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Black Swan of the Decade

The deadly Coronavirus is disrupting global supply chains. How will countries cope with this unexpected “decoupling” from China?

COVID 19 and the global economy

Hubei Province, the epicentre of the COVID -19 epidemic, is a densely populated manufacturing and transport hub. With the international travel and the onset of a Chinese New Year, conditions were ideal for the spread of the deadly virus which would soon threaten to turn into a pandemic.

China is a global supply chain hub, and disruption there undermines output elsewhere. Along with Hong Kong, the Chinese trade surplus is $301 billion which accounted for 16 % of the global exports.

It is clear that global supply chains, market and economies have been affected. Even if the outbreak wanes and these negative demand and supply shocks fade into memory, the damage to China and the global repercussion would be lasting.

The global growth rate is reported to have slowed down from 3.6 per cent to 2.9 percent. Epidemiological estimates state that the global GDP is likely to shrink by $500 billion which is the economic price tag for the aftereffects of the coronavirus:  workplace absenteeism, reduced productivity, decline in travel, distorted supply chains and lower trade and investment.

Impact on the economic ecosphere around China 

South Korea has declared an economic emergency, to limit the damage to the economy deeply intermeshed with China. South Korean electronics companies, automakers and electrical equipment makers are grappling with the problem of getting parts they need from China to keep their factories running. 

Japan has the most virus cases outside China and is facing the biggest contraction in more than five years. Toyota and Nissan have had their output disrupted at Chinese factories while inbound Chinese tourism has reduced immensely. Japan’s economy has contracted at an annualised rate of 6.3 per cent in the fourth quarter of 2019. Add to that the loss of trade with China – a recession now seems likely. Japan is scheduled to host the 2020 Olympics in July and has spent more than 1.37 trillion yen on preparations for the games. Doubts are being raised whether they will go through as scheduled.

Southeast Asia is very vulnerable to lower Chinese demand, in an array of sectors including tourism and manufacturing. Vietnam is suffering due to their increased dependence on China's supply chain linkages and exports. The reduction in Chinese tourist numbers could cost the Thai economy about $3.05 billion, according to The Tourism Authority of Thailand, not counting the revenue loss of other nationalities choosing to stay away

European tremors

Europe is more dependent on China for trade than the United States, being extensively linked through a web of supply chains. European automotive sectors have stated that they are only weeks away from having to stop production due to depleting components supply. 

Germany’s exports to China last year stood at a whooping €94 billion ($101.6 billion).  These levels are impossible to match this year and the price will be paid by its already stressed manufacturing sector.  Before the coronavirus struck, Italy’s economy was contracting at 0.3 per cent and a recession was looming. Chinese tourists are a major source of earning and premier fashion brands are particularly exposed.

The United States

The United States, the world’s second-largest economy, appeared relatively resilient by comparison, but 2.1 per cent real (inflation-adjusted) GDP growth in the fourth quarter of 2019 hardly qualifies as a boom. 

China exported $539.5 billion in goods and services to the U.S. in 2018, according to the Office of the U.S. Trade Representative which is more than 21% of all imports into the country. Chinese tourists to the U.S. have increased 13 times more than in 2002, making China the largest foreign consumer of U.S. travel. A report from the Tourism Economics states that it is expected that the United States will lose about 1.6 million visitors from mainland China. Each Chinese visitor to the US spent an average of $6,500 in 2018 which is the highest among all internal visitors.

China was to lower its tariffs for the import of millions of dollars’ worth of American farm products as a good will gesture to resolve the trade war. This is now likely to be affected.

The Middle East 

China is the largest consumer of petroleum products in the world and a slump in its industry will directly impact oil producing nations.  Saudi Arabian crude supply to China for March has been reduced by 500,000 barrels per day. As the virus spreads around the world, oil prices have sunk to $50 a barrel, with fears that things could get worse.

The UAE earned substantial revenue from Chinese tourists who make up 6 per cent of total tourist inflow.  Dubai’s renowned high-end shopping and resorts are seeing falling footfalls and sinking profits. 

Iran’s emergence as a hot zone for Coronavirus has made it complicated for the economy which is sliding deeper into recession. It is reeling from tough sanctions, which includes wide ranging restrictions on its economic bloodline the oil. The US sanctions have also worsened Iran's medical sector, which has struggled to keep up with soaring prices of medicines and medical instruments.

Australia 

Australia is the world’s most reliant economy on China with about a third of its exports going there. There are 160000 Chinese students which means one-third of the total fee of Australian $32 billion came them alone. International students contribute beyond just fees. They spend money on accommodation, food and other experiences. Other sectors that have been affected are fishing and tourism. 

Globalisation and Pandemics 

The world is one big market, for good or for bad. This was made amply clear by the crashing stock markets in all major economies as investors sensed the impending economic fallouts of the virus. It has been the worst week for Global share prices since the world financial crisis in 2008. 

The organization, resources, labour, sourcing and logistics are the key components that convert raw materials to finished products and move them to the end customer. The Coronavirus has put limitations at all levels and could create a further lag in the process timelines as quarantine guidelines get stricter. Eighty percent of the world’s goods move by ship, and demand for shipping is starting to slip noticeably. 

Assessment 

  • The global economy is staring at a recession and the reason is China. The “World’s Factory,” touches the life of every working man, around the world. This global connection, hailed as a miracle of globalisation, is now proving to be a bane. Whether this experience will act as a further dampener on globalisation and “outsourcing” will only be known once the world has crushed Coronavirus. The voices against globalisation, especially in North America and Europe, are already getting more stringent. 
  •  A global epidemic reinforces the need for intelligent, data-driven supply chain systems for faster and effective decision-making. Artificial intelligence and machine learning foundation can trigger real-time alerts based on public data feeds. Supply chains can then proactively take measures to avoid the disruption.
  • China's One Belt One Road initiative intertwines 152 nations. China now has the dubious distinction of being home to pandemics, largely due to its unregulated exotic food markets. This innate fear could be a dampener on efforts to revitalise these ancient Chinese concepts.
  • The virus has surfaced when there is erosion of trust within and between countries. Catastrophic risks are occurring at a greater frequency and the world has to jointly devise global solutions to absorb such shocks.

Image Design: Chris Karedan, Synergia Foundation

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