Speaking to members of the National Press Foundation via livestream on the trade impact of coronavirus, Ambassador Kurt Tong told members of the global press on Monday that the covid-19 epidemic has “already had” a decoupling effect on global trade relationships—principally the U.S. and China—with 2020 likely to be marked by deepening trend of “de-globalization”

An eventual “re-globalization”—whenever it materializes, and however it may look—may not be U.S.-led.

Tong previously served as Consul General and Chief of the U.S. Diplomatic Mission in Hong Kong and Macau, as well as Principal Deputy Assistant Secretary for Economic and Business Affairs at the U.S. State Department from 2014-2016. He was Deputy Chief of Mission and Chargé d’Affaires at the U.S. Embassy in Tokyo from 2011-2014, where he was instrumental in assisting Japan’s entry into the Trans-Pacific Partnership and in U.S. efforts to aid Japan’s recovery from the 2011 Great East Japan Earthquake. Having served as a U.S. Foreign Service Officer for 30 years, today he is a Partner at the Asia Group, where he leads work on Japan and the broader East Asian region.

“The instinct—the gut feeling of people at my firm—is that a re-globalization process will happen, starting in Asia, spreading outward, just like the virus did,” he said. “What is the role of the United States going to be in that?”

Tong said that the phenomenon of global trade decoupling—of widening distance between economies of the U.S. and China, in particular—had been largely driven by geo-strategic considerations, changes in how countries view one another, and by what they view as necessary policies for engagement at a time when globalized interaction has become uncomfortable .

In this respect, he explained, the U.S./China relationship may continue to serve as a proxy for other tense relationships around the world.

What crisis trajectory?

Given certain unique aspects of the coronavirus shock, compared (for example) to the terrorist attacks of September 11, 2001, an area of acute concern is the negative impact on the U.S. services sector.

Over the last 20 years, he said, trade growth in services has outpaced GDP growth, and is likely to contract even faster than trade growth in goods, due to the effect of social distancing. Unlike post-9/11, when ships and planes were grounded temporarily, the economic impact of coronavirus will likely be a sharp downturn and bankruptcies in specific service-related sectors, due to people simply not moving around.

In the best-case scenario, Tong said, the economic impact of covid-19 will resemble the “severe, but short-lived” impact of the 2003 SARS epidemic—despite the fact that the outbreak is already more severe than SARS, and occurring in different parts of the world successively, rather than simultaneously.

A scenario to avoid is the pervasive, long-term economic constriction of the Global Financial Crisis, which took half a decade to overcome. The factors that determine which crisis model materializes remain uncertain.

“We don’t know how successful the major economies will be in terms of the social distancing aspect, how quickly a vaccine comes on-line, and is there a second wave?” Tong said.

The severity of this concern was reflected in Sunday’s emergency, full-percentage-point rate cut from the U.S. Federal Reserve, coming amid similar cuts from other global central banks.

“What we expect to see is all the governments of the [developed] world – Asia, Europe and U.S – looking at extraordinary fiscal measures to match the monetary policy outlays of the central banks,” he said. “Central banks can act quickly, but the results tend to be slow. Governments have trouble acting quickly, but the results can be quick, depending on the design of the fiscal measures.”

Around the horn

Tong pointed to China as the region’s probable economic and political bright spot, given that its economy was growing at an (unverifiable) 4-6% pre-virus, and good prospects for its government to be fairly quick footed in implementing short-term recovery measures, despite a heavy corporate debt burden and the ongoing economic liability of inefficient, state-supported enterprises.

Japan, he said, was doing, economically and politically, “no better or worse” than usual heading into the crisis. Notwithstanding some potential instability around the 2020 Tokyo Olympics, there remains a ruling party firmly in charge of the country, with greater depth in fiscal policy available to them than monetary policy.

India remains a “question mark,” he said, given that its economy was already slowingbefore the dimensions of the virus became global. Whether the Indian government has the wherewithal to play an active role in channeling resources to the private sector bears close watching.

South Korea’s economy was also in a difficult spot before the crisis, and its economy is disproportionately affected by supply chain and external demand shocks.

Hong Kong, meanwhile, is one of the region’s most economically vulnerable to external shocks. Politically, it remains in a state of near-paralysis, except for those parts concerned with issues surrounding global financial markets. He expects Hong Kong’s financial markets to continue reflecting global, rather than local trends, with likely continued bad feeling between Hong Kong and China, greater polarization of public opinion within Hong Kong (despite hopes for the opposite, and even if mainland policy toward Hong Kong does not materially change), and the potential for another summer of heated political protests.

Borderless black-swan

On a more optimistic note, covid-19 may present a unique opportunity for countries to work together.

“Theorists around U.S./China relations are constantly grasping at [the issue of] climate change as the reason they [the two countries] must get along. But all of the actions on climate change are, by nature, local, and have an economic cost, so they lead to a ‘tragedy of the commons’ – it’s not really a cooperative conversation,” he reflected.

By contrast, the person-to-person, infectious nature of the coronavirus makes it an area where international cooperation—even in a decoupling world—may be possible and even uniquely advantageous.

“There is potential for the U.S. and China—after this is all over—to say, ‘Hey wait a minute – we have just rediscovered the fact that everybody on the planet can infect everybody else…let’s do something about this, let’s have a G20 for medicine, for pandemics, or let’s strengthen the WHO to improve response,” he said. “In the past, you had [the emergence of] strategic petroleum reserves to respond to the 1970s supply shock. Maybe we need a strategic ventilator reserve.”