The US and China’s dangerous blame game will do no Good

An inquiry into the origins of Covid-19 is needed if important lessons are to be learnt

Gideon Rachman

Trump Xi Finger Heads
© James Ferguson

Future historians might record that the Covid-19 pandemic marked the start of a new cold war between China and the US. Even before coronavirus emerged, tensions between Washington and Beijing were rising. China had challenged American power in the Pacific, by building a chain of military bases across the South China Sea. In the US, the Trump administration had initiated a trade war.

Now as the pandemic wreaks havoc on the world economy, with more than one-quarter of the world’s fatalities in America, Donald Trump is increasingly turning on China. The US president has endorsed the idea that the coronavirus originated in the Institute of Virology in Wuhan.

He has also speculated that it might have been deliberately manufactured — an idea his own intelligence agencies have explicitly repudiated. The White House is also reported to be interested in trying to nullify the legal doctrine of “sovereign immunity”, which protects China from being sued for damages in US courts.

China has also contributed mightily to the rise in tensions. A Chinese foreign ministry spokesman, Zhao Lijian, has floated the evidence-free idea that coronavirus might have originated in the US. Beijing has also responded with unreasonable aggression to calls for an international inquiry into what is now a global disaster. When the Australian prime minister, Scott Morrison, called for such an inquiry, the Chinese ambassador there raised the idea that his country’s consumers might boycott Australian goods in retaliation.

Chinese officials seem to be under instructions to try to extend their own censorship regime to the foreign media and even foreign governments, policing what can be said, and threatening retaliation against those who fail to comply.

The Chinese ambassador in France has attacked the “malevolence” of the French media and crowed that people in the west are losing faith in democracy. Outspoken nationalists — such as Mr Zhao, the foreign ministry spokesman — have been rewarded with promotions. But these efforts are counter-productive and are fostering the anti-Chinese sentiment they claim to be repressing.

If Beijing took a more subtle approach to the protection of China’s image, it would agree to an international inquiry into the origins of the virus. Such an investigation — if it was staffed by respected scientists from all over the world, including China and the US — would help to defuse some of the wild, and often contradictory, conspiracy theories circulating in both countries. Above all, an independent inquiry could provide valuable lessons to avert the next pandemic.

Of course, Beijing is highly unlikely to accept any such inquiry. Agreeing to let foreigners investigate events in China would be portrayed as a humiliation by nationalists. The Chinese government is also ruthless in protecting the image of both the Communist party and President Xi Jinping. An honest account of the early stages of the pandemic — and the intimidation of doctors who tried to raise the alarm — would embarrass the party. It might also be true that China has other damaging secrets to conceal.

China also has legitimate reasons to doubt the good faith of Mr Trump, who has consistently dabbled in conspiracy theories and repeated “fake news” while claiming to denounce it. This behaviour is likely to get even worse as the November US presidential election approaches. However if China were to accept calls for an international inquiry, it would not be Mr Trump who drew up the terms of reference. Other parties, including the UN and the EU (whose commission president has also called for an inquiry) could help to ensure the objectivity of the process.

Do I expect any such inquiry to happen? Not really. But in the absence of an independent investigation, the blame game between the US and China is likely to escalate and become more dangerous.

Even before the pandemic, there was a strong case for the west to toughen its line with China on a range of issues, from Taiwan and Hong Kong, to investment in strategic industries. But the risk now is that a reasoned and principled reset of relations with China will slide into something more dangerous.

There is an undeniable element of xenophobia in some of the China-bashing that is going on in the west, which has led to a spate of verbal and physical attacks on Asian-Americans in the US.

Senior American politicians, such as Republican senator Tom Cotton, are campaigning to stop Chinese students enrolling in technical courses such as artificial intelligence and quantum computing in US universities. There are even some hotheads in Washington who are calling for the US to renege on debt owed to China.

In China meanwhile, the nationalist twist that was given to the school curriculum 30 years ago, after the Tiananmen Square massacre, has raised an often-angry generation, quick to take offence at alleged slights by foreigners and eager to demonstrate Chinese power. Those sentiments are nurtured by a government that wants to deflect discontent away from the Communist party itself.

