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The impact and implication of the COVID-19 on the trade relationship

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TRANSNATIONAL CORPORATIONS REVIEW
https://doi.org/10.1080/19186444.2021.1972700

ARTICLE

The impact and implication of the COVID-19 on the trade relationship

between China and the United States: the political economy perspectives
N. S. Cooraya and Thangavel Palanivelb
a
International University of Japan, Niigata, Japan; bGlobal Policy Network Bureau for Policy and Programme Support United Nations
Development Programme, New York, NY, USA

ABSTRACT ARTICLE HISTORY

The trade dispute between China and the US is not a recent phenomenon. The US administra- Received 11 September 2020
tion argues that increased tariffs and fairer trade, investment, and technology relationships are Revised 16 August 2021
necessary to reduce large and rising trade deficits with China and protect national security and Accepted 19 August 2021
the intellectual property of the US businesses. Recently, however, the COVID-19 Pandemic is
KEYWORDS
causing a massive impact on trade relations between the two economies. We believe that any COVID-19; America; China;
analysis should go beyond mere economic reasoning and traditional statistics to assess the full trade war; international
implications of the COVID-19 on fighting for the order. It is an undeniable fact that China has political economy
encroached on the political, trade, and economic hegemony that the US has marked for deca-
des. The rise of China has been recognised as the most impactful phenomenon in the inter-
national political, economic, and trade relations in the new millennium.

1. Introduction
The trade dispute between China and the United States of America is not a recent phenomenon ( Iqbal, 2020; I.
Moosa & Ma, 2013; Wang & Ge, 2020; Yadav & Iqbal, 2021 ). The trade dispute emerged mainly due to the high
and rising trade deficit of the United States (US) against China. For example, the US goods trade balance with
China in 2001 was a mere $83.0 billion, and it boosted to $419.2 billion in 2018 – a rise of $336 billion. The mas-
sive gap has become one of the most worrying concerns for policymakers and experts in the US (Cooper, 2008;
Corden, 2007, 2009; Feldstein, 2008; Sun, 2020; Vlados, 2020). The Trump administration argues that increased tar-
iffs and fairer trade, investment, and technology relationships are necessary to reduce such large and rising trade
deficits with China and protect national security and the intellectual property of US businesses (Fatma & Bharti,
2019; Sukar & Ahmed, 2019).
The COVID-19 Pandemic is causing a massive impact on trade relationships between the two largest econo-
mies. It also brought the two countries and the rest of the world into massive contractions and effects on domes-
tic workers worldwide1. The pandemic has sparked a war of words. It has generated harsh bitterness in China
and the US relations partly due to substantial suffering of the US from the COVID-19 outbreak that originated in
China and partly due to the political convenience of the Trump Administration to blame China in an elec-
tion year.
In this background, it would be interesting to examine the impact of the COVID-19 on the trade bond
between the US and China. At the same time, it must be recognised that the COVID-19 pandemic remains
dynamic and evolving, and it is not clear how long it will take countries to return to normal activity levels. This
implies that it is still premature to evaluate the influence of the COVID-19 pandemic on the trade relations
between the two countries based on any solid statistical evidence. High-frequency trade and investment data
provide some indicators; however, it is hard to assess the full impact as the virus is still spreading, But all avail-
able data indicate that the COVID-19 pandemic signifies an unparalleled disturbance to the world trade, as the
global consumption and production have decreased across the world (Goulard, 2020). The paper thus makes a
modest attempt to assess the impact of these twin shocks, namely, the recent trade war and COVID-19, on the

CONTACT N. S. Cooray [email protected] International University of Japan, Niigata, Japan

ß 2021 Denfar Transnational Development INC.
2 N. S. COORAY AND T. PALANIVEL

trade relationship between China and the US and their implications on the global supply and value chains and
economic recovery.
However, it is an undeniable fact that China has encroached on the political, trade, and economic hegemony
that the United States has marked for decades(Yu, Du, & Dang, 2020). The rise of China has been recognised as
the most impactful phenomenon in the international political, economic, and trade relations in the new millen-
nium (Dittmer, 2008; Medeiros & Fravel, 2003; Moore, 2008; Yildiz, 2020). Since the COVID-19 pandemic shatters
the towers of the whole international system, its impact on the China-US relationship should be viewed through
the distribution of power capabilities of these two confronted powers. China’s advent and the behaviour in the
international multilateral economic, trade, and finance regimes, enthusiasm for establishing multilateral develop-
ment banks prove its vested interest to grasp the hegemonic status (Wu & Lansdowne, 2008). As Allison (2017)
pointed out, this confrontation between the existing hegemon and the rising power could lead even to a military
clash between two powers (Thucydides Trap). However, the dynamics that the pandemic has created cause a dif-
ferent behaviour of the two nations. Especially in a context of a global crisis, the responsibilities and power inter-
ests of the two leading nations in the international system invite us to look into the analysis of Charles
Kindleberger on global crisis management. Kindleberger, a key architect of the ‘Marshal Plan,’ analysed the rela-
tionship at the power transition between the US and Britain after World War I. He described the crisis of the
1930s as a result of the weaker reaction of the US as the emerging power and the inability of Britain as the out-
going power in global crisis management (Nye, 2017). As Nye,(2017) mentioned, the US should avoid both
Thucydides Trap and Kindleberger Trap to maintain a sophisticated trade, economic and political relationship
with China.
The paper is organised as follows. After the introduction, Section two briefly reviews the China and US trade
relations, while Section three deals with assessing the impact of COVID-19 on trade relations. Section four dis-
cusses the consequence of COVID-19. Section 5 examines the long-term courses of the US trade deficit, and
Section six provides the conclusion.

