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Distrust is contagious: How the coronavirus could upend America’s business relationships to China

March 16, 2020, 10:00 AM UTC

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From the moment it erupted in Wuhan, China, the COVID-19 virus has proved particularly lethal to patients with the prior, chronic illnesses often described as “underlying health conditions.” Now the contagion is having a similarly grim effect on the U.S.-China economic relationship—where accumulated mistrust and resentment have ­created unhealthy conditions of a different kind. 

As the virus shakes the world’s business community, sending global stocks into or close to bear-market territory, it’s easy to forget that many of the first economic warning signs came from U.S. companies with significant China exposure. Apple and Nike reported supply-line disruptions. Ford, General Motors, and Tesla shuttered factories in China and fretted over shortages everywhere else. Starbucks and Walmart closed Chinese stores, while Disney suspended operations at parks in Shanghai and Hong Kong. 

At minimum, the chaos has prompted U.S. investors and executives to rethink the wisdom of concentrating supply lines in China and relying heavily on Chinese consumers. More broadly, the epidemic has added kindling to a smoldering debate about “decoupling”—the idea that after four decades of stitching the U.S. economy ever more closely to China’s, the time may have come to pry them apart again. 

DEC.04.20.Coronavirus-Mask
Photo-Illustration by Selman Design

Decoupling implies a full split, and few business leaders are willing to use the “D” word on the record. But proponents of a more distant relationship, including some of President Trump’s top economic advisers, have seized on the contagion as proof of the dangers of doing business in a secretive, Communist-controlled economy. Over the past few weeks, White House trade adviser Peter Navarro has called the outbreak a “wake-up call,” while Commerce Secretary Wilbur Ross predicted it would help bring manufacturing jobs back to the U.S. Even those who favor continued engagement warn that the virus may hasten a decisive fracture in relations already frayed by three years of hostile rhetoric over matters of trade, technology, national security, and human rights.

Trump and China’s Xi Jinping in December reached a “phase 1” deal that puts trade hostilities on hold. But escalating conflict had already led U.S. businesses to reroute orders worth hundreds of billions of dollars to other countries, in industries from textiles to toys. Huge electronics retailer Best Buy has suggested that it will reduce products made in China to 40% of the cost of goods it sells, down from 60% in 2019. In a recent earnings call, CEO Corie Barry called the coronavirus “one more piece of evidence that will continue to put pressure on diversifying supply lines.” 

The superpowers’ diverging paths are painfully apparent in technology. Google, Facebook, and Twitter are banned in China, and first-time foreign visitors marvel that it is almost impossible to get around, communicate, or dine there without relying on Chinese tech giants Tencent or Alibaba. In hardware, the U.S. has cited security and human-rights concerns in cutting Chinese tech companies out of its supply chains. It has also placed telecommunications giant Huawei and dozens of other Chinese firms on a blacklist that prevents them from buying key components from U.S. firms without a waiver. Beijing has responded by turning its technological back on America, accelerating its drive for autonomy in areas such as semiconductors and artificial intelligence.

Even those who favor continued engagement warn that the virus may hasten a decisive fracture in relations already frayed by three years of hostile rhetoric.

Another symptom of the diseased relationship is the constricted flow of talent. The 370,000 Chinese students enrolled in U.S. colleges and universities account for 34% of all international students in the U.S., and many U.S. schools rely on Chinese tuition to balance their budgets. But travel restrictions designed to contain the virus have prevented thousands of Chinese students from returning to the U.S. for this spring’s semester. Even before the outbreak, Chinese students were finding it harder to obtain U.S. visas, and many in the applied sciences complain of a “red scare,” in which they are increasingly viewed as government spies.

The rift creates difficult choices for economies that trade heavily with the superpowers. Taiwan’s biggest chipmaker, the $36-billion-in-revenue Taiwan Semiconductor Manufacturing Co. (TSMC), supplies U.S. companies including Apple and Chinese firms including Huawei. In recent weeks, the Trump administration has pressured it to shift production of its military-use chips to the U.S. TSMC says that it hasn’t ruled out the possibility but that there is “no concrete plan.” 

The prospect of a split is especially troubling in Australia, a staunch U.S. ally that is also the developed world’s most China-reliant economy, with trade worth around $200 billion annually. Australia ships a third of its exports to China, and Chinese nationals account for 15% of its tourists. Former Australian Prime Minister Kevin Rudd, now president of the New York–based Asia Society Policy Institute, has been beating the drum to warn against separation. “A fully decoupled world would be a deeply destabilizing place, undermining the global economic growth assumptions of the last 40 years,” he lamented in a recent speech.

By the numbers:

109 billion

Decline in China-U.S. trade from 2018 to 2019. Source: U.S. Commerce Department

370,000

Chinese students enrolled in U.S. colleges and universities. Source: Institute of International Education

60%

Share of Americans with an unfavorable attitude toward China—a record high. Source: Pew Research Center

By mid-March, China’s government was declaring that the slowdown caused by the coronavirus was reversing, reporting that more than 90% of the state-owned firms it oversees had resumed operation (though many are far from full strength). In theory, trade and investment between the U.S. and China could stage a “V-shaped” recovery, as happened after the SARS epidemic in 2003. 

But COVID-19’s economic toll, far greater than that of SARS, is also affecting an American public that’s less sympathetic than ever to China. In 2019, the percentage of Americans with an unfavorable attitude toward China jumped to a record high of 60%, according to the Pew Research Center. In the upcoming presidential election, hostility toward China may be the rare issue on which Trump and his Democratic opponent agree. 

Both nations have too much to lose from completely severing their myriad commercial connections. And COVID-19 has shown how much damage the economic equivalent of a quarantine can do. For now, like the rest of us in this age of contagion, they’ll opt for fewer contacts and less prosperity in exchange for less entanglement. Call it the economic version of social distancing.

With reporting by Phil Wahba

A version of this article appears in the January 2020 issue of Fortune with the headline “Distrust is Contagious.”

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