The Coronavirus Outbreak Is an Economic Red Flag The world has given over much of its manufacturing supply chain to China. That has magnified vulnerability to a pandemic shock. by David Dayen 6:00 AM

Mark Schiefelbein/AP Photo

U.S. newspapers have started to catch up to international coverage on the coronavirus outbreak. But if you’ve been following the business press, this has been the only story in town for the past couple weeks, as everyone tries to game out whether the epidemic is a “black swan” event that could radically change economic fortunes, or just an opportunity to buy the dip. Even the normally prudent Federal Reserve chair Jerome Powell highlighted Tuesday at a Congressional hearing that the Fed was “closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

The way this could spill over is simple, and terrifying: A substantial amount of what the world produces originates in or is reliant on China. The nation’s presence as a major market, a manufacturing hub, and a source of materials and components can make any shock of this magnitude catastrophic. For decades, world leaders have allowed multinationals to chase lower labor costs, thereby centralizing production and fixing supply lines. We’re now seeing the tragic fragility associated with that decision.

The death toll from coronavirus, now above 1,000, has surpassed the deaths from SARS, the last Chinese-originated epidemic. But China was a far less critical country to the global economy in 2002, when SARS hit. Wuhan, the epicenter of the outbreak, is today as important to global manufacturing as Detroit was in the 1960s.

China attempted to stop the spread of the virus by extending the Lunar New Year holiday, which shut down industry towns well beyond Wuhan. Monday was supposed to bring the holiday to an end, but China remained quiet, with 60 million still under virtual quarantine. Some provinces have kept factories closed until at least March.

This has first and foremost impacted direct production. Smartphone shipments, dominated by Chinese firms, are expected to fall 30 percent in the first quarter of the year. Despite re-opening, only 10 percent of the workforce has returned to the Foxconn factory where Apple products are manufactured. China supplies 80 percent of the world’s garlic; Indonesian garlic prices jumped 70 percent in a week on slowdown concerns. Amazon has secretly tried to stockpile made-in-China inventory, with the expectation of reduced production.

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Industry lobbyists have claimed that China is the only country with the capacity to make Bibles and prom dresses, which is insane, though there’s a kernel of truth to it. The entire U.S. labor force for many manufacturing sectors has vanished, and it’s not so easy to just restart a factory when you’ve lost the technical know-how. So in consequence, America, like many countries around the world, has built a dependency on China, one that’s threatened by events like this pandemic.

When a population is fearful and confined to their homes, economic activity naturally slows. WeWork closed 100 buildings in mainland China temporarily. Most of the nation’s movie theaters have been closed; China is a growing profit center for Hollywood. Over 300 Chinese companies have applied for large bank loans to stay in business. You may not think coronavirus would engulf a Chinese company that places advertisements in elevators, but that firm laid off 500 employees to “ensure survival” this week. Between two and three million lost jobs could result in the first quarter of the year.

As demand for oil, which is connected to reduced economic activity, also slows in the world’s largest commodities buyer, analysts expect contraction in those markets, another way pain can ripple out from China. The outbreak could shave 1 percent from total Chinese GDP growth in 2020, and since it’s the largest trading partner for many developed countries, that economic sickness will spread.

Chinese disruptions don’t just hit Chinese manufacturing, they hit everyone’s.

Fear itself has a depressing economic impact. Amazon led a number of companies in backing out of the Mobile World Congress in Barcelona—far from Wuhan—over coronavirus fears. The fact that a telecom industry gathering would have some relationship to China was enough to tamp down participation. The hospitality industry in transportation, hotels, and the like will also take a hit. If airplanes don’t add wear and tear because of less intensive use, that pushes out airplane purchases, and Boeing, reeling from the 737 Max crisis, has no margin for slowed demand, to say nothing of its many suppliers.

Even if the coronavirus eventually subsides, the nature of the just-in-time economy means that China’s actions have already had dramatic economic effects. Modern production processes don’t normally involve stocking up protective inventory to counteract supply chain disruptions. Just a few weeks without goods flowing makes production impossible. If your plant is single-sourced from China, you’re scrambling to find someone else to supply key components. If your Chinese supplier fails amid the economic carnage, you need to source those parts permanently.

China is a source of not only finished goods, but also of input parts and raw materials. A substantial number of the materials needed for defense and electronic systems come from China, and that nation is “the single or sole supplier for a number of specialty chemicals,” according to a recent Defense Department report. Rare earth minerals, which are critical to electronics, are largely mined in China. As a result, Chinese disruptions don’t just hit Chinese manufacturing, they hit everyone’s. Automakers have already had to slow or shut down factories globally due to supply shortages.

Perhaps the biggest concern is over medical supplies. China produces and exports a large amount of pharmaceuticals to the U.S., including 97 percent of all antibiotics and 80 percent of the active ingredients used to make drugs here. Penicillin, ibuprofen, and aspirin largely come from China. Last month, the medical supply firm Cardinal Health recalled 2.9 million surgical gowns “cross contaminated” at a plant in China; the blood pressure drug valsartan also saw shortages recently, thanks to tainted active ingredients at one Chinese plant. The combination of supply chain disruptions and increased demand at hospitals if coronavirus spreads to the U.S. could prove devastating.

In a dark irony, most of the world’s face masks—now ubiquitous in China as a precaution—are made in China and Taiwan, and even for those made elsewhere, some component parts are Chinese-sourced. Shortages have led China to declare the masks a “strategic resource,” reserving them for medical workers. U.S. hospitals are “critically low” on respiratory masks, according to medical-supply middlemen. Lack of protective gear could increase vulnerability to the virus, and the one place on earth suffering from production shutdowns is the one place where most of the protective gear originates.

One estimate from Washington University in St. Louis professor Panos Kouvelis projects total supply chain damage at $300 to $400 billion, and ripple effects for up to two years. That’s actually manageable as a share of the global economy. But as new cases pop up in Singapore, an important financial hub, and as the head of the World Health Organization warns that we could be seeing only the “tip of the iceberg,” those numbers could already be out of date.

It’s wrong to let fear guide responses to coronavirus. Restrictions in China could end up working, and an experimental drug from Gilead Sciences may provide relief. But the economic threats to locating so much of the global supply chain in one part of the world were eminently predictable. Neoliberal dogma about “comparative advantage” and a concomitant preference for mass outsourcing put the world on a tenuous path. It is not racist or xenophobic to want to avoid centralized monopolies on production in any single region, and we’re seeing exactly why today.

If there’s a silver lining, it’s that this threat could inspire more diversification of supply chains. The race to the bottom in manufacturing clearly has a cost, and countries must learn that self-preservation demands maintaining some semblance of an industrial base. The U.S.-China trade war did lead to some companies moving their work out of China, but only to cheaper countries where multinationals will likely conglomerate, to build economies of scale. We know the dangers inherent in that. Rebuilding domestic manufacturing is not just a question of jobs; it’s a question of safety.