and aluminum tariffs were helpful to the economy." 

"We'd accomplished a lot, and at the end of the day, he was going a different direction on some of the trade negotiations than I would have gone," Cohn said.

Go deeper: The "phase one" deal isn't all that it seems

Gary Cohn says Trump tariffs on China "totally hurt the United States"

"I don't think the tariffs helped us get to any different outcome."

Lost amid headlines about the coronavirus pandemic and the seemingly unstoppable stock market rally, has been the monthslong escalation of tensions in the U.S.-China trade war —  and it's likely here to stay.

Why it matters: The tariffs continue to impress a sizable tax on U.S. companies and consumers, adding additional costs and red tape for small businesses, farmers, manufacturers and households trying to stay afloat amid the pandemic.

"The trade war has been quietly intensifying," Stephen Gallagher, chief economist at Société Générale, tells Axios.

Driving the news: White House chief of staff Mark Meadows said late Wednesday that administration officials are "looking at the national security risk as it relates to TikTok, WeChat and other apps" from China and could announce bans in the coming weeks.

That followed remarks from President Trump on Tuesday that he had no plans for "phase two" trade deal negotiations and was "not interested right now in talking to China.”

What's happening: The "phase one" deal was cheered by investors as a positive first step, because it stopped a tit-for-tat tariff escalation that was poised to add a tax to nearly every product traded between the U.S. and China.

However, it did nothing about tariffs on hundreds of billions of dollars of Chinese imports already in place that are paid by U.S. companies.

Why you'll hear about this again: With the U.S. ratcheting up the pressure, there is a decreasing likelihood China lives up to its "phase one" agreement.

That means a diminished outlook for industries that were counting on the $200 billion in increased purchases of U.S. agriculture, energy and manufacturing after a brutal 2019.

Remember: The primary cost of tariffs isn't the tariffs themselves, but the deadweight loss of consumers buying more expensive, or less efficient, products.

The trade war also is a major factor pushing businesses to pull supply chains and production out of China, increasing costs and uprooting longstanding relationships.

For big companies, this will weigh on margins; for small companies, it could mean going out of business.

Don't sleep: Deutsche Bank’s global head of tech strategy Apjit Walia warns that the demand disruption, supply chain upheaval and bifurcated tech standards from a "Tech Cold War" between the U.S. and China could cost the sector more than $3.5 trillion over the next five years.

What's next: Even if Trump loses in November, investors don't expect a significant change in the U.S. approach to China given Joe Biden's recent rhetoric and bipartisan legislation condemning China for its treatment of Uighur Muslims and restrictions on public companies.

The U.S.-China trade war quietly escalates

Photo Illustration: Sarah Grillo/Axios. Photos: Alex Wong/Getty Images and Lintao Zhang/Getty Images

Technology

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Axios Pro Rata

Protectionism is poised to play an elevated role in global dealmaking, particularly as countries grapple with the economic fallout of COVID-19.

Driving the news: Governments are creating new regulations and incentives to maintain local ownership of homegrown companies.

France’s Finance Ministry on Friday formed a fund to invest in domestic tech companies if they receive unsolicited takeover offers from foreign suitors. It begins with €150 million, managed via state-backed lender Bpifrance, but could expand to €500 million next year.

Australia has proposed a series of changes related to foreign takeover offers in all sorts of industries, regardless of deal size, including one that would let the country's treasurer force divestitures on the basis of national security.

Poland, Hungary and the Czech Republic are in various stages of implementing new restrictions of foreign direct investments, with the goal of restricting takeovers by non-EU companies.

Germany also strengthened its screening of foreign direct investments, initially aimed at health care, but it's expected to expand to other "sensitive" industries like artificial intelligence.

Sweden today got into the act, with top government officials introducing a series of proposals to better screen foreign direct investments.

India last month said that companies from its seven neighboring nations, including China, must receive government approval for takeovers of Indian businesses. It also applies to other changes to beneficial ownership.

The U.S. doesn't appear likely to enact similar restrictions, regardless of White House saber-rattling toward China, although there was that proposal from some congressional Democrats in April to put an overall moratorium on large M&A until the pandemic subsides.

By the numbers: Global cross-border merger activity is down 40% year-to-date, compared to an overall 43% drop in total M&A, per Refintiv. Cross-border deals for European targets, however, are down 5% versus an overall 12% increase in European dealmaking.

The bottom line: The world may be flat, but political policy is marked by peaks and valleys.

Governments turn to protectionism in pandemic fallout

Global cross-border merger activity is down 40% year-to-date.

Protectionism

Data: U.S. Dept. of Commerce; Chart: Chris Canipe/Axios


President Trump's trade war has led to even bigger trade deficits with China, even though it was intended to improve the trade balance. But it's not just China — the deficit has increased with most of our other major trade partners, too.

Why it matters: While economists agree that trade deficits aren't a good way to measure   a trade relationship, they are the metric Trump fixates on, made campaign promises about and uses to evaluate relationships with other countries. 

Throughout his campaign, Trump vowed that he would wipe away the U.S.'s trade deficits: "You will see a drop [in the trade deficit] like you’ve never seen before.” 

Reality check: Among the U.S.'s 15 biggest trading partners, the trade balance has moved in the wrong direction for Trump in 10 of those countries between 2016 and 2018, while the aggregate trade deficit has jumped from $503 billion to $628B.

While Trump can explain the deficit spike with China as a short-term sacrifice for long-term benefit, it doesn't account for the wider trend.

The latest: The U.S. trade deficit in the first 6 months of 2019 is even bigger than in the last two years.

What's going on: Trump's tax cuts are as much to blame for the increase in the trade deficit as anything else, writes Axios Markets editor Dion Rabouin:

More money in Americans' pockets leads to more consumption, often of Chinese-made goods.

Despite promises, Trump's trade deficits are only growing

Under Trump, the U.S. trade deficit has increased by $125 billion.

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