At worst, all these angry emotions on both sides will lead not just to a cold war, but to a hot one: a real, armed conflict. Both the US and China need to move off that dangerous path.

The first step would be to agree to an independent international inquiry into the origins of Covid-19.

Mercosur Dies a Slow Death

By: Allison Fedirka

The unanticipated decline in global trade has naturally led countries to rethink their trade relationships.

Trade blocs and other methods of economic integration originally meant to achieve peace and prosperity are now seen as impediments. Of course, countries aren’t going to stop trading anytime soon, but it’s becoming clear that the post-Cold War era models characterized by interdependence and increasingly segmented and diversified supply chains appear to be on their way out.

And though every country will make the necessary adjustment at its own pace, some in South America are already doing so.

Brazil and Argentina – the region’s two largest economies – have taken actions that will redefine Mercosur, their framework for bilateral and foreign trade.

In redefining Mercosur, Argentina and Brazil will also redefine their relationship with one another and the rest of South America.

Argentina and Brazil view the role of trade and foreign business from fundamentally different positions.

Argentina’s economy has been in decline for years. Its gross domestic product contracted 2.5 percent in 2018 and 2.2 percent last year. The government also has about $65 billion worth of debt it desperately needs to renegotiate.

President Alberto Fernandez, who inherited most of this debt from his predecessor, has rejected austerity on the grounds that it harms the lives of Argentine citizens and so has reverted to a strategy of greater state funding and management of the economy.

Thus is Argentina’s trade dilemma: The presence of foreign goods threatens to replace domestic-made products or raise prices across the board, thereby undercutting local producers and reducing consumption of domestically made goods.

Brazil has also struggled to jumpstart its economy after its last recession. But its plan to spark domestic economic growth involves increasing exports of Brazilian-made goods. It also has extensive plans to privatize business and sell off other assets – a move to get more revenue and make the economy run more efficiently.

For Brazil, trade and foreign participation in the economy are cornerstones of the government’s revitalization efforts, and though the coronavirus pandemic has put some of its components in jeopardy, trade is still a priority.

Brazil and Argentina's different stances on trade explain their different approaches for shaping free trade negotiations. On April 24, Argentina’s Foreign Ministry announced that it would no longer engage in Mercosur’s free trade talks with other countries, though it would complete and honor agreements with the European Union and the European Free Trade Association.

Argentina said it needed to prioritize its own needs and that it didn’t want to hold up the process over issues that are incompatible with its own priorities.

The government later had to clarify that it had no intention of leaving the bloc – which currently regulates intra-bloc trade – and wanted to maintain regional ties.

Argentina’s presumed withdrawal was strongly welcomed by Brazil, which outgrew Mercosur's objectives long ago. Argentina’s move effectively clears the way for the world’s eighth-largest economy to engage in free trade talks unimpeded. (Paraguay and Uruguay will gladly follow deals it can get through Brazil and welcome the flexibility for themselves too.)

The Brazilian government has already started discussing plans to revise Mercosur regulations in Brazil’s favor, codifying Argentina’s decision and allowing it to navigate talks without Argentina’s agreement (unanimity has long been a requisite for Mercosur agreements) even if Argentina finds itself ready to reengage in foreign trade talks in the future.

This not only addresses Brazil’s short-term needs but creates more flexibility for Brazil to act on its own down the line.

However, redefining how Mercosur conducts trade talks necessarily brings into question the future of ties within the bloc. In its nearly 30-year existence, Mercosur has never come close to achieving the four progressive goals it set out to achieve: establish a free trade zone with no restrictions on the circulation of goods among member states, form a customs union in which common external tariffs would be uniformly applied across the group, create a common market to allow free movement of labor and capital, and synchronize member states’ macroeconomic and trade policies.

Mercosur has established relatively free trade practices and components of a customs union, but institutional constraints and domestic economic crises have always prevented it from doing more.

