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Economy

How the Coronavirus Challenges Global Supply Chains

Mar 03 , 2020
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

In our time of global collaboration, the division of labor in industry is becoming more complex and evolving in an ever more tightly interwoven network. Because the sudden outbreak of COVID-19 has affected numerous connections in the global supply chains, no country can afford to be an outsider. 

As the epidemic continues to spread, the world’s reliance on China has become a prime focus of attention. China is a major trading partner of more than 120 countries. It accounts for 17 percent of global GDP and nearly 12 percent of global trade. It is the largest exporter of electrical and electronics components, accounting for 30 percent of the global total, and it is a global center for supplies that provide 19.3 percent of labor-intensive products such as textiles, finished garments, furniture and toys. According to JCER, every $10 billion that Chinese manufacturing drops will result in a reduction of $6.7 billion from overseas production and revenue. South Korea, Japan and the United States are among the nations most affected.

China’s impact on the global economy far exceeds the size of its own economy. For more than a decade, China has not just been assembling products, but producing many of the components, becoming the globe’s largest trader of intermediate products. Different from the export of final products, trading in intermediate products arises from the fact that single commodities are produced consecutively at multiple stages in different countries.

Any disruption in the intermediate goods trade may affect the continuity of the entire production process, causing damage at greater scale.

China’s added value from manufacturing now accounts for nearly a third of the global total, and the country is deeply integrated into industrial, supply and value chains around the world. The proportion of imports from China of intermediate and finished products by others is constantly rising. In Asian supply chains, about 40 percent of industrial intermediate products are from China. Another 10 percent are from the United States, which indicates far greater dependence on the former than on the latter.

Developed economies also rely heavily on Chinese supplies. According to the OECD, in 2018 a significant proportion of intermediate input in global manufacturing came from China. Chinese intermediate inputs in electronic products in Germany, Britain and France accounted for 10.1 percent, 8.8 percent and 9.9 percent, respectively.

The coronavirus outbreak is testing the very structure and system of global supply chains. Since the epidemic has brought production in China to a virtual halt in some sectors, factories operating under capacity in others and breaking component supply streams, global supply chains inevitably will suffer great damage. With the compenent supply from China cut, Hyundai Motors, for example, has already suspended all production lines at home. Japan’s top three automakers, Nissan, Toyota and Honda, also are having trouble resuming production. Since China provides more than 30 percent of Japanese imports of auto parts, postponements in China means risks of broken supply chains for Japanese car manufacturers.

The latest trend in the epidemic’s global reach is alarming. So far 37 countries have reported infections, with the total number of confirmed cases exceeding 80,000. Though the spread appears to have been arrested within China, newly confirmed cases overseas have for the first time surpassed those in China. The dramatic increase in reports of confirmed infections in such places as Japan, South Korea, Italy and the Middle East is worrying.

Both Japan and South Korea are key exporters that play equally important roles in global supply chains. Among the nearly $2,100 billion of Chinese imports last year, 8.3 percent were from Japan and 8.4 percent were from South Korea. Should the epidemic spread further globally, it will deal a second blow to both the Chinese economy and global supply chains.

According to the WTO-issued world trade barometer, the prosperity index for world trade dropped to 95.5 in the first quarter of 2020, lower than the 96.6 of Q4 last year and six consecutive quarters below the 100 bench mark.

Because of the escalation of the epidemic, worries are rising about a further slowdown in the circulation of global goods are on the rise. A recent Sea-Intelligence report indicates that since the beginning of the outbreak, global trade has dropped by 350,000 containers. More than 50 percent of cargo on shipping lines has been suspended to and from northwestern Europe, the northwestern and eastern U.S., Africa, Southeast Asia, Australia and New Zealand. The suspension of maritime logistics and supply chains can be expected to create domino effects at greater scale.

Currently, and evaluation of the epidemic’s economic influences is to a great extent just an educated guess. Out of consideration of supply chain security, some overseas companies may speed up modifications to their supply chains to reduce the reliance on China. Especially in recent years, as European countries and the U.S. embrace a strategy of re-industrialization in a bid to bring some links in the global supply chain back home, unilateral trade actions and protectionism are erecting new barricades. Restructuring of global supply chains will give rise to some changes, but the coronavirus epidemic’s impact will not be subversive. It simply won’t last.

On one hand, the tremendous size of China’s economy and market, as well as the country’s role as a crucial hub in global supply chains, have made it a “dual center” — both a global manufacturing center and a global market — that cannot be replaced by other economies.

On the other hand, the complex division of labor and productive relations require long-term coordination, meaning that the cost of involved in rerouting global supply chains will be very high.

Of Apple’s 220-plus suppliers, for example, 41 are from China, four more than from the U.S. Judging by the distribution of Apple’s main assembly facilities — and despite such challenges as the China-U.S. trade war — the Chinese mainland continues to boast the most assemblers for the company. The long-term nature of such productive relations links trade closely to investment, and makes it impossible to separate them easily.

History has proved repeatedly that in the face of a major global public health challenge, no country can remain an outsider. Epidemics know no borders. This one calls for global synergy to guarantee supply chain security. Unfortunately, trade frictions linger, and some countries are more interested in going it alone, which poses a huge challenge to the necessary spirit of cooperation.

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