How Will the Spread of the Virus Impact China’s Economy and Trade?
China has become an economic powerhouse over the past several years, so concerns over reports of cities shutting down, the number of victims rising, and concerns over economic impact are quickly rising. According to an article by Time, China is the world’s largest manufacturer, and imports more crude oil than any other country. China was the United States’ largest supplier of goods in 2018, including electrical machinery ($152 billion), machinery ($117 billion), furniture and bedding ($35 billion), toys and sports equipment ($27 billion) and plastics ($19 billion), as reported by Forbes.
While countries have dealt with illness outbreaks and the effects on their economies before, including China back in 2003 with the SARS outbreak, China’s current dominance in the market will have a larger impact globally if there is a prolonged suspension in manufacturing and trade. In 2003, when the SARS virus hit, China’s GDP was $1.6 trillion. Today, China’s GDP sits around $13 trillion and has greater commercial ties to the U.S. than back in 2003, as reported by Forbes. The impact of this viral outbreak will affect the economy in ways we haven’t seen before.
While it is not easy to estimate the extent of the economic damage the virus is likely to inflict, it is possible to use the SARS epidemic as a guide, suggests The Guardian. Pantheon Macroeconomics estimates that SARS decreased China’s quarterly growth rate down to 1.8% in April-June 2003, from an average of 2.8%. The Centre for Economics and Business Research (CEBR) says the knock-on effect to world GDP was a fall in 2003 of between $30 billion and $100 billion, which was equal to between 0.08% and 0.25% of global GDP.
The Guardian also reports that last year’s tit-for-tat trade war between China and the U.S., which involved both sides imposing import tariffs on hundreds of billions of dollars’ worth of goods, affected China’s already ailing GDP growth rate down to 6% in 2019 and helped depress global growth, falling from 3.6% in 2018 to 3% in 2019.
A Chinese official warned recently that the spread of the virus from its beginnings in Wuhan to about 10,000 victims across the country would add to the damage from the trade war, and possibly cause more economic harm than the SARS epidemic, reports The Guardian. Sixteen cities in China, with a combined population of more than 50 million people, are on lockdown and airlines are cancelling or suspending flights to and from China, isolating the country even further.
Time reports that Chinese companies began to shut down at the end of January for the annual Lunar New Year holiday, but at a time when they would normally be preparing to get back to work, 14 provinces and cities, which account for more than two-thirds of China’s economic output, announced that businesses would extend the holiday to February 8th. There are indications that this work delay is extending well past this date.
Eswar Prasad, an economics professor at Cornell University, told Time that the outbreak may cause multinational companies that were already reassessing their supply chains, due to rising wages in China and trade war tensions, to reduce their production footprints in the country.
Time reports that China was already under economic pressure before authorities initially reported the first cases of the Coronavirus due to tensions from the trade war and sluggish demand at home, resulting in the slowest GDP growth in 2019 since 1990. Cody Bates, a Plastics Industry Analyst, points out we may not have seen or felt the full extent of what is happening on the ground and how it will affect business and trade due to these major, extended shut downs of businesses and companies. Now, China and the rest of the world wait to see the impact of the virus as businesses adjust to this new “normal”—which, for some companies means some people can work from home, but the on-the-ground manufacturing as of this writing, is still tentative in many sectors.
The prices of some commodities, including oil, have declined sharply over concerns that the virus and measures to contain it will lead to lower demand from China, according to Rabobank, a Dutch bank and financial services firm, reports Time.
Bates believes that mold and tool building in China is going to be severely curtailed, with new orders stacking up, causing huge delays in tooling production. He thinks that there is going to be a massive surge in demand for tooling to get built in the U.S. in an industry that was previously gutted 20 years ago by China’s role in the industry. The result may mean that North American-based tool building will have massive backlogs, as well.
However, Bates thinks differently regarding plastic resins. He believes that the impact on plastic resin materials will stoke an opposite reaction. As people react to the instability—possibly in a panic—the price of oil will fall, mirroring what is reported by Time, which will help soften the cost of all materials on its own (with the exception of PE, because it is mostly made of natural gas). The demand for PE and PP from Asia, which is already pretty small, will likely dry up considerably, if not completely. This decrease in price is going to greatly impact sectors of the recycling industry, which will have costs potentially above that of virgin commodity resins.
While we manufacture our products in the U.S., trade oversees will still have an impact on the plastics industry overall, so we expect that here at Alpha Rho we’ll feel some of those effects. Take a moment to check your inventory and stock up on our products to avoid a backlog of demand later. Click here for Alpha Rho’s catalog or contact us with any questions.
We hope everyone stays safe during this difficult time and we hope China and its people will soon see some relief and a return to better economic stabilization.