To overcome the gridlock, the bloc has devised ways to side-step problematic restrictions. For example, each member can select goods it believes could be harmed by lifting tariffs and can continue charging duties on those products within the bloc. In other words, Mercosur is not truly a free trade zone because it has allowed its members to impose hundreds of tariff restrictions.

If Mercosur were to completely fall apart, its members would still hold special trade status because of accords they signed under the ALADI framework, which laid the foundation for Mercosur.

These agreements opened specific market segments to free trade-like status and were used to create a basic framework for a common market. Dissolving Mercosur would not dissolve these previous agreements, though it would lift the restrictions on foreign trade negotiations and bring intra-bloc trade back to the bilateral level.

The Argentina-Brazil relationship is the heart of Mercosur. The bloc itself is a product of the post-Cold War order in which economic and political forces in the region increased global trade and led to the collapse of military governments in South America.

When military rule ended in Argentina and Brazil in the 1980s, the struggle for regional dominance and competition for external markets and over nuclear energy development that had typified their relationship cooled down.

Both were facing economic uncertainty and dealing with political transition, and they couldn’t afford to continue the rivalry any longer. Their vulnerabilities and interests aligned, and Buenos Aires and Brasilia overcame their political differences and decided to pursue economic integration.

The inclusion of Paraguay and Uruguay – originally created to serve as buffer states between Argentina and Brazil - further helped defuse tensions between the two.

Hence the creation of Mercosur.

The bloc is no stranger to controversy, but the conditions in which Argentina and Brazil face controversy have shifted. Over the years, they have managed to keep the bloc together through political negotiations even when they faced financial and monetary crises.

Now, their interests are simply not as aligned. Despite its current economic challenges, Brazil dominates the bloc.

Whereas its size and general economic trajectory allow it to pursue a more global agenda, Argentina’s domestic problems keep it inwardly focused and unattractive to outside business.

Argentina understands it is the weaker of the two, as demonstrated by its decision to hold back from foreign trade talks. It bowed out because it knew it could not negotiate a free trade deal with other countries under current conditions.

But it did not want to risk the regional ties the bloc offers; by giving space to Brazil to negotiate trade deals on its own, Argentina moved to preserve what would remain of the Mercosur agreement and trade benefits.

For Brazil, however, there is little value in preserving the regional-level agreements. The government of Jair Bolsonaro has been chipping away at Mercosur since taking office and even used the ALADI framework (not Mercosur) as the method of choice to coordinate COVID-19 relief materials among the member states.

The disintegration of Mercosur, slow as it may be, will shift regional dynamics further away from integration. Until now, countries have hesitated to violate the bloc’s rules because of the consequences they could face.

But crises such as Venezuelan migration and the coronavirus pandemic have forced them to start walking away from regional blocs in favor of pursuing their own national interests. The political consequences of not doing so are greater than the consequences of breaking rank.

In this context, buffer states such as Paraguay, Uruguay, Bolivia and Ecuador will increasingly return to this role as old rivalries and tensions between the larger nations could reemerge.

Reconstruction of national economies will be as much an economic decision as it is a political one.

Restructuring Argentina’s Private Debt is Essential

Argentina's creditors are being asked to accept a proposal that would reduce their revenue stream but make it sustainable. A responsible resolution will set a positive precedent, not only for Argentina, but for the international financial system as a whole.

Joseph E. Stiglitz, Edmund S. Phelps, Carmen M. Reinhart

stiglitz272_Matías BagliettoNurPhoto via Getty Images_martinguzmanargentinadebtimf

NEW YORK – The COVID-19 pandemic has pushed humanity toward the worst global recession in modern times. Pressure on public finances has become enormous, particularly in developing countries that were already highly indebted.

The World Bank, the International Monetary Fund, and the United Nations have launched various initiatives to relieve the public debt burden in this extraordinary situation. As a first step, the G20 countries agreed to grant a moratorium on official bilateral debt of the world’s 76 poorest economies.

This moment poses the ultimate test of the international financial architecture. “Sustainability” is a term that is now ubiquitous in global finance and investment, and for good reason. The principles it embodies – such as in the UN Sustainable Development Goals – speak to building a better world. And those principles are deeply relevant when it comes to the sovereign debt of struggling developing countries.

