On Friday January 7, mainland China suffered its deadliest day in the coronavirus outbreak with authorities reporting 86 fatalities, bringing the death toll to 722, according to CNN. Over 34,500 people are known to have been infected in mainland China, according to China’s National Health Commission, and another 320 cases have been reported across 27 other countries. The majority of cases have been recorded in Hubei province and its capital, Wuhan, the epicenter of the outbreak.
Reuters reported on February 6 that many factories have suspended operations until next week or longer as authorities try to contain the virus’s spread, and the Chinese government is studying monetary policy options amid expectations the outbreak will have a devastating impact on first-quarter growth, dropping GDP by as much as 2%. One of the main reasons for business leaders’ concern is that Hubei province and its largest city, Wuhan, are crucial centers for manufacturing and logistics.
According to the Wall Street Journal, “87% of member companies surveyed by the American Chamber of Commerce in Shanghai expect the outbreak to have a direct negative pull on their revenue, while only 13% considered the revenue consequences to be limited. About a quarter of member companies in the flash survey expect the outbreak to cut their China revenue by more than 15% in 2020.” A CNN headline reported “The coronavirus could cost China’s economy $60 billion this quarter.” The same article noted that Tesla has closed in Shanghai facility and Apple has lost significant production from suppliers in Wuhan.
Among the most vulnerable to the outbreak, and in some ways the most problematic for the virus’s continued spread, are China’s estimated 290 million migrant workers, who travel from rural areas to the cities to find jobs. The timing of the coronavirus outbreak has also exacerbated the risk of the contagion – it has coincided with the Lunar New Year holiday season, during which many migrant workers leave their factories and return to their villages and families.
The coronavirus crisis comes amid the backdrop of an extended trade war between China and the U.S. The U.S., citing unfair Chinese trade practices, began imposing tariffs in January 2018. In March of 2018, President Donald Trump tweeted that “trade wars are good and easy to win.” The President imposed and escalated tariffs on multiple categories of products throughout 2018 and 2019, with more tariffs threatened (particularly against a wide range of consumer products) towards the end of 2019. In January 2020, however, it seemed that the trade war was resolved in principle and new tariffs and planned escalations would be held in abeyance (and some tariffs were reduced or eliminated) pending the drafting of a comprehensive treaty.
Many consumer products businesses nervously applauded this détente, but some that we have spoken to pointed out that they had already moved production out of China to other countries to avoid tariffs. Footwear News similarly reported “the nearly two year trade war between the U.S. and China may have had an inadvertent upside for American footwear manufacturers: they are seemingly less susceptible to major shipping delays caused by global concerns about the rapidly spreading coronavirus.” China’s National Bureau of Statistics acknowledges that 3.8 million manufacturing jobs were lost last year, as many businesses shifted sourcing to venues like Indonesia, India, Pakistan and Vietnam.
Some of the American consumer brands warning of negative financial performance caused by the coronavirus are businesses with significant sales within China, such as Apple. Among those American consumer businesses who have historically relied on Chinese factories primarily to supply the domestic U.S. market, there appear to be two camps: those who stayed in China believing that the trade war would resolve itself, and those that moved production out given the uncertainty of the tariffs. The latter group may owe the President a thank you note for inadvertently helping them avoid late or lost shipments due to the coronavirus.
Final note: more important than any economic impact is the health of the people impacted. We hope a cure for the coronavirus is quickly developed, for those affected to return to health quickly, and for normalcy to return to China.
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