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TWN Info Service on Health Issues (Mar20/01)
9 March 2020
Third World Network

Coronavirus outbreak could cost $50 billion in exports, says UNCTAD
Published in SUNS #9083 dated 6 March 2020

Geneva, 5 Mar (Kanaga Raja) -- The dramatic slowdown of manufacturing in China due to the outbreak of coronavirus (COVID-19) has had a ripple effect throughout the global economy and could result in a US$50 billion fall in exports across the world, the UN Conference on Trade and Development (UNCTAD) said on 4 March.

According to UNCTAD, in February, China's manufacturing Purchasing Manager's Index (PMI) fell by about 22 points to 37.5, the lowest reading since 2004.

This fall implies a 2% reduction in output on an annual basis and this 2% contraction in China's output has caused an estimated fall of about US$50 billion in exports across countries, it said.

In a Technical Note, UNCTAD said the most affected economies (due to Chinese supply disruptions) include the European Union ($15.6 billion in export losses resulting from a 2% reduction of China's exports in intermediate inputs); the United States ($5.8 billion); Japan ($5.2 billion); Republic of Korea ($3.8 billion); Vietnam ($2.3 billion) and Taiwan Province of China ($2.6 billion).

The most affected sectors include precision instruments, machinery, automotive and communications equipment, said UNCTAD.

"In addition to grave threats to human life, the coronavirus outbreak carries serious risks for the global economy," said UNCTAD Secretary-General Dr Mukhisa Kituyi.

"Any slowdown in manufacturing in one part of the world will have a ripple effect in economic activity across the globe because of regional and global value chains," he added.

IMPACT OF CHINA ON WORLD ECONOMY

At a media briefing on 4 March, Ms Pamela Coke-Hamilton, Director of the UNCTAD Division on International Trade and Commodities, said: "I think we are here because we know the impact that China has had on the world economy. In fact, 20% of overall global production and trade and manufacturing of intermediate goods is reliant on China."

As a result, China has become a critical and integral part of the economies and the global value chain across the world.

In February, the country's manufacturing Purchasing Manager's Index (PMI) had fallen to 37.5, the lowest reading since 2004, and this also correlates directly to exports and implies a 2% drop in overall exports, she said.

"This will show that there is a ripple effect throughout the global economy, and to the tune of a $50 billion fall in exports across the world," said Ms Coke-Hamilton.

Highlighting the degree of integration of countries and industries with China's economy, she said that the level of integration and therefore interdependence is clear.

"I think if this COVID-19 had occurred in Jamaica [where she is from], we would not be sitting here simply because the level of integration of production that is reliant on China and China's intermediate outputs is so significant to the national economy and to the global value chain that it is important for us to measure," she said.

She however pointed out that this is a limited and preliminary measurement in that it is only reliant on February's indices.

"If we look at what is occurring across the world now and even with respect to China, we will no doubt realize that the fall may be continuing and this may actually be a conservative estimate," she said.

Asked if it was possible for companies to diversify their suppliers vis-a-vis China, Mr Alessandro Nicita, an economist at the UNCTAD Division on International Trade and Commodities, said that it was not possible in the short-term, as it would take a while to identify new suppliers.

"In the long-term, probably yes," he added.

He however pointed out that the one big constraint is not only related to production but also to logistics.

China has built up a large transport logistics such as ports, shipping lanes, and aircraft that are able to move goods in and out of China, he noted.

Ms Coke-Hamilton also pointed out that the same argument was used when US President Donald Trump thought that simply imposing certain measures on certain countries would shift production back to the United States.

"It's never that easy because when companies move and they relocate and set up their industries and logistics frameworks, it is very hard to shift in the short-term. They may begin to look now that they have a situation that has impacted them so negatively," she said.

"They may begin to look for the medium to long term on shifting production perhaps to other Asian countries in the region still relying on the logistics value chain that has been established in that hemisphere but it won't happen in the short-term."

Asked if the coronavirus is having a strangulating effect on the global supply chain, Ms Coke-Hamilton said "in short, yes. It would seem so. Assuming that it is not mitigated in the short-term, it's likely that the overall impact on the global economy is going to be significant in terms of a negative downturn."