Against the backdrop of this global emergency, Argentina is spearheading its public debt-restructuring process in a constructive manner, in good faith, and with the support of all domestic political sectors.

Since 2016, when the country regained access to international markets, external creditors made a bet by acquiring debt with high coupons, but compatible only with extremely robust growth rates that did not materialize.

In February, before the COVID-19 crisis became acute, the IMF concluded that Argentina’s public debt is “unsustainable.” There is consensus that the debt is unaffordable, with interest payments having doubled as a share of government revenue. To be blunt, the cost of refinancing has become excessively high.

A renegotiation requires the commitment of all parties. Argentina has presented its private creditors a responsible offer that adequately reflects the country’s payment capacity: a three-year grace period with a minor cut in capital and a significant cut in interest.

The proposal is in line with the IMF’s technical analysis, which states that substantial debt relief from Argentina’s private creditors will be needed to restore debt sustainability with high probability.

Debt relief is the only way to combat the pandemic and set the economy on a sustainable path. Before the crisis, the World Bank estimated that urban poverty in Argentina stood at 35.5%, and child poverty at 52.3%. The UN now regards the impact of the shock on the country as among the worst in its region, with the IMF projecting a 5.7% contraction in GDP in 2020.

Creditors are being asked to trim the revenue stream but would still receive reasonable interest rates in the future. Argentina has ratified its willingness to service the restructured debt, precisely because it will become feasible at the new interest rate proposed. Only an economy that grows sustainably can meet its financial commitments over time.

The difference in treatment between capital and interest is designed precisely to alleviate the burden of debt service, while the country fights COVID-19 and works to restore growth. Indeed, the reduction of the average bond coupon offered by Argentina (from the current average of 7% to 2.3%) is reasonable, given the current global interest-rate environment.

At this exceptional moment, Argentina’s proposal also presents an opportunity for the international financial community to show that it can resolve a sovereign-debt crisis in an orderly, efficient, and sustainable manner. The absence of an international legal framework for sovereign-debt restructuring should not deprive indebted countries of the possibility to protect their people and provide for economic recovery during the greatest global crisis in our memory.

We believe a sustainable agreement benefits both sides: a struggling economy with 45 million people and the creditors themselves. Now is the time for private creditors to act in good faith.

A responsible resolution will set a positive precedent, not only for Argentina, but for the international financial system as a whole.

