Virus Outbreak in China Could Slow Supply Chains, Affect Trade Deal, Report Says
© , Sandler, Travis & Rosenberg, P.A. Originally published in the [02/20/2020] issue of the Sandler, Travis & Rosenberg Trade Report. Reprinted by permission.
Medical supplies, pharmaceuticals, auto parts, microelectronics, and strategic raw materials are among the sectors whose supply chains could be impacted by the novel coronavirus (COVID-19) outbreak in China, according to a recent report from the Congressional Research Service.
Production in China generally slows during the annual Lunar New Year holiday in January, and U.S. firms sourcing from China adjust their orders and inventories accordingly. However, the report notes that this year the Chinese government extended that holiday in the wake of the coronavirus outbreak and many firms are still awaiting government approval to reopen. Of those companies that are open, many do not yet have sufficient staff to run a production line because their employees are struggling to return to work amid transportation shutdowns and contagion concerns. Moreover, the central government has repurposed some production facilities (include those of U.S. firms such as General Motors and 3M) to meet health and medical needs.
As a result, the report states, production has slowed across China. This affects not only Chinese manufacturers of goods such as auto parts, LCD panels, and pharmaceuticals but also manufacturing that has shifted offshore to other parts of Asia but still depends on intermediate inputs from China.
Another challenge is that measures to contain the outbreak have significantly curtailed domestic and global transportation links, preventing the transport of many products and manufacturing inputs. Passenger air traffic has slowed significantly, taking offline significant air cargo capacity for microelectronics and other products that ship by air, and restrictions have been imposed on pilots and flight staff on cargo flights to third countries. Vessel cargo operations depend on port staffing and are reportedly operating at significantly reduced capacity, which could slow shipments to, and perhaps result in shortages in, the U.S. of a wide range of industrial and consumer goods.
If the travel and transportation restrictions extend beyond March, the report states, global supply chains could see additional pressure. Vietnam, Taiwan, Malaysia, South Korea, Japan, Thailand, and Singapore all have strong supply chain links with China and are already reporting supply shortages. At the firm level, companies in sectors such as technology and autos or that are exposed to China’s tourism, retail, or other services businesses could take a significant hit.
The report also notes that the outbreak is calling into question China’s ability to implement the trade deal it signed with the U.S. in January. For example, transportation constraints and a slowdown in demand could affect China’s import levels. However, both the U.S. and China recently implemented a trade deal commitment to reduce by half the tariffs they imposed in September 2019, and China also announced a tariff exemption process for 700 tariff lines that include some agriculture, medical supplies, raw materials, and industrial inputs.