2. China-US trade relations: an overview

In the late 1970s, China liberalised its trade policies together with many other reforms. Since then, the trade flows
between the two countries have expanded significantly – it increased from $4 billion in 1980 to $737 billion in
2018. Until early 2019, China was the primary trade partner of the United States, and presently, it is the third-larg-
est trading partner after Canada and Mexico. The US goods trade deficit with China was $419.2 billion in 2018,
while the services trade surplus with China was $40.5 billion in 2018 Sun (2020). In 2019, the deficit declined to
$345.6 billion (17.6%). China’s US goods trade deficit has increased yearly by about 19 billion, or 22%, on average
since China entered WTO in 2001. From 2001 to 2018, US service exports to China expanded from US$5.41 billion
to the US $58.9 billion. The US service trade surplus with China rose from the US $1.88 billion to US $40.5 billion
during the same period. The overall trade deficit has grown from 17% in the early 1990s to 46% in recent years.
The US has distinctive competitive advantages in tourism, education, financial services, and patent rights transfer.
For the US policymakers and international experts, such a broad and widening trade deficit has been an issue
of apprehension (Sun, 2020). Some argue it as an indicator of Chinese unjust trade practices and production proc-
esses, which the government greatly influences. In contrast, some others have pointed out that the trade imbal-
ance is widening due to international comparative advantages of the Chinese and the US economies and
consumer preference, and deep underlying structural factors such as the dollar being the global reserve currency,
macroeconomic imbalances (the excess of national spending over domestic savings) and rising national debt
(Cline, 2009; Corden, 2007; Feldstein, 2008). This dispute is not seemingly mere a trade conflict. Still, it has clear
political implications that derive from the long-term power interest of two competing nations to reach the dom-
inant capacity of the international system. According to Gilpin (1981), politics among the nations is none other
than a never-ending struggle for power and wealth between the states in a state of anarchy. Organski’s power
transition theory observes two major characteristics of transiting the power between nations. First, he concluded
that the roots of the power of a country laid in its domestic development, particularly the strength that it gained
from industrialisation. The second is the argument that the hegemon has vested power to shape the international
system (Organski, 1968). As China achieved industrialisation later than the US, its development is more rapid than
the US. When China’s trade and economic power grow, its military capacity is also increasing. When it realises
 TRANSNATIONAL CORPORATIONS REVIEW 3

that the existing hegemon makes the international trade and economic norms, settings, and institutions, it
entrenches the hegemon’s hegemony. Kim (2019, p. 31) argues that the fear of the United States about losing
the hegemonic capabilities and China’s rapid growth as a rising power that can challenge the US hegemony is
caused a US-launched trade war with China.
China has considerably relaxed its trade and investment policies during the last four decades. In recent years,
though, US policy-makers have continuously expressed their concern about large and widening trade deficits. They are
also concerned about the inadequate safeguard of intellectual property rights in China, involuntary transfer of technol-
ogy arriving from foreign firms operating, the substantial attachment of the Chinese government in its economic activ-
ities through subsidising state-owned enterprises, and the cyber intrusions into the US business networks. Such cyber
intrusions include classified business information such as trade secrets, technical data, and sensitive internal communi-
cations. As China has adhered to the open economy and market with its unique characteristics, this will be a struggle
between the US-led market capitalism and China-led state capitalism.
Since President Trump’s political campaign in 2016 to ‘Make America Great Again,’ he has frequently expressed
his dislike for the US economic relationships with many countries. The President promised to establish a new
equilibrium in the US relationship with all major countries for reasons such as bringing manufacturing jobs back
from other nations where they have been outsourced (Sukar & Ahmed, 2019). He has repeatedly pointed out the
growing US trade deficit with China, stealing intellectual property, and the involuntary acquiring of technology to
China. The US wants to eliminate ‘unfair’ Chinese trade practices and renegotiate the US-China economic relation-
ship. After becoming the President, in this context, he adopted a three-pronged strategy: the trade war, techno-
logical blockade, and ideological attacks to address these issues, starting with the imposition of a series of tariffs
on Chinese imports of everything from steel to solar panels and washing machines. The Trump administration
has made many changes in the US foreign policy by shifting its focus from multilateral to bilateral. Many coun-
tries have been threatened by President Trump’s aggressive trade policy, while his primary focus has been
on China.
China, however, argues that it does not adopt any unfair trade practices with the United States. From their
perspective, the US-China trade disparity is an outcome of international comparative advantage (competitiveness),
automation, growing global supply or value chains, and fiscal, monetary, and exchange rate policies (Corden,
2009). Chinese also argue that the US trade deficit is due to an imbalance in its domestic savings and investment.
Its fiscal and monetary decisions are responsible for widening America’s overall trade deficit, including China
(Cline, 2009).
Nevertheless, the US went ahead and imposed a series of tariffs estimated at $436 billion worth of Chinese
imports with duties ranging from 10 to 25 percent during 2018-19. The stated objectives of these increased tariffs
are to (1) bring down bilateral trade deficits; (2) bring back manufacturing sector employments opportunities to
the US; (3) make tariffs more reciprocal; and (4) address Chinese policies with negative implications for inter-
national trade such as inadequate IP protection, subsidizations of state-owned enterprises, and involuntary tech-
nology transfer. From the US perspective, progress on these matters will necessitate China to conform with its
World Trade Organisation (WTO) obligations and push China for new trade guidelines not covered by its WTO
commitments (Madi, 2020). These new rules may include state-owned enterprises (SOEs), state subsidisation, and
digital professions.
China has disputed these unilateral and protectionist policies with all past trade wars, arguing that the US
ignores differences between countries in different development stages. China retaliated and imposed 10 to 25%
tariffs on an estimated $160 billion worth of American imports. However, it may be noted that China’s capacity
to levy retaliatory tariffs is limited because China exports $558 billion worth of goods to the United States but
imports only $179 billion from it. Both countries have gradually levied tariffs and have similarly initiated specific
quantitative measures to protect their economies and promote macro stability.
Due to this tit-for-tat policy, average bilateral tariffs have increased from 2.6 to 17.5% on Chinese imports,
while the tariffs on US imports increased from 6.2 to 16.4% between 2018 and 2019. In the last two years, the
trade dispute between these two largest economies has affected investment decisions and impacted supply
chains globally. The trade has led to a substantial drop in trade flows between the US and China in 2019 and
2020. It is accompanied by a trade diversion to imports from other countries and changes in the global value
chain network. The US-China economic tension has moved to a critical stage in 2019.
4 N. S. COORAY AND T. PALANIVEL