"I think also for developing countries, the impact of what is happening in China is going to be felt very, very intensely and we will look at that as well in greater detail in the coming months."

Mr Nicita said that ultimately the economic impact of the coronavirus depends on the measures that countries apply to contain the virus. He noted that China has done a great job in containing the virus.

IMPACT OF COVID-19 ON GLOBAL VALUE CHAINS

According to the UNCTAD Technical Note, besides its worrying effects on human life, the novel strain of coronavirus (COVID-19) has the potential to significantly slow down not only the Chinese economy but also the global economy.

China has become the central manufacturing hub of many global business operations. Any disruption of China's output is expected to have repercussions elsewhere through regional and global value chains, said UNCTAD.

The most recent data from China indicate a substantial decline in output. China Manufacturing Purchasing Manager's Index (PMI), a critical production index, fell by about 22 points in February.

This index is highly correlated with exports and such a decline implies a reduction in exports of about 2 percent on an annualized basis.

In other words, the drop observed in February spread over the year is equivalent to -2 percent of the supply of intermediate goods, said UNCTAD.

Indicators on shipping also suggest a reduction in Chinese exports for the month of February.

Container vessel departures from Shanghai were substantially lower in the first half of February with an increase in the second half.

However, the Shanghai Containerized Freight Index continues its decline thus indicating excess shipping capacity and lower demand for container vessels.

According to UNCTAD, during the last two decades, China has become crucial to the global economy.

China's rising importance in the global economy is not only related to its status as a manufacturer and exporter of consumer products.

China has become the main supplier of intermediate inputs for manufacturing companies abroad.

As of today, about 20 percent of global trade in manufacturing intermediate products originates in China (up from 4 percent in 2002), said UNCTAD.

Chinese manufacturing is essential to many global value chains, especially those related to precision instruments, machinery, automotive and communication equipment.

Any significant disruption in China's supply in these sectors is deemed to substantially affect producers in the rest of the world.

"Indeed, many companies around the world are fearful that the measures put in place to contain COVID-19 (i.e. restrictions to economic activities and movement of people), could hinder the supply of critical parts from Chinese producers, therefore affecting their own output," said the UNCTAD Note.

A reduction in Chinese supply of intermediate inputs can affect the productive capacity and therefore the exports of any given country depending on how reliant its industries are on Chinese suppliers, it added.

For example, some European auto manufacturers may face shortage of critical components for their operations, and companies in Japan may find it difficult to obtain parts necessary for the assembly of digital cameras, and so on.

For many companies, the limited use of inventories brought by a lean and just-in-time manufacturing process would result in shortages that will impact their production capabilities and overall exports, said UNCTAD.

In terms of the potential effect of COVID-19 on exports (by sector) in the most exposed countries to Chinese supply disruptions, UNCTAD said that the most impacted economies will be the European Union (machinery, automotive, and chemicals), the United States (machinery, automotive, and precision instruments), Japan (machinery and automotive), the Republic of Korea (machinery and communication equipment), Taiwan Province of China (communication equipment and office machinery) and Viet Nam (communication equipment).

While there is still uncertainty about the impact of the COVID-19 on China's productive capacity, the most recent statistics point to a significant downturn, said UNCTAD.

"The full effect of COVID-19 on global value chains will become clearer in the coming months."

On the question of how a disruption in Chinese supply of intermediate inputs will affect the rest of the world, the UNCTAD Technical Note said that based on its analysis, even if the outbreak of COVID-19 is contained mostly within China, the fact that Chinese suppliers are critical for many companies around the world implies that any disruption in China will also be felt outside China's borders.

"European, American and East Asian regional value chains will be disrupted. The estimated global effects are subject to change depending on the containment of the virus and or changes in the sources of supply."

Second, said UNCTAD, it is expected that the spillover effects of a disruption in Chinese supply will be diverse across economic sectors and dependent on the geographic localization of the COVID-19 outbreak and of the containment measures within China.

For example, it noted, automotive industry's intermediate exports may fall relatively more as the industry is geographically localized in the region where the outbreak of COVID-19 occurred.

Importantly, because of lack of information, UNCTAD said that the Technical Note does not consider this second aspect.

Once sectoral data on Chinese output is available, the likely effect on the various global value chains will become clearer, it said. +

 


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