This commentary is co-signed by: Jeffrey D. Sachs, Columbia University; Dani Rodrik, Harvard Kennedy School; Thomas Piketty, School for Advanced Studies in the Social Sciences; Mariana Mazzucato, University College London; Kenneth Rogoff, former IMF chief economist and Harvard University; Brad Setser, Council on Foreign Relations; Ricardo Hausmann, former IADB Chief Economist and Harvard Kennedy School; Carlos Ominami, former Economy Minister, Chile; Yu Yongding, former member of the Monetary Policy Committee, People’s Bank of China; Erik Berglof, former EBRD chief economist and London School of Economics; Nora Lustig, Tulane University; Nelson Barbosa, former Minister of Finance and Planning; Justin Yifu Lin, former World Bank chief economist and Peking University; Partha Dasgupta, University of Cambridge; Kevin P. Gallagher, Boston University; Stephany Griffith-Jones, Columbia University; Stephanie Blankenburg, UNCTAD; Richard Kozul-Wright, UNCTAD; Ricardo French Davis, University of Chile; James K. Galbraith, University of Texas; Jean-Paul Fitoussi, Sciences Po; Amar Bhattacharya, Brookings Institution; Robert Boyer, National Scientific Research Council; Robert Pollin, University of Massachusetts-Amherst; Robert Howse, NYU Law; Giovanni Dosi, Scuola Superiore Sant’Anna; Juan Carlos Moreno Brid, National Autonomous University of Mexico; Josh Bivens, Economic Policy Institute; Arjun Jayadev, Azim Premji University; David Soskice, London School of Economics; Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University; Mauro Gallegati, Università Politecnica Delle Marche; Natalya Naqvi, London School of Economics; Daniela Gabor, UWE Bristol; Marcus Miller, University of Warwick; John E. Roemer, Yale University; William H. Janeway, University of Cambridge; Dean Baker, Center for Economic and Policy Research and University of Utah; Gerald Epstein, University of Massachusetts-Amherst; Anwar Shaikh, New School University; Kaushik Basu, Cornell University; Matias Vernengo, Bucknell University; Philippe Aghion, London School of Economics; Anne Laure Delatte, Centre d’Etudes Prospectives et d’Informations Internationales; Sudhir Anand, London School of Economics; Christoph Trebesch, University of Kiel; John Weeks, University of London; David Vines, University of Oxford; Saskia Sassen, Columbia University; Sandra Polaski, Boston University; Thomas Pogge, Yale University; Rhys Jenkins, University of East Anglia; Jurgen Kaiser, Jubilee Germany; Gary A. Dymski, University of Leeds; Andreas Antoniades, University of Sussex; Raphael Kaplinsky, University of Sussex; Diane Elson, University of Essex; Ernst Stetter, former secretary general, Foundation for European Progressive Studies; Ozlem Onaran, University of Greenwich; Todd Howland, Office of the United Nations High Commissioner for Human Rights; Isabel Ortiz, Columbia University; Carolina Alves, University of Cambridge; Eric LeCompte, Jubilee USA Network; Richard Jolly, University of Sussex; Christoph Trebesch, University of Kiel; Diego Sanchez-Ancochea, University of Oxford; Mark Weisbrot, Center for Economic and Policy Research; Lara Merling, International Trade Union Confederation; Pedro Mendes Loureiro, University of Cambridge; Ilene Grabel, University of Denver; Sabri Öncü, CAFRAL; David Hall, University of Greenwich; Jose Esteban Castro, Newcastle University; Andy McKay, University of Sussex; Stefano Prato, Society for International Development; Rosemary Thorp, University of Oxford; Barry Herman, The New School for Public Engagement; Andrés Arauz, former Minister of Knowledge and Central Bank General Director, Ecuador; Manuel Alcántara, University of Salamanca; Alex Izurieta, UNCTAD; Michael Cichon, UNU Maastricht; Biswajit Dhar, Jawaharlal Nehru University; Jens Martens, Global Policy Forum; Nicolas Pons-Vignon, University of the Witwatersrand; Jean Saldanha, European Network on Debt and Development (Eurodad); Leonidas Vatikiotis, Debtfree Project; Valpy FitzGerald, University of Oxford; Giovanni Andrea Cornia, University of Florence; Matthias Thiemann, Sciences Po; Yılmaz Akyüz, former chief economist, South Centre, Geneva; Stephan Schulmeister, University of Vienna; Eduardo Strachman, São Paulo State University; Peter Dorman, Evergreen State College; C.P. Chandrasekhar, Jawaharlal Nehru University; Leopoldo Rodriguez, Portland State University; Chris Tilly, University of California Los Angeles; Tracy Mott, University of Denver; Jeffrey Madrick, Schwartz Rediscovering Government Initiative; Günseli Berik, University of Utah; Joseph Ricciardi, Babson College; Lorenzo Pellegrini, Erasmus University Rotterdam; Erinc Yeldan, Bilkent University; Sunil Ashra, Management Development Institute; Mustafa Özer, Anadolu University, Turkey; Rolph van der Hoeven, Erasmus University Rotterdam; Al Campbell, University of Utah; Antonella Palumbo, Università Roma Tre; Arthur MacEwan, University of Massachusetts Boston; Neva Goodwin, Tufts University; Korkut Boratav, Turkish Social Science Association; Michael Ash, University of Massachusetts-Amherst; Alicia Puyana, Facultad Latinoamericana de Ciencias Sociales, Mexico; John Willoughby, American University; Marco Palacios, El Colegio de Mexico; Reza Mazhari, Gonbad Gavous University, Iran; Ann Markusen, University of Minnesota; Renee Prendergast, Queens University; Michael Moore, University of Warwick; Carlos A. Carrasco, Universidad de Monterrey, Mexico; Robert Lynch, Washington College; John Schmitt, Economic Policy Institute; Venkatesh Athreya, Bharathidasan University; Jeff Faux, Economic Policy Institute; Kunibert Raffer, University of Vienna; Jenik Radon, Columbia University; Maria Joao Rodrigues, Foundation for European Progressive Studies; Stephanie Seguino, University of Vermont; Gustavo Indart, University of Toronto; Cyrus Bina, University of Minnesota; Alberto Minujin, The New School; Philip Alston, NYU; Sudhir Anand, London School of Economics; José Gabriel Palma, Cambridge University; Michael A. Cohen, The New School; Jeff Powell, University of Greenwich; Christopher Sims, Nobel laureate in economics and Princeton University, and Rob Johnson, President, INET.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is the author, most recently, of People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Edmund S. Phelps, the 2006 Nobel laureate in economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Mass Flourishing and Dynamism.