Figure 1. How the US-China trade war escalated. URL. http://www.ftchinese.com/interactive/14488?full=y

Fortunately, the trade tensions between the world’s two largest economies somewhat declined in December
2019, when the two countries came to an arrangement commonly labelled as a ‘Phase One’ deal. On January 15,
2020, Chinese Vice Premier Liu He and President Trump authorised the ‘Phase One’ pact. In the agreement, China
promised to surging imports of US goods and services by at least $200 billion during 2020 and 2021, over a
 TRANSNATIONAL CORPORATIONS REVIEW 5

baseline of $186 billion of imports in 2017. Pledges included $78 billion in extra manufacturing imports, $54 bil-
lion in energy imports, $32 billion more in food imports, and $38 billion in imports of services. In addition to
increased imports, China has also promised to open market access for US-based financial and insurance compa-
nies. China has also agreed to strengthen its intellectual property rights legislation and issue new currency guide-
lines to address the US concerns about its currency management. China also agreed to cancel retaliatory tariffs
that it had threatened to impose from mid-December 2019. In return, the US promised to remove the additional
import duties it had set in September 2019 on $120 billion of Chinese imports from 15 to 7.5%. To suspend tar-
iffs on an extra $160 billion of Chinese imports threatened to impose from 15 December 2019. Just a few days
before signing the Phase 1 deal, the US reversed its description of China as ‘a currency manipulator’ as part of its
Phase 1 deal promises.
Both parties also agreed to create a Bilateral Evaluation and Dispute Resolution Arrangement and an appeal
process through which any emerging issues can be sorted out. It should be noted that the phase one deal only
reduced some of the tariffs each side had placed on each other during 2018 and 2019. For example, the US left
in place earlier duties placed on $250 billion of Chinese goods. Consequently, the Phase One Agreement expects
only a minor reduction of average bilateral taxes from 17% to 16%. The leaders declared that phase 1 (consider-
ing the consistency) The first step in reaching a more comprehensive ‘Phase Two’ final deal clarifies that the two
countries would continue negotiating to determine their remaining differences. See Figure 1 for details on how
the trade war escalated.
Even though the Phase One agreement stabilised trade tensions, bilateral tensions continued to simmer con-
cerning non-trade issues such as the potential spying and security threat from the Chinese phone-maker Huawei
(Fatma & Bharti, 2019; Sukar & Ahmed, 2019; Yong 2020) observes that the clash between the US and China has
escalated from a ‘trade and tariff war’ to a ‘technology war’ after March 2018. China has triumphed to reach a
high-level hard power from the beginning of the open-up policies. When it reached the material power, it
attempted to get the soft power to manipulate the barriers on its path to the globe. It focuses on the sharp
power to complete the triumph to be globalised with a significant capacity as the challenger to the US. The con-
flict derived from Huawei is a signifier of this development.
Moreover, the pressure continues because of China’s repressive actions of Uighurs in Xinjiang, territorial dis-
putes & military disagreement in the South China Sea, and Hong Kong and Taiwan’s status. The US-China trade
war has a political dimension Yu (2019). All these imply that the crux of the US-China relationship is not merely
about trade alone. Instead, it is about ‘Technopolitical spheres of influence’ in the world. Chinese recent strategic
initiatives such as the ‘Made in China 2025’, ‘Belt and Road Initiative (BRI),’ and ‘Asian Infrastructure Investment
Bank (AIIB)’ have reinforced the Chinese ‘Technopolitical spheres of influence’ in the world. China is the most
influential power in deciding the policies of the AIIB since it is the most significant financial contributor. Its voting
power is crucial according to such financial contribution.
The voting power of China within the AIIB indicates 26.6% as a member. India, as the second-largest voter,
has acquired only 7.6% of the voting capacity. Let’s compare the above ability of China to shape the decisions in
AIIB with the voting power of the US in Bretton Woods multilateral development banks. Both powers are the
same in the context of two different most influential financial regimes in the contemporary world. The US has
acquired 15.8% of voting power within the decision-making body in the World Bank Group. The significant differ-
ence between the two powers is the advantage for the US in the IBRD that comes from the support of its allies.
China is still behind in terms of the overwhelming support from the other countries that are members of AIIB.
However, China’s massive voting power can form new norms crucial in financial management and economic
development within the Asia-Pacific region. Signs for China’s readiness to embrace the power transition are pro-
ven by the AIIB, BRI, and Beijing’s plan for ‘Made in China 2025’ (Kim, 2019, p. 33). These developments under-
score the difficulty of the U.S.-China relationship. In these circumstances, even if the US and China succeed in
resolving trade issues, concluding a comprehensive second phase trade agreement between the two countries
looks difficult.

