Coronavirus: What China’s Chaos Means For America (And The World)

Coronavirus: What China’s Chaos Means For America (And The World)

The Wuhan flu outbreak may be more determinative than tariffs in causing many companies to revisit decoupling their China-centric supply chains.
Chuck DeVore
By

As the People’s Republic of China grapples with the deadly Novel Coronavirus outbreak, there is mounting evidence that China’s economy is taking a major hit. The latest indicator is that U.S. crude oil futures are at their lowest prices in more than a year, down 21 percent from their January highs to $49.45 a barrel for the benchmark West Texas Intermediate (WTI).

The sole driving factor for oil’s precipitous drop can be found in China, where even the streets of Beijing are now empty of traffic, although the city lies some 600 miles north of Wuhan, the virus epicenter. Chinese oil demand has dropped 20 percent of total consumption, or about 3 million barrels a day—the largest demand drop since the financial crisis 12 years ago and the most rapid demand drop since the 9/11 terror attacks.

Chinese oil imports in 2019 reached an average of 10 million barrels a day, surpassing U.S. peak imports reached in 2005. Due to the American fracking boom, U.S. oil imports were down to 6.9 million barrels a day last year.

From the very start of the coronavirus epidemic, Chinese Communist Party officials worked to cover up and downplay the size and extent of the outbreak. Even now, the official count of 30,834 confirmed cases in China with 635 dead is likely understated. A hint of the far larger toll is seen with accounts of Chinese medical personnel working around the clock to the point of collapse while crematoriums have more than tripled their hours of operation.

It is widely understood that the Chinese Communist Party controls the number of confirmed coronavirus cases by metering the number of test kits sent to regional hospitals. Those with symptoms in excess of kits are sent home to self-quarantine.

If the virus’ rate of spread and mortality is far greater than the official count, short of successful and widespread medical treatments, China could see more than a million of its subjects die from the infection this month—roughly 5  percent of the nation’s typical yearly annual number of deaths. Should the virus spread to other nations with even less well-equipped health care systems, the number of dead could be far higher.

That the virus poses a dire public health risk can be seen in China’s extensive quarantine measures, which show every sign of disrupting China’s export-driven economy just as it was expected to partially rebound in the wake of the “Phase 1” China trade deal President Trump agreed to on Jan. 15.

The “Phase 1” agreement saw the United States leave in place its 25 percent tariffs on most of what it buys from China, including components used in just-in-time manufacturing processes, while reducing the tariff rate to 7.5 percent from 15 percent on $112 billion worth of imported goods. But the Wuhan flu outbreak may be more determinative than tariffs in causing many companies to revisit decoupling their China-centric supply chains.

American firms—and other foreign operators in China—have become increasingly concerned about China’s lack of respect for contract law, intellectual property protections, and increasing costs on top of the Trump administration’s tariffs policy. Russia closed its 2,600-mile border with China, airlines have cut service, and increasing numbers of travelers from China have been placed in quarantine. So a major hit to transpacific trade will soon follow.

It takes about three weeks for a ship to make its way from China to the U.S. West Coast. Reaction to the coronavirus is forcing China’s ports to a standstill while the government is allowing affected exporters to declare force majeure to cancel contracts without legal or financial harm. Factories are similarly affected. The entire supply chain is coming to a halt, with imports at the giant twin ports of Los Angeles and Long Beach likely to see a major slowdown by month’s end.

The short-term implications for the world economy aren’t good, but how might things play out in America? One interesting area to watch over the next few months is the growing plastic feedstock and manufacturing centers in Texas and Louisiana.

More than 300 plastics and petrochemical facilities are under construction or planned in the United States, buoyed by the near-tripling of ethane production due to fracking over the past 15 years. Much of this new capacity exports to China. But now that trade with China has been disrupted, there’s a good chance that existing U.S. plastics manufacturers will increase overtime and add shifts to make up for the loss in imports from China.

This near-term action—and parallel actions in other industries—may cause a bump in inflation as supply can’t meet demand. However, such price signals may encourage additional domestic capital investment in new capacity. The danger might be if the Federal Reserve interprets this supply-disruption-induced inflation as somehow requiring a tightening of the money supply, thus choking off the very funds needed to increase capacity.

The cumulative effect of tariffs and the viral outbreak was on U.S. Secretary of Commerce Wilbur Ross’s mind when he said on Fox Business last week that jobs might return to America as a result. Official U.S. unemployment rates remaining at record low levels, combined with enhanced immigration enforcement, should lead to continued strong demand for labor. That will attract additional Americans into the workforce, millions of whom have been idle since the Great Recession.

Chuck DeVore is vice president of national initiatives at the Texas Public Policy Foundation and served in the California State Assembly from 2004 to 2010.
Photo Image by _freakwave_ from Pixabay

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