Coronavirus and the Global Economy

Two months have passed since an outbreak of coronavirus was reported in the city of Wuhan in China. As of the end of February 2020, over 85,000 cases have been confirmed. The number of deaths attributable to the disease already has surpassed the number of deaths that resulted from the 2003 SARS outbreak (about 800 fatalities). The reports of the past couple of weeks have indicated a surge of new cases outside of China, including in South Korea, Italy and Iran. At the moment, it appears we may be on the brink of a global pandemic, with new cases being reported among people who have not traveled to countries hit by the outbreak or been in contact with anyone known to have the disease, which public health officials refer to as “community transmission.” This article considers the impacts of the coronavirus contagion on business and international trade.

Coronavirus outbreak: workers in Guangdong, which is the second worst-hit province. Photograph: Alex Plavevski/EPA
(Photo: from The Guardian: Coronavirus outbreak: workers in Guangdong, which is the second worst-hit province. Photograph: Alex Plavevski/EPA)

Coronavirus initially led to a virtual shutdown of the world’s second largest economy and most important manufacturing hub. When Chinese factories started to reopen this month, many were operating below capacity and safety measures mandated by the government have slowed down production even further.

The SARS outbreak, which began around February of 2003, seems to be the best point of reference to try to form an estimate of the possible eventual impact of this contagion on the global economy. During that episode, it was estimated that China lost more than one percentage point of its annual economic growth. The biggest fall in economic growth took place between the first and second quarters of 2003, going from 11.1% to 9.1%. The Chinese economy went on to recover some of that loss by the third quarter and bounced back to a growth rate of 10%.

There are two main differences between the current coronavirus situation and the SARS case from 17 years ago, which point to a more significant impact this time around. First, China’s economy is much larger now. In 2003, China accounted for 4% of global economic output. Today, China’s GDP comprises 17% of the global total. Moreover, the SARS outbreak happened approximately one year after China became a member of the WTO. China is much more integrated in the global economy now, and the nation serves as an artery for the global supply chain. Hence, the impact from any slump in Chinese economy is much more consequential for the world now than in 2003.

Second, as the Chinese economy has matured in recent years, it simultaneously has become more vulnerable to such a disruption. Services and internal demand now account for a bigger share of the Chinese economy than manufacturing and exports. These changes have translated into lower growth rates in the recent years. Add in the impact of the ongoing trade war with the United States, which spurred many companies to flee their Chinese manufacturing bases in favor of countries like Vietnam, and one can see why China reported about 6% growth last year, its lowest since 1990. China will not be able to rely as heavily on its manufacturing sector as an engine for quick recovery after the spread of the virus is contained.

Photo from Putnam Investments
(Photo: from Putnam Investments)

Many global firms rely on factories in China to manufacture goods. China’s network of factories accounts for a fourth of the world’s manufacturing output. Several large companies, chief amongst them Apple, have indicated that production may be hurt because of the coronavirus outbreak. In the wake of the trade war between the two countries, some observers believe that the spread of coronavirus might accelerate the decoupling between the U.S. and Chinese economies.

Additionally, the impact from the spread of the virus on the global economy cannot be isolated to China. As of the time of this writing, multiple countries had taken emergency measures to contain a local outbreak of the virus. It is impossible to predict to what extent the virus will spread globally before the situation is contained. More countries may take emergency measures and impose travel restrictions. What already is certain is that apart from the slow-down in China, the direct negative impact of the contagion on the global economy will be significant.

It took 20 months for researchers to find the needed SARS vaccine after the outbreak in 2003. Some observers believe that the accumulated body of research into similar viruses since 2003 might lead to a faster medical response in this case. However, statistics also point to a faster spread rate for this virus compared to SARS in 2003, even though its fatality rate remains low. Hopefully, this will not turn into a full-blown global pandemic. But it is hard to doubt that the scale of the global economic impact will be greater than the one seen in 2003.

By Amin Bahrami, Legal Fellow