Two slender U.S.-China threads

After years of escalating tensions, the U.S.-China relationship hangs by a few slender threads. By far the most important of these is the "phase one" trade deal the two countries signed in January. Another is the telephone line between President Donald Trump and President Xi Jinping. The deal, a truce in the trade war started by Trump, was always something of an artifice: it papered over deeper rifts between the world's largest economies, including U.S. complaints about predatory Chinese industrial policies and state-sponsored theft of intellectual property. The main goal of the pact, to boost Chinese imports of U.S. goods by $200 billion over two years, was never realistic. Now Covid-19 has made it virtually impossible.   Still, at the very least the deal showed it was possible for the two countries to find some common ground. The question now is will the accord unravel.   A container ship arrives at the Port of Los Angeles on April 1. Photographer: Bloomberg This week in the New Economy   Trade collapse signals India's worsening economy. India to spend $20 billion to lift income for farmers and fishermen. Private creditors form a group to negotiate Africa debt relief. Nigerian forces kill dozens of militants in a series of offensives. Singapore to allow more construction laborers to start work.   Listening to Trump, the partial trade-deal's prospects for survival don't look good. "We could cut off the whole relationship," he proclaimed Thursday. "Now, if you did, what would happen? You'd save $500 billion."   As for Trump's phone calls with Xi (who has rarely reciprocated the U.S. president's often effusive praise of him), he said "I don't want to speak to him." This is incendiary rhetoric, even for Trump. "Never since the normalization of relations in 1979 have China-U.S. relations been as dangerous and as confrontational as today," Gao Zhikai, a onetime interpreter for late paramount leader Deng Xiaoping, told Bloomberg News. Granted, when it comes to China, Trump is prone to bombastic absurdity: Last year, he "hereby" ordered all U.S. companies to exit the country. But heading into the November election, with America's economy devastated and his aggressive mishandling of the pandemic increasingly blamed for tens of thousands of unnecessary deaths, the Republican may just calculate he has more to gain by resuming his trade war against China.    Nurses recite an oath during a ceremony marking International Nurses Day, at Tongji Hospital in Wuhan, China, on May 12. Photographer: STR/AFP Already, a U.S. drive for economic "decoupling" from China has cut through exchanges of technology and talent. That will set back—though not derail—China's high-tech ambitions. Financial flows are next, although it's easy to exaggerate the threat posed to China in that arena, too. Few take seriously calls by hawkish U.S. politicians to cancel U.S. debt to China as punishment for Beijing's early opacity about its coronavirus outbreak. That would be the surest way to blow up the dollar. Meanwhile, the decision this week by a federal retirement fund to defer its investments in Chinese equities, while symbolically significant, won't have much practical impact; the sums involved are relatively tiny. Even Trump has acknowledged that kicking Chinese equities off U.S. bourses would simply encourage them to list elsewhere. But trade is a different matter: This is where China is immediately vulnerable. Although the Chinese economy is increasingly driven by consumer spending and services, trade is still almost 40% of Chinese GDP. And with unemployment surging, Beijing can ill-afford to take another hit to export industries that employ millions of rural workers. What's more, the latest Chinese data show an alarming gap between rising factory production and still-sluggish domestic consumption. Unless demand picks up in the rest of the world, China faces a deflationary glut, putting further pressure on wages and jobs. Of course, a new trade war would also harm the U.S., and risk turning the deepest global recession since World War II into a prolonged depression. But Trump's understanding of trade economics is, to put it politely, idiosyncratic. Where did the $500 billion number he cited on Thursday come from? Out of thin air. It is neither the figure for total U.S.-China trade nor China's trade surplus with the U.S. Perhaps the hard number that will get his attention is the U.S. jobless rate. Goldman Sachs has dramatically upped its projection for the second quarter to a shocking 25%. Even when polls open in November, Goldman calculates that at least 10% of American workers will be out of job (and by then, the number of Americans killed by Covid-19 will almost certainly be deep into six figures). The advisers who've been pleading with Trump to settle with China on trade will surely be telling him that rising prices from new tariffs, on top of mass unemployment, could cost him the White House to former Vice President Joe Biden. They may not be talking by phone, but both Xi and Trump have at least one thing in common: fear of the angry unemployed. That may be what saves the phase-one trade deal, if not their overall relationship. Bloomberg New Economy Conversations On May 19, Andy Browne will be joined by officials from the Bill & Melinda Gates Foundation and Mastercard, founding members of the Covid-19 Therapeutics Accelerator, an initiative designed to speed development and distribution of a vaccine. Browne will speak with Anita Zaidi, the foundation's director of vaccine development and surveillance, and Mike Froman, Mastercard's vice chairman and president, Strategic Growth. Register now to join the conversation, on Tuesday at 10 a.m. EDT. Follow Bloomberg New Economy on Twitter @neweconforum . __________________________________________________________ Like Turning Points?  Subscribe to Bloomberg All Access and get much, much more. You'll receive our unmatched global news coverage and two in-depth daily newsletters, The Bloomberg Open and The Bloomberg Close. Interested in the future of health care? Sign up for Bloomberg's Prognosis . Get the latest news and analysis about the coronavirus pandemic, and the people, science and industries driving the medical economy, delivered to your mailbox weekly. Download the Bloomberg app:  It's available for iOS and Android. 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