3. Assessing the impact of the trade war and COVID-19 on China and US trade relations
Impact assessment of the trade war and the pandemic on the US and China trade relations can be analysed from
both short-run and long-run perspectives. In the short run, the trade war’s impact will be on bilateral trade,
6 N. S. COORAY AND T. PALANIVEL

Table 1. United States trade with China.

2017 2018 2019 2020 2021
Month E I TB E I TB E I TB E I TB E I TB
Jan 10.0 41.3
31.4 9.9 45.7
35.8 7.1 41.4
34.3 7.2 33.2
26.0 12.9 39.1
26.3
Feb 9.7 32.8
23.0 9.7 39.0
29.2 8.1 33.1
25.0 6.8 22.7
15.9 9.4 34.0
24.6
Mar 9.7 34.2
24.4 12.7 38.3
25.6 10.6 31.2
20.6 7.9 19.8
11.9 12.5 40.2
27.7
Apr 9.8 37.4
27.6 10.5 38.2
27.7 7.9 34.6
26.7 8.6 30.9
22.3 11.8 37.6
25.8
May 9.9 41.8
31.9 10.4 43.9
33.5 9.1 39.1
30.0 9.7 36.6
26.9
Jun 9.7 42.3
32.5 10.9 44.5
33.7 9.2 38.9
29.7 9.2 37.5
28.3
Jul 10.0 43.6
33.6 10.2 47.0
36.9 8.7 41.4
32.7 9.1 40.7
31.6
Aug 10.8 45.8
35.0 9.3 47.8
38.5 9.4 41.1
31.7 11.0 40.8
29.8
Sep 10.9 45.4
34.5 9.7 49.9
40.2 8.6 40.1
31.5 11.5 41.2
29.7
Oct 13.0 48.1
35.2 9.2 52.1
42.9 8.9 40.0
31.1 14.8 44.8
30.0
Nov 12.9 48.1
35.2 8.7 46.3
37.7 10.1 36.4
26.3 14.2 44.8
30.6
Dec 13.6 44.4
30.8 9.2 45.8
36.6 8.9 33.6
24.7 14.5 41.8
27.3
Total 130.0 505.2
375.2 120.3 538.5
418.2 106.4 450.8
344.3 124.5 434.7
310.3 46.6 151.0
104.4
All figures are in billions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified. Details may not equal totals due to
rounding. The table reflects only those months for which there was trade. E, I, and TB indicate exports, imports, and trade deficits, respectively.
Source: https://www.census.gov/foreign-trade/balance/c5700.html#2017.

which is likely to affect as the companies seek to replace tariff-affected goods with cheaper imports from other
countries. In the long-term, the impact will be in the form of relocating some of the factories meant for inter-
national trade and supply chain from China to other countries. In the long run, non-Chinese companies could
also seek to source products from new suppliers in other countries. Bilateral trade between the US and China is
also one of the possible losers of the recent pandemic. Even before the coronavirus outburst became a pan-
demic, the bilateral trade relationship between the US and China was unstable. As mentioned earlier, under the
phase one trade deal, China is obligated to import an additional $200 billion in goods and services from the US.
However, COVID-19 severely impacts China’s aptitude to fulfil its promised imports and, thus, toss the US-China
trade relationship back into the fragile situation.
The economic disruption triggered by COVID-19 has severely impacted the implementation of the phase 1
trade agreement between China and the US. Even before the COVID-19 outbreak, China’s promise of importing
an extra $200 billion of US goods and services in 2020 and 2021 would have been a challenging target, as it was
more than double of China’s annual imports from the US (Is it China’s imports or China’s exports). Hence, many
experts viewed the goal as an unrealistic import target unless China makes significant sacrifices in its imports
from other countries. As the COVID-19 reduced consumer demand in the Chinese economy, the target seems to
be impossible. One can witnessed a substantial decline in the volume of bilateral trade in 2019 and and 2020.
The magnitude of this deterioration in 2021 is challenging to foreseeable future. It also concluded that China
reaching the targets of the phase one deal will be impossible. However, the actual value of exports of the US
was $124 billion in 2020. Slowing goods trade has an impact on the business in service trade. Tariffs on goods
trade affect the content of the service of those traded goods in terms of transport, insurance, after-sale services,
distribution and logistics, and marketing and sales services, among others. However, according to the United
States Census Bureau statistics, China’s purchases of US goods during the first four months of 2021 were $46.6
billion, while that of 2020 were $30.5 billion (Table 1).
The US trade balance with China declined in 2019 in six years. But as tables and charts indicate, the US
exports, imports, and bilateral goods trade deficit with China deteriorated in 2021. Before the trade deal was
signed, they were substantially lower than in 2017. Both trade war and the pandemic obstructed Chinese exports
to the US, and succeeding lockdowns worldwide changed trade patterns drastically. Therefore, the bilateral trade
balance fell even further in 2020 compared to the 2019 level. However, the US trade statistics until April 2021
highlighted that both imports and exports have increased while widening the trade deficit ($104.4 billion)
Figure 2.
Despite substantial suffering from the COVID-19, China has not invoked a clause of the Phase One Agreement,
including a force majeure article. But given that many experts currently view the purchase targets highly chal-
lenging, even without a pandemic-related economic decline, China can invoke such a provision in the coming
months and request renegotiation of these purchase commitments. The future of the US-China trade is primarily
dependent on the fulfilment of phase 1 and ongoing negotiations around phase 2, which will deal with data
flows and the role of state-owned enterprises (SOEs). Due to the COVID 19 pandemic and related blame game,
these talks have now stalled. It is doubtful that a phase 2 agreement would be struck before the November
 TRANSNATIONAL CORPORATIONS REVIEW 7

