With more than 50 million people on lockdown, economists warn China’s efforts to contain the coronavirus outbreak are reverberating through the global economy.
For two weeks major airlines have either scaled back or outright cancelled service to China, and many global retailers, including coffee chain Starbucks and furniture giant Ikea, have announced that they are temporarily closing outlets there. Yum brands, the owner of well-known fast food chains including KFC and Pizza Hut, said that it had been forced to close nearly a third of its stores in the country.
The impact is now growing outside China. This week, Hyundai Motor Company announced that it had been forced to suspend production at its plants in South Korea because parts made in China were no longer available. Nintendo announced that shipments of its popular Switch gaming platform would be delayed, and luxury brands including Estee Lauder, Coach, and Kate Spade have warned that the outbreak may have a significant negative effect on sales.
Apart from company statements, there is little data available to assess the immediate impact of the virus on global trade. But among experts, there is no doubt that the economic fallout from the situation will be noticeable and potentially severe.
GDP drop expected
“When trade slows in China, that obviously means less income for other countries, and it will slow them down as well,” said economist Gary Hufbauer, a senior fellow with the Peterson Institute for International Economics. “In other words, their growth rates are not independent of the Chinese growth rate.”
Hufbauer said that a conservative estimate impact of the coronavirus epidemic on China alone might be to cut its annual growth rate by a percentage point. “I will be surprised if it is greater than 5%,” he said, citing a figure about a percentage point lower than the Chinese government’s official forecast released prior to the outbreak.
While one percent may sound trivial, in an economy the size of China’s it represents about $153 billion in lost economic output over a full year, according to International Monetary Fund data.
He added that without the aggressive measures the Chinese government has implemented to boost the economy, including immediate monetary stimulus and promised fiscal stimulus, the damage might be even greater.
It is difficult to directly translate a slowdown in China into precise effects on other countries, but it is clear that an extended period of low productivity there will have impacts around the globe.
About 17% of Chinese exports are considered “intermediate” goods, according to World Bank data, meaning that they are inputs that other manufacturers use to produce their finished goods. This includes electronic components, auto parts, steel, and more. In the U.S. alone, businesses purchased $37.3 billion in intermediate goods from China in 2018.
Lunar New Year creates economic buffer
From a global economic standpoint, the timing of the coronavirus outbreak had some advantages. The Chinese economy typically slows down dramatically during the lunar new year holidays. That annual lull is already included in companies’ expectations for supply chain performance, so the current disruption in manufacturing is causing less of a disturbance than it might otherwise have.“
In an ideal economic calendar, China would still be on break until Feb 10th, which is when the New Year period ends,” said Rui Zhong, a program associate with the Kissinger Institute on China and the United States at the Wilson Center, a Washington, DC think tank. “So we won’t know for sure the impacts until a few weeks from now. Manufacturing facilities around Wenzhou, one of the harder-hit areas, might impact small consumer goods and electronics as it enters a quarantine period.”
Zhong added, “As for global reverberations, supply chains for assembly in China and business travel slowdowns may impact the speed at which commercial activity is conducted until the coronavirus is adequately contained.”
Peter Bolstorff, the executive vice president for corporate development with the Association for Supply Chain Management, agreed that “domestic Chinese businesses are just at the start” of the outbreak’s impact. However, he said, global companies are already looking for ways to avoid the expected disruption in China. Some, he said, may stand to profit by being better prepared than their competitors.
Trade war may have prepared US businesses
“We've had plenty of supply chain disruption in the last five years, and people are actually getting skilled at [thinking] about risk events and probabilities and starting to plan around them,” he said. “So, what I would predict in the future is, coming out of this particular disruption, organizations that have prepared for risk, are going to gain market share over those that did not.”
Ironically, he pointed out, the damaging trade war between the United States and China, brought on by President Trump’s imposition of large tariffs on Chinese goods, may have served to inoculate many U.S. businesses against the impact of a major supply chain disruption focused in China.
With the status of U.S.-China trade relations in doubt over the first years of the Trump administration, many U.S. businesses began to shift production and seek suppliers in other countries. To the extent that many of these, including Vietnam and Thailand, are less affected by the coronavirus than China, companies that rely on production there instead of China will suffer fewer disruptions.