COVID-19 SPECIAL

Will Covid-19 spark another trade war?

Trump threatens to impose tariffs on China as punishment for its role in virus' spread

Stock markets have been a roller coaster because of the Covid-19 outbreak. Health experts, governments and economists are still trying to get a grip on the virus.

As if things are not complicated enough, investors may now have to brace themselves for another potentially major source of uncertainty in the coming months which could roil financial markets.

Last Friday, Wall Street saw a sell-off after US President Donald Trump again raised the spectre of a trade war when he threatened to impose tariffs on China to punish the country for its role in the spread of the coronavirus to the United States and worldwide.

Mr Trump had earlier said the US might seek damages from China for the outbreak of Covid-19.

The US has the highest death toll of any country from the pandemic, which has hurt its economy and the rest of the world severely.

Finger-pointing between the US and China has been on the rise in recent weeks. Mr Trump has said he has evidence that a laboratory in China was the source of the Covid-19 outbreak, but has not shared details. He also accused China of not letting the world know about the virus earlier.

He has also alleged that China is trying to sabotage his chances of re-election, and suspended funding to the World Health Organisation (WHO), saying it is biased towards China and was slow to respond to the crisis.

Washington and Beijing have often traded barbs in the past, but what could spook markets this time is the fact that this is an election year in the US.

Mr Trump could up the ante against China, blaming it for the US' economic woes to divert attention from the negative impact of Covid-19 on the economy and his own handling of the outbreak.

The US economy is clearly feeling severe pain from the virus. It contracted by a larger-than-expected 4.8 per cent in the first quarter, marking the biggest decline since the global financial crisis in 2008.

To make things worse, Federal Reserve chairman Jerome Powell said last week that the US economy will contract at an unprecedented rate in the second quarter. Analysts are expecting a large double-digit decline.

A New Yorker protesting during May Day. The United States economy is feeling severe pain from the coronavirus pandemic, contracting by a larger-than-expected 4.8 per cent in the first quarter.
A New Yorker protesting during May Day. The United States economy is feeling severe pain from the coronavirus pandemic, contracting by a larger-than-expected 4.8 per cent in the first quarter. PHOTO: REUTERS

The pandemic has also wiped out all the job gains in the US since the Great Recession from December 2007 to June 2009, with more than 26 million Americans having filed for unemployment benefits over the past five weeks.

How the American economy does can have a big impact on the re-election chances of the country's incumbent president.

Since 1990, only one president has won re-election with a recession occurring in the last two years of his first term. Since then, four presidents who ran for re-election during an economic downturn had been unsuccessful.

POLITICAL TEMPERATURE ON THE RISE

Whether Mr Trump will impose more tariffs on China remains to be seen, but just the rhetoric and the possibility of this could rattle investors who are already saddled with lots of worries about Covid-19.

Meanwhile, the Trump administration has ramped up its bid for Taiwan's inclusion in the WHO, which has irked China.

US naval warships have also recently conducted "freedom of navigation operations" aimed at challenging Beijing's claims in the South China Sea.

The political tension between the US and China sparked by Covid-19 could grow into something bigger if left unchecked.

Mr Trump made China a key focus of his election bid in 2016 and it worked.

Will he blame China once again to sway the US electorate? This raises the risk that the trade war between the US and China could be rekindled in the coming months.

A trade war is the last thing that the global economy and markets need right now. Politicians, policymakers and investors already have enough to deal with when it comes to Covid-19.

Nevertheless, the risk of rising tension between Washington and Beijing in the run-up to the US election in November should not be taken lightly.

If the two giants decide to go head on with tariffs or other economic sanctions, this could roil stock markets and make the sharp market sell-off in March look like a storm in a teacup.

• Vasu Menon is executive director of investment strategy at OCBC Bank.

A version of this article appeared in the print edition of The Straits Times on May 05, 2020, with the headline 'Will Covid-19 spark another trade war?'. Subscribe