Carmen M. Reinhart is Professor of the International Financial System at Harvard University's John F. Kennedy School of Government.

Meet the New Trade War. It’s Not the Same as the Old Trade War.

With U.S.-China trade deal goals increasingly out of reach, another round of trade conflict looks near. But things could play out quite differently this time.

By Nathaniel Taplin

President Trump on Wednesday said he was ‘watching closely’ to see if China was living up to trade-deal commitments. / Photo: Doug Mills/Zuma Press .

Investors in Asia woke up Thursday to an old, familiar and very unwelcome sound: President Trump saber-rattling on trade.

The president on Wednesday said that he was “watching closely” to see if China was living up to trade-deal commitments to purchase large quantities of American goods, and could know one way or another within weeks. That was followed Thursday by Chinese trade data showing a surge of exports in April and falling imports.

In yuan terms, imports from the U.S. were down 3% in the first four months of the year compared with the same period last year, according to China’s customs administration, not exactly what President Trump wants to see.

The stage seems set for a renewed flare-up in trade tensions. But the drama could play out differently this time.

The new aggressive rhetoric from the Trump administration is part of a broader push to paint China as the villain ahead of the U.S. election. But it also represents a tacit admission that current trade policy has failed. The trade war of 2018 and 2019 did damage China, but not enough to elicit meaningful changes to its mercantilist industrial policy.

One reason was that China’s currency fell sharply. But another, arguably even more important reason is that trying to pressure the world’s largest trading power without buy-in from allies is a losing game.

China’s exports to the U.S. fell by close to $60 billion in 2019 according to Chinese data, but exports to everywhere else rose by about $70 billion as importers elsewhere took advantage of a glut of cheap Chinese goods.

Overall Chinese exports still eked out a 0.5% gain. The phase one trade deal presents a similar problem: China can try to massively increase purchases of U.S. goods, but that risks pushing up prices and damaging demand for American wares elsewhere. Now the coronavirus has made executing the already deeply flawed trade deal nearly impossible.

As a result, it’s no surprise to see the Trump administration toying with a more multilateral approach. Secretary of State Mike Pompeo last week hinted at a broad attempt to restructure supply chains with the help of friendly nations including Japan, Australia, India, South Korea and Vietnam.

Reuters reports that the U.S. is pushing for a “Global Prosperity Network” of trusted partners including companies and civil society. U.S. allies like France and Australia are expressing deep reservations both over China’s handling of the coronavirus outbreak and excessive dependence on China-centric supply chains.

The big winners from all this look like other Asian and Pacific nations who could find their bargaining power with both China and the U.S. enhanced. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership—the successor agreement to the now-defunct Trans-Pacific Partnership—could take on greater importance and expand membership.

Strengthening supply chains within Asia but outside of China is one obvious way to reduce the risks of overdependence on China without overtly antagonizing it.

China’s manufacturing prowess and huge domestic market mean most businesses aren’t going anywhere: but the logic of supply chain diversification is looking more and more inexorable.

More tariffs may or may not be imminent, but the U.S. and others seem determined that the precrisis supply chain system can’t go on.