SINGAPORE (May 15): As the United States grapples with escalating Covid-19 death toll and worsening economic fallout, the blame game has started right on cue.

Increasingly tough rhetoric by US president Donald Trump, as well as other politicians and officials, lay the blame on China for the pandemic, reviving concerns over the trade war.

On paper, the Phase One trade deal between the two superpowers inked just in January remains in force. Official response from China is that the existing deal is good for US, China and the world, and that US politicians should focus their energy fighting the outbreak and not indulge in political stunts for the benefit of their constituents “A word of advice to those in the US: Don’t get too deep in the show to lose sight of reality,” said China’s foreign ministry spokesman Zhao Lijian on May 13.

However, reports quoting unnamed officials from both sides have speculated that the existing agreement could be up for renewed negotiations, or otherwise. Threats of sanctions have also been muttered. Analysts attribute the weaker markets in Asia these past few days to investors’ worries over how the trade war will be reignited, which has the proven effect of hurting corporate earnings.

For now, many analysts hold on to this view that the trade-related rhetoric will remain as such, instead of spiralling into a real breakdown. “We expect heightened rhetoric and fresh non-tariff action, but we think the situation is more likely than not to stop there, at least until the US election,” says Morgan Stanley.

Jeffrey Halley, senior market analyst at OANDA, calls this “a storm in a teacup” and that tearing up the deal or reworking one most likely will not happen. For one, having invested enormous political capital in the trade deal, Trump will not just walk back all or some of the terms. Halley believes this will be “electoral suicide” for the re-election coming in November. although US presidential election is likely to be fought on getting tough on China by both sides, Trump had said to the effect he was not considering reconsidering the trade deal, he adds.

UBS analyst Sundeep Gantori says while there is near-term headwind for equity investors, it will be brushed aside by a “stronger gust” when lockdowns ease. “Most Asian markets are in relatively advanced stages of the Covid-19 pandemic. The gradual resumption of economic growth should spur a solid expansion from 3Q onward, leading to an improving fundamental backdrop that extends into 2H2020 and 2021,” he says.

Other market watchers see longer-term trends shaping up beyond this year and next. For example, the countries will be drifting further apart, as China focuses on growing a domestic consumption economy and US households continue to trim debt. The Covid-19 outbreak, according to Morgan Stanley, will more likely reinforce long-term micro themes than materially impact near-term macroeconomic direction.

The US bank urges investors to sieve for winners from sectors that will benefit from a bipolarised economy, such as Chinese internet companies and payment system providers. Conversely, they ought to be wary of buying into sectors that rely on efficient supply chains such as car makers, capital goods and IT hardware.

Unfortunately, plenty of uncertainty remains. While RBC Wealth Management’s head of investment strategy Frédérique Carrier does not see the trade war back in full force, “missteps” from either side should not be underestimated as this could cause serious ramifications at a time when the global economy is particularly weak.

Indeed, the outbreak has shown how neither China nor the US was doing all the right things as one should as a global power, generating not just near-term disappointment but also long-term harm.

In his commentary (See page 10), Arvind Subramanian, a former chief economic adviser to the Indian government, notes that “both (US and China) have been providing global public ‘bads’ such as trade wars and erosion of international institutions instead of public goods such as stability, open markets, and finance.”

“By further weakening the internal cohesion of the world’s leading powers, the Covid-19 crisis threatens to leave the world even more rudderless, unstable, and conflict-prone,” writes Subramanian.

That is one direction many lesser powers and smaller states will not want to see the world order heading towards.