3 ways coronavirus will affect the US economy – and 1 silver lining

As the new coronavirus spreads around

the world, and confirmed cases and deaths

mount, economists are increasingly

concerned about the impact on the U.S.

economy. In a recent report to Congress, the

Federal Reserve warned that disruptions

from the coronavirus could spill over into

the global economy, creating new risks to

the U.S. And Wall Street lender Goldman Sachs estimates that the virus will cut as much as half a point off of U.S. economic output in the first quarter of 2020.

As an expert in supply chain management, I’ve studied how dependent U.S. companies have become on manufacturers of parts and products in China. But that is only one of many ways the outbreak could hurt the U.S. economy. Here, I list three – as well as something that could mitigate the impact.

1. Sales to China
China is one of the largest markets for U.S. products, especially electronics and fashion.

For example, about 47% of Qualcomm’s annual revenue and 28% of Intel’s income comes from China, making it the most important region for both chipmakers. China is also the second-largest market for iPhone-maker Apple, and the outbreak has the potential to severely depress its sales. Apple extended the closure of its corporate offices and all of its stores in China until at least Feb. 14.

Many cities and provinces have told businesses to stay closed, and residents throughout China have been staying off the streets. That has resulted in deserted shopping centers with closed stores, including those run by American fast food companies and fashion retailers, such as Nike, Starbucks and McDonald’s, to name a few.

2. Constrained and disrupted supply chains
The Chinese economy has effectively shut down, which is taking a toll on U.S. manufacturers through their supply chains.

Manufacturers that use components in their products that are mostly sourced from infected areas in China such as Wuhan, where more than 500 car parts manufacturers operate, have two options: find alternative sources outside of China or shut down production.

Automakers including Tesla, Ford and Volkswagen have shut down plants in China. Hyundai has gone a step further and temporarily closed production lines in South Korea because of a shortage of parts, a hint of more trouble for other manufacturers.

U.S. companies such as Apple that have outsourced most of their manufacturing facilities to China have been affected by widespread closures. And even when components or products remain generally available, the disruption to established supply chains is limiting access for some companies.

3. US tourism will take a hit
Chinese tourism has in recent years become an important driver of U.S. GDP.

Then the trade war arrived, and that caused a large drop in Chinese visits. Now, the coronavirus is expected to deal another blow to the industry. Many airlines have have canceled all flights in and out of China, and the Trump administration has imposed travel restrictions that bar any foreign national who has recently traveled to China from entering the U.S.

The number of visitors coming to the United States from China could drop by as much as 28% in 2020, which could translate into $5.8 billion in less spending this year and $10.3 billion less through 2024.

Trade war’s silver lining
One consequence of the U.S.-China trade war is that many U.S. companies have moved all or most of their manufacturing facilities out of China to other countries in the region, such as Vietnam, Taiwan, Bangladesh and South Korea.

In a May 2019 survey, about 40% of American Chamber of Commerce member companies said they have relocated manufacturing facilities outside China or were considering doing so.

This could mitigate some of the impact as a result of disruptions in mainland, but the outbreak is spreading to other countries in Asia – though not as fast as in China – so their new manufacturing facilities could still be affected.

Virus Disrupts China’s Shipping, and World Ports Feel the Impact

Even where factories are back in operation, getting freight to docks has been impeded by roadblocks and quarantines.

SHANGHAI — Some docks in China are clogged with arriving shipping containers or iron ore. Warehouses overflow with goods that cannot be exported for lack of trucks. And many factories are idle because components are not reaching them.
As Beijing tries to jump-start an economy hobbled by its coronavirus epidemic, one of the biggest obstacles lies in the country’s half-paralyzed logistics industry. China has some of the world’s biggest and newest seaports and airports, but using them has become a lot harder because of roadblocks, quarantines and factory closings.
Global shipping has been one of the biggest casualties. More tonnage of container ships is idled around the world now than during the global financial crisis, according to Alphaliner, a shipping data service.
Daily charter rates for tankers and bulk freighters have plummeted more than 70 percent since early January as China buys less oil, iron ore and coal, said Tim Huxley, the chief executive of Mandarin Shipping, a Hong Kong-based freighter shipping line.
Ports and their customs offices are operating fairly smoothly, said several freight forwarders, who are essentially travel agents for cargo shipments. The difficulties lie in getting goods to and from the docks.
The slowdown in China is already being felt in the United States.

In January, container volume dropped 2.7 percent at American ports, according to Panjiva, a research unit of S&P Global Market Intelligence. And officials say they expect much bigger declines as the crisis goes on.
“The overall economic impact of these types of emergencies is often in the tens of billions of dollars,” said Cary Davis, an official with the American Association of Port Authorities. “Due to the coronavirus outbreak, cargo volumes at U.S. ports might be down by 20 percent or more on a year-on-year basis compared to 2019.”
Chinese government agencies have announced a series of measures in the last few days aimed at getting the country’s trucking fleet and ports humming again. But no one can say how quickly activity will return to normal.
Places like Jiangxi Province and the metropolis of Chongqing this week ordered the removal of most of the countless roadblocks and checkpoints erected by towns and cities to keep infected travelers out. Shanghai agreed on Tuesday to let trucks enter and leave the city with few health checks, even as people arriving in cars and buses remain subject