While the global community hurries to try to slow or halt the spread of the coronavirus virus, officials do so knowing that whether the outbreak is contained or not, it will likely create severe economic costs that will have an impact far beyond China’s borders.
Following the virus’ initial outbreak in Wuhan, China, passenger airlines have already voluntarily suspended or cut back on flights into the country, and U.S. government officials have warned that if conditions worsen, an official ban might be put in place. Meanwhile, governments around the world are chartering special flights to evacuate their citizens from China, in many cases bringing them home to be quarantined until they can be certain they are not carrying the virulent respiratory disorder.
As of late Wednesday morning Washington time, medical officials worldwide had identified more than 6,000 cases of the virus, the vast majority still centered in China, so far resulting in more than 130 deaths. The Wuhan virus, has already infected more people in China than severe acute respiratory syndrome (SARS) did 17 years ago. The outbreak is overwhelmingly focused in China, but cases have been reported in more than a dozen different countries.
The World Health Organization has scheduled a meeting for Thursday to consider whether to issue an emergency declaration, which would allow it to take the lead in coordinating a global response to the outbreak.
Meanwhile, major global companies doing business in China are temporarily shutting down or scaling back operations. Toyota and Ford have stopped production at some of their factories there until at least Feb. 9, Starbucks has closed 2,000 stores, agricultural conglomerate Cargill has ordered its workers to remain at home, and companies like Apple, with supply chains deeply rooted in China, are bracing for major disruptions.
“At the micro level, Chinese and multinational companies are taking stock of the situation,” wrote Scott Kennedy, senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. “The outbreak and response will, at a minimum, affect treatment of firms’ employees, manufacturing and production, support from suppliers, and delivery plans for customers. Slower activity up and down the supply chain will have financial repercussions, putting stress on banks’ balance sheets and securities markets.”
Economists and public health experts are warning that the global economic impact of the outbreak could be significant, given the speed with which the virus is spreading and the increasing interconnectedness of global supply chains. The SARS outbreak of 2002-03 cut China’s GDP in the year following the outbreak by an estimated 1 percent, and global economic growth by an estimated 0.3%.
However, China is a much larger economy than it was 17 years ago. Kennedy estimates that a major slowdown in economic activity — even as short as two weeks — could slash GDP by as much as $380 billion in the coming year.
Dependence on Asian manufacturing
And as China has grown economically, so has the rest of Asia. Collectively, Asian countries will have the largest GDP of any region in the world in 2020 and are expected to account for 60% of global growth. Companies around the world have grown much more dependent on far-flung manufacturing sites, many of which are in China and other countries on or near its borders in Southeast Asia.
This means that if the virus cannot be contained and spreads across borders, the economic damage to the global economy could be far more severe than what any previous pandemic has caused.
The biggest impact so far has been on countries that depend on Chinese tourists. The Chinese government has sharply limited travel, quarantining entire cities and blocking much internal travel. That means that many places will not benefit from the annual influx of Chinese tourists over the Lunar New Year celebration, from casinos in Macau to beaches in Thailand.
“It hits the tourism industry very hard, like a giant bomb, causing many damages,” said Nguyen Van My, director of Lua Viet Tourism Company in Vietnam. “First, during Tet holidays, normally a busy time for outbound tours, including those to China, but now the whole Chinese market is closed down. And secondly, Chinese tourists are barred from entering Vietnam, too.”
If the world manages to contain the disease primarily in China, experts warn, there will still be a global economic impact.
“Even if it is potentially contained within the borders of a country or a region, there’s so much global manufacturing and trade that happens in these areas, they can still be impacted by factors such as employee absenteeism that could reach really high levels in these areas,” said Nita Madhav, chief executive officer of Metabiota, a San Francisco company that studies the spread and impact of epidemics. “And that could disrupt … the manufacturing of different goods and the shipping of them across the world.”
Indeed, Chinese companies provide both finished goods and component parts for other manufacturers, and even a brief disruption in their operations could cascade through the global economy in ways that aren’t yet well understood.
“We have these phenomenally complex, just-in-time systems that are amazingly powerful, but they have a kind of systemic fragility that creates a real concern,” said Ben Oppenheim, a senior director at Metabiota. Those systems have not really been tested in the context of a major infectious disease outbreak, he said.
Trade with US
In the U.S., experts warn that a major economic slowdown in China could also make it difficult for Beijing to follow through on promises it made to the Trump administration as part of a “Phase One” trade deal signed this month.
Beijing committed to increase its purchases of U.S. goods and services by $200 billion over two years and “to continue on this same trajectory for several years.” Even before the coronavirus outbreak, experts were skeptical about whether China would or could keep that promise, but in the event of a major economic crisis, it seems all but certain that it would not. That could be bad news for U.S. farmers in particular, who have suffered from declining Chinese purchases in recent years.