Exports Imports Trade Balance

200

150

100
US $ Billions
50

0
2017 2018 2019 2020 2021
−50

−100

−150
Figure 2. US Exports, Imports and Trade Balance of Goods during2017–2021. Created using the data given in Table 1. Only the
first four months are included in 2021.

election. Therefore, bilateral trade between the US and China will suffer in the short-run and the medium-term
due to the COVID-19 outbreak.
With the victory of Joe Biden, the US bi-lateral and multi-lateral policies towards China seem to be revised to
some extent. Biden administration has not shown interest in adding to the sanctions imposed by the previous
regime on Chinese companies and officials (Brunswick Group, 2021, p. 4). However, the US will not loosen its
effort to recover the hegemony in the global economic and trade realm. The US has not signalled to lift its bar-
rier on Huawei and has claimed that it will continue those sanctions (Jin, Dorius, & Xie, 2021). The most signifi-
cant development and achievement of China’s rise are recently coming with its power over the global
information flow. Baidu, Weibo, and Huawei are only a few examples of China’s strength so far. As sharp power is
becoming a vital component to decide the power of a nation, both the US and China will hang on to their capa-
bilities on global information flow. The new administration has not decided on the changes in tariff structures.
However, it has shown interest in examining the phase 1 trade talks. The Chinese side has already pointed out
the importance of revamping bilateral negotiations on tariffs and sanctions on goods trade and companies (Shi,
Wang, & Ke, 2021).

4. The implications of COVID-19

4.1. Transforming value chains network from global to regional or local
The COVID-19 reshapes the bilateral trade, investment, and technology flows between the world’s two biggest
countries and affects global supply chains. The pandemic has resulted in severe shortages of drugs, masks, and
other things made in China, underlines the mounting anxiety in the US and the rest of the world about their too
much dependence on Chinese supply chains. Hence, the COVID pandemic may rush towards diversifying global
supply chains, partly because of the risks of heavy reliance on China.
The quarantine in some parts of China and resulting production disruption in 2020 has influenced global man-
ufacturing, transportation, shipping, and global supply chains. The break-in of these supply and value chain flows
has affected many companies in Asia and Europe. News media highlighted that even currently, most multi-
national companies experienced some COVID-19-related supply chain disruption, and many companies also indi-
cated they might have a negative impact. This interruption to global supply chains has encouraged many
countries and businesses to reconsider their offshore production and collaboration. The pandemic has educated
countries that need to safeguard domestic production capacity in industries vital to country security. The global
supply and value chain network are not only final products and components but also material input. After the
COVID-19 outbreak, there have been many vocal advocates for a shift towards de-globalisation or localisation of
the production of critical products domestically and ensuring a diversified supply of raw materials
and components.
In the last three decades, global value chains have become a link between trade expansion and development.
Global value chains are an unavoidable feature of international trade, accounting for about 70% of the total
8 N. S. COORAY AND T. PALANIVEL

world trade. The current pandemic pushes countries to adopt protectionist policies, undermining any economic
interests of participating countries and companies in such global supply and value chain networks. This will have
long-term developmental implications for both developed and developing countries. The question of supply
chain rearrangement after COVID-19 is not simply about China but involves other countries, as countries and
multinational companies are keen to avoid laying all the eggs in one basket. Supply chains need to be re-engi-
neered to build strength, even while cutting risks and reducing costs. Given China’s enormous market size for
many multinational companies, any restructuring of the value chain will likely be more like a ‘China þ strategy,’
Companies would relocate some of their production facilities to other countries while retaining some production
capacities in China itself. A regional value chain network will become more critical in this context, especially in
North America, Europe, and Southeast Asia. Given that global value chains often involve transport, some argue
that one country such as China dominating such a global supply network contributes to global warming and
environmental degradation due to extensive international transportation and excess waste from the packaging
of goods.

