Economists used to that say “when America sneezes, the world catches a cold.” Could the same apply to China—as it struggles to contain the fallout from the coronavirus?
After days of paralyzing dithering, the U.N.’s World Health Organization (WHO) finally declared a Global Health Emergency yesterday over the Novel Coronavirus, a week after failing to declare the outbreak an emergency during its last meeting on Jan. 23. More concerned about the need to not offend China’s Communist Party leadership, WHO Director-General Tedros Adhanom Ghebreyesus congratulated the Chinese government while WHO extraordinarily opposed any travel restrictions against China.
Meanwhile, nations, organizations, and corporations are taking their own defensive measures.
Russia announced yesterday it is closing its 2,600-mile land border with China through March 1, an extraordinary step, given Russia’s increasing reliance on trade with China. Today, the Russian government suspended work visas and air services to Chinese nationals while Russians evacuated from China will be quarantined for 14 days.
Numerous airlines are canceling flights to China or curtailing operations. The pilots’ union for American Airlines sued yesterday to stop all flights into and out of China, citing the “serious, and in many ways still unknown, health threats posed by the coronavirus.”
The virus causes lower respiratory difficulties, lung lesions and symptoms ranging from coughing and sneezing to pneumonia and kidney failure. The incubation period is thought to be up to 14 days with perhaps a week of being contagious before displaying symptoms. As of Friday afternoon, Johns Hopkins University was tracking 9,925 confirmed cases of which 9,783 were in mainland China with 213 deaths.
Of course, these numbers are predicated on accurate and timely reporting as well as limitations in diagnosing a new viral outbreak. The actual numbers of infected people are likely far higher, with some models suggesting that 100 million people may be infected by the end of February, with as many as one million dead.
Until an effective vaccine is developed and distributed, it is highly likely that the Novel Coronavirus will soon sicken far larger numbers of people in China and later, globally. Beyond the human toll, how might this outbreak affect economies?
There are reports out of China that the coronavirus is causing a slowdown at ports, with a lack of dockworkers and truck drivers stretching out cargo ship onloading times, while the storage yards adjacent to the docks are clogged. China’s Ministry of Transport ordered port operators to speed up ship movement, but the virus is unmoved by the edict. As a result, the Chinese government is offering force majeure certificates to affected businesses, allowing them to break their contracts without consequences.
In Singapore, terminal operators are grappling with a requirement that all ships crew from China will be declined entry.
This shipping slowdown should start to affect major U.S. supply chains soon. It takes about 20 days for a ship to cross the Pacific from China to the West Coast. Some shipments may be delayed in about a week’s time, with increasing numbers of cargo loads delayed or even canceled by mid-February. The slowdown in California’s sprawling ports of Los Angeles and Long Beach will likely be significant by the end of February.
In the U.S., supply chains that had been reexamined in light of the Trump administration’s tariffs on goods manufactured in China and the renegotiation of trade agreements with Canada and Mexico, will come under increasing pressure due to the declining reliability of shipments out of China.
On the American export side, the burgeoning plastic feedstock industry in Texas and Louisiana will see continued readjustment, as large ethane and polyethylene shipments to China decline and smaller shipments of plastic feedstocks get parceled out to India, Vietnam, Mexico and Europe.
Due to the fracking-enabled oil and gas boom in America, more than 300 new petrochemical and plastics plants are under construction or planned in the U.S. This follows on years of rapid growth that took advantage of the almost three-fold increase in ethane production since 2005. Shale-related exports of ethane for plastic feedstock was expected to reach $30 billion by 2025.
But what if demand from the largest buyer of plastic feedstock, China, drops off due to the coronavirus outbreak and supply chains reassemble elsewhere? Might there be a boom in finished plastics manufacturing in Texas, Louisiana and Northern Mexico?
Given the current low cost of money, it may well lead to increased manufacturing activity in North America, especially given that the technical challenges in building such capacity aren’t as difficult as is the case in building new integrated circuit manufacturing facilities. However, due to the extremely tight labor market, much of this new capacity would likely be highly automated.
If large volumes of imported plastic and finished plastic products from China can no longer meet North American demand due to manufacturing and shipment bottlenecks, how quickly might an increased price signal cause capital investment further down the supply chain? We may soon find out in the case of plastics. As for other, more complex and valuable manufacturing activities, these too may decamp China later this year as corporate decision-makers, their minds concentrated by tariffs and increasingly angered by China’s lack of respect for intellectual property and contract law, are further troubled by the Chinese Communist Party’s secretive and inadequate response to a deadly viral pandemic.
U.S. Secretary of Commerce Wilbur Ross said as much yesterday on Fox Business when he suggested that the coronavirus could be a catalyst to bring jobs back to the America. In response, Chinese officials took the outbreak’s threat to its global manufacturing dominance seriously, at least rhetorically, with China’s Foreign Affairs Ministry knocking U.S. officials for making “unfriendly comments” while criticizing U.S. travel warnings as running counter to the WHO’s opposition to travel restrictions, asking, “Where is its empathy?” A Chinese expert with close ties to China’s Commerce Ministry went so far as to label Secretary Ross’ observation as “terrorism.”
Such comments aren’t likely to influence corporate decisions. They do show official China’s increasing desperation. By the end of 2020, America’s overseas supply chains will have measurably less Chinese content and with greater value being filled by goods made in the U.S., Canada, Mexico and the remainder of Asia.