4.2. Reversing globalisation and decoupling process

In recent decades, the cross-border flow of goods, services, technology, and investment has increased. Similarly,
people and their data and knowledge have been shared widely (Liming, Haibo, & Yafeng, 2020). They have gener-
ated substantial benefits for humanity. However, since the 2008 global financial crisis, many people have pointed
out several negative implications of the globalisation process, ranging from increased vulnerabilities and risks to
rising unemployment and inequality across the world.
Consequently, signs of reversal of globalisation have been emerging in certain areas. While tourism, migration,
and information flows have seen a significant surge, global trade growth has slowed dramatically from its histor-
ical rates. Consequently, according to the world development indicators of the World Bank, the share of trade to
the total output of the global economy has declined from 60.9% in 2008 to 59.5% in 2018. Similarly, cross-border
investment flows are also below the pre-2008 global financial crisis peak. Though tourism, international educa-
tion, and migration flow are rising,2 migrant workers to high-income countries experienced a slight drop - from
112.3 million in 2013 to 111.2 million in 2017.3 One can also notice similar signs of a de-globalisation process in
the policy formulation procedure. Such symptoms include the impasse in the Doha Round of the World Trade
Organisation (WTO) and the Trans-Pacific Partnership (TPP) collapse with the US withdrawal.
In the last decade, through ‘import restrictions,’ ’learning-by-doing,’ ‘technology absorption,’ and ‘technology
adaptation’ policies, China created several technology companies for exactly similar services offered by US com-
panies. For example, by restricting Google, Twitter, WhatsApp, PayPal, and eBay/Amazon in China and adapting
the underlying technology, it created Baidoo, Weibo, WeChat, Taobao, and Alibaba for exactly similar services. To
avoid such technology absorption and adaptation in the 5G, AI, and other new technology areas, recently, the US
started to impose a series of restrictions on the technology exports and transfers to China, undermining its ability
to do global business in those areas. Given the tense political relationship between the US and China due to
COVID-19, in May 2020, the US banned Chinese IT giant Huawei and its suppliers from using
American technology.
The COVID-19 pandemic also brought out a similar decoupling process in non-technology areas. In line with
the comparative advantage theory, the current international trade, investment, labour, and knowledge flows allow
for accelerating economic growth and enhancing human welfare. However, the COVID-19 pandemic has shown
that such a globalisation process also comes with costs. The pandemic will hasten the demise of globalisation
and its transformation. The COVID-19 pandemic has also pushed countries to impose new trade barriers at
breath-taking speed, undermining globalisation. Globalisation has already been in a regressive process, after g
reaching its peak in the mid-2000s - just before the 2008 global financial crisis. The pandemic will undoubtedly
emphasise the dangers of too much dependence on global supply chains, prompting a regionalisation and local-
isation of production.
The global supply or value chain network plays a crucial role in accelerating globalisation through such net-
works; material inputs move across borders to be assembled to make finished goods. By supplying low costs and
high efficiencies for producers, global value chains have benefitted both businesses and consumers. However, the
2008/09 global financial crisis, the 2018/19 US-China trade war, and now COVID-19 all showed the weakness of
 TRANSNATIONAL CORPORATIONS REVIEW 9

such a global supply chain network and globalisation process. The likely result is an acceleration of changes that
have long been in motion towards a new and more limited form of global value chain network and globalisa-
tion process.
Given increased risks and job losses due to globalisation, many countries and territories such as the US, Japan,
and Chinese of Taiwan signalled their strong desire to bring back companies by establishing an innovative regu-
latory framework and providing fiscal incentives. For example, as part of the COVID-19 fiscal stimulus package,
Japanese official announced that they are allocating about ¥220 billion for re-shoring companies (move back
some of the supply chains from China to Japan) and ¥23.5 billion for those looking for relocating manufacturing
process from China to other countries. The COVID-19 pandemic is expected to increase such governments’ sup-
port in the coming years to bring back companies from China as countries across the world faced short of med-
ical and other critical supplies of goods in the last six months.
China has reached the world’s foremost producer and exporter of material inputs, representing about two-
thirds of its exports. When China locked down in February and March 2020, the influence was felt worldwide, par-
ticularly in Japan, South Korea, Thailand, and Vietnam and territories like Taiwan. Many industries faced undersup-
plying of essential components. This encouraged many countries to reconstruct additional safety measures into
their supply chains. The developments relating to the reversal of globalisation and decoupling offer low-cost
countries such as Bangladesh, Cambodia, and Myanmar, would be wise to pursue them.
The threat to global economic recovery: There can be little doubt that persisting tense economic and polit-
ical relationships between the two largest economies will undermine growth potential in China, the US, and the
rest of the world. China is the world’s largest manufacturer accounting for about 29% of global manufacturing
value-added. According to a recent UNCTAD (2020) report, it also accounts for about 20% of global trade in man-
ufacturing intermediate products, thus becoming an important provider of intermediate goods.4 With a popula-
tion of 1.4 billion and GNI per capita of more than $US 10,000, China has become the most significant consumer
of many manufactured products. All these make China a principal producer, trader, and consumer in the world
economy. Similarly, the US is the world’s frontrunner in new technologies and the largest consumer and exporter
of high-tech products. Given this situation, the ongoing trade war will affect their economies and sluggish the
global economic revival in the post-COVID-19 era.
Covid-19 already inflicted unprecedented damage on global businesses and economies. Even before the pan-
demic, economists and experts warned that a worsening relationship between the two countries could under-
mine international trade, finance, technology, and economic development through persistent uncertainty.
Continued economic and political tension not only would weaken the world’s recovery from Covid-19 but would
also risk critical technological innovations and international financial stability. While China seems to have passed
the worst of the pandemic, the US and the rest of the world are still suffering without showing any sign
of recovery.
For the first time since 2014, due to COVID-19, the real GDP of the US dropped by 5.0% in the first quarter of
2020 and 32.9% in the second quarter of 2020. According to the International Monetary Fund, the global econ-
omy is projected to diminish by 3% in 2020, its most significant economic slump since the Great Depression.
Similarly, recent WTO data show that the global volume of merchandise trade declined by 3% in the first quarter
and reduced further by 18.5% in the second quarter of 20205. Given that the COVID-19 pandemic is spreading
globally, the recovery of global trade and the economy will take many years.
In February 2021, President Biden’s government has authorised an executive to review the global supply
chains of computer chips, electric vehicle batteries, pharmaceuticals, and minerals in electronics. Those were
highly affected by the adverse effect of the pandemic. Further, the new administration concludes the review on
the industries included in the Phase One agreement (Hsu, 2021). This review will give a snapshot to the US for
revamping the steps towards the bilateral trade relations with China. However, the recovery of the US economy
and trade is not an easy target to be achieved given the collapse due to the flames of the pandemic and civic
uprising that was taken place in the latter part of the Trump regime. Biden is closely observing China’s
‘technology authoritarianism’ and will policing the economic strategy accordingly. Despite the collapse of China’s
economy due to the pandemic, the recovery has been reported tremendously in both economy and trade. This
paves the way for China to entrench the global power that the US currently holds comprehensively in the inter-
national system. Suppose China decides to provide global public goods that the existing hegemon, the Us, is
weaker to supply in the wake of the pandemic. In that case, the world will not go into a ‘Kindleberger Trap,’ and
10 N. S. COORAY AND T. PALANIVEL

China’s journey towards hegemony will be strengthened. In such a circumstance, the US will have to decide the
nature of its trade and economic relations with China in a critical manner. As history is evident, the US will be
more offensive than its present stance to reinstate its legacy on global multilateral trade, economic and finan-
cial stages.
The political confrontation was reflected in the recent abrupt tit-for-tat escalation of the US decision to shut
down the Chinese consulate in Houston, followed by China’s decision to close the US consulate in Chengdu.
Neither side is interested in bridging fundamental differences between them, and uncertainty has been added,
not removed, due to COVID-19. This leaves the two economies for more decoupling, which will produce add-
itional costs for both countries and the world. Even though the short-term impact of the COVID-19 on inter-
national trade is critical, it may be manageable. Therefore, one could expect that once the pandemic fades, the
global business may reach its typical pattern. However, the pandemic’s potential consequence may be more
intense than predicted initially, paving the way for structural transformations in the process of economic
globalisation.

4.3. Pandemic politics in the wake of changing the hegemonic capabilities

Virus politics’ and ‘vaccine diplomacy’ are new terms derived from the dynamics of the COVID-19 pandemic.
COVID19 pandemic altered the destiny of China in the arena of the international power map. Initially, China
received blames for the mismanagement of the pandemic situation. However, at his visit to China in January
2020, the Director-General of the World Health Organisation (WHO) advocated for China’s effort to manage the
pandemic and its contribution to medicinal management and medical research to cure and prevent the COVID-
19 effects. This caused the US’s suspension of subscribing to the WHO. Trump said that the WHO is becoming
China-centric. This paved the way for China to entrench world health management, one of the most critical sec-
tions of the current global governance. On the next stage, China started its ‘vaccine diplomacy’ to grasp its influ-
ence on the developing nations that need assistance for healthcare. China began its vaccine diplomacy from the
African continent and then expanded it to South America and Asia. China needs the support and closer bond of
these nations to establish its footprints in international multilateral settings.
China-made COVID-19 vaccines have been exported to more than 80 countries by April 2021. China uses its
vaccine diplomacy to cover the sphere of influence 53 countries mentioned above, 80 have received vaccines for
free. Pakistan and the Philippines are also among the free receivers of the China-made vaccine. Pakistan and the
Philippines are more strategic partners than the developing nations in Chinese eyes Zhao (2021). This new diplo-
macy recalls ‘China’s Marshal Plan’ that the notion coined by John Mearsheimer in his offensive realism
(Mearsheimer, 2006).

5. The causes of trade war go beyond COVID-19

The impact of the COVID-19 epidemic on the US-China trade is a recent phenomenon; however, there are some
long-run structural factors and political reasons explaining to resolve the trade conflict (Corden, 2007, 2009;
Feldstein, 2008; Moosa, 2020; Zeng & Sparks, 2020). The structural factors can be explained using the following
Keynesian income identity.
Y ¼ C þ I þ G þ X – M, using this identity for an open economy one can derive the current account balance as
M - X ¼ (I – S) – (T – G), where, Y ¼ Income (or GDP); C ¼ Private consumption; S ¼ Savings; I ¼ Investment;
G ¼ Government expenses; X ¼ Exports, M ¼ Imports; and T ¼ Tax. The difference between M and X is the trade
account deficit, (T – G) is the budget deficit, while (S – I) shows the saving-investment balance. This Keynesian
identity can be applied to any amount of GDP (Moosa, 2020). Any increase in the U.S. current or trade account
shortfall implies rising additional expenditure over output and investment expenditure over savings. The deterior-
ation of the US trade balance commenced due to the weakening of US international competitiveness in manufac-
turing. The trade surplus of China with the US since 1985 was created largely by many structural factors.
Therefore, reducing the US trade deficit involves long-term effort in reducing the twin deficit-budget deficit and
saving-investment gap (Cline, 2009).
Some countries, such as China, Japan, Germany, and others, have high domestic savings and enjoy a trade sur-
plus. The savings in every country depends on GDP, and when world GDP share changes, the savings also
 TRANSNATIONAL CORPORATIONS REVIEW 11

change. The US has twin deficits, a domestic investment-saving gap, and a noticeable trade gap. Therefore, it is
natural for those high-saving countries to invest in the US, in line with the US economy’s share in the world
economy. The states with high savings and with no home bias investment would invest those savings in the US.
Chinese savings have been increasing due to the unavailability of social security, and it reached about 50% of
GDP. At the same time, investment has gone up to 45%, generating a surplus of about 5% in the current
account. This calculation suggests expecting more massive US trade deficits as home bias remains to decay.
Allison (2017) elucidates why Thucydides’s Trap is the best way to comprehend the clash between the two
giant economies. Thucydides Trap refers to 2500 years ago when the Peloponnesian War happened and was writ-
ten about a Greek named Thucydides. The basic idea of Thucydides is that rising power, i.e., China as the
second-largest economy, attempts to influence the rest of the world. In contrast, the dominant force, i.e., the US
as the number one economy in the world, counteracts and tries to prevent it from happening. Recently, particu-
larly after COVID-19, the US is creating an ally with European countries and isolating China. In achieving hege-
monic power in the Indo-Pacific, there is an excellent game with three plans: Maritime Silk Road of China, Act
East Policy of India, and US Rebalancing Asia. China is seeking control over strategically and economically essen-
tial seas using the Regional Comprehensive Economic Partnership (RCEP), the Asian Infrastructure Investment
Bank (AIIB), and the Belt and Road Initiative (BRI). China is also pursuing what has been generally characterised as
a string of pearls tactic of nurturing India’s neighbours as friendly countries to safeguard its economic, peace,
and security concerns and control rising India.
Cooper (2008) argues that some demographic factors include ageing, fertility, life for the deficits seems the
sentence is not completed. The population in most developed countries like Germany and Japan, as well as in
China, is not reproducing. One can see a low fertility rate of women in the child-bearing period; for example, 1.4
in Germany and Japan and 1.0 in Hong Kong and Singapore. It should be noted that 2.1 kids per woman are
essential to preserving a similar magnitude of a country’s population in the long run. The young adults’ ages
15–29 have been falling, and it will decrease between 2005 and 2025 by 19% in China, 21% in Japan, 16% in
Germany, and 24% in some well-to-do countries in Asia.
Low fertility suggests a lesser need for schools and housing facilities. The labour shortage in those countries,
caused by demographic transformation, will encourage capital-labour substitution and decrease domestic returns
to capital. This will enhance investment abroad. However, the US outlook is exceptionally different. The US popu-
lation is amplified by above one million immigrant workers a year. They are primarily fresh and will join the
labour force. Moreover, young adults are projected to rise by 7 percent from 2005 to 2025.
China appears as the principal exporter of high-tech goods. If one carefully looks at the structure, China con-
tributes only to a very low-value addition of the final stage of the ICT supply chains. It is argued that the actual
contribution to a majority of high-tech exports is not technology but Chinese labour (Xing, 2021).

6. Concluding remarks
The current research attempted to examine the effect of the recent COVID-19 pandemic on the trade relations
between China and the US. The analysis was assisted by the paradigms of hegemonic stability theory and some
notions of the power transition theories. The US trade deficit peaked in 1996, and it has decreased since then.
The US-China trade is currently being shaped by various strategic, political, and economic forces, apart from
COVID-19. There are many economic reasons for the US deficit, and therefore she needs to correct those weak-
nesses in the long run with adequate domestic fiscal and monetary policies. Even if trade relations between the
two countries improve, the fighting for hegemonic power will remain for some decades (Allison, 2017;
Gros, 2019).
The researchers found that due to pandemic and related blame games, two-sided trade concerning the US
and China has suffered a lot and will continue the tension with different magnitudes in the long run. Rising ten-
sion between China and the US and the weakening of globalisation have been apparent since the 2008/09 global
financial crisis. But COVID-19 has accelerated these trends. According to the Pew survey in March 2020, nearly
two-thirds of American citizens have unfavourable views concerning China. This is a 20% increase since President
Trump took office. China seems to have 17 territorial disputes with its neighbours on land and sea. Capitalising
on this situation, the former US Secretary of State Mike Pompeo once expressed the US official denial of most of
China’s claims in the South China Sea. Currently, the US is allying with its European counterpart, Japan, and India
12 N. S. COORAY AND T. PALANIVEL

to isolate China. The issues of human rights violation in Xinjiang, Tibet, the political crush in Hong Kong and
Taiwan, China’s offensive behaviour in the South China Sea region, and the attacks on democratic rights in the
Mainland were common concerns to show the ‘unpeaceful, offensive and assertive’ behaviour of China. However,
with China’s attempt to provide global public goods, it will win the support of the most bandwagoning states in
the developing world. This will make China is much more assertive in many multilateral settings, including trade,
economic, security, and environmental regimes.
The COVID-19 related disruption has negatively affected global supply chains and made countries inward-look-
ing. This, in turn, delays the global recovery. The need for self-sufficiency in essential goods such as medical and
food supplies and other critical products is rising. At the same time, today’s world economy is far more inte-
grated than ever before, so the costs of transformation from the global value chain to the regional value chain or
reversal of globalisation or decoupling will be very high.

Notes
1. According to the international labor organization “55 million domestic workers significantly impacted by COVID-19”.
https://www.ilo.org/wcmsp5/groups/public/–-ed_protect/–-protrav/–-travail/documents/publication/wcms_747961.pdf.
Accessed on 25 June 2021.
2. Benzinga.com (2019), Global trade flows decline even as capital and people flows stay resilient, Says DHL Report, 6
December 2019.
3. International Organization for Migration (2020), World Migration Report 2020.
4. https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf. Accessed on 01 August 2020.
5. https://www.wto.org/english/news_e/pres20_e/pr858_e.htm

Acknowledgement
The authors acknowledge the financial support received for this research from the International University of Japan and thank
Sumudu Walakuluge for his excellent research assistance. The constructive comments of annynimous reviewers are greatfully
acknowledged.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Notes on contributors
Dr. N. S. Cooray is a Professor at the International University of Japan, Niigata, Japan.
Dr. Thangavel Palanivel is a Senior Advisor, Global Policy Network Bureau for Policy and Programme Support United Nations
Development Programme, New York, NY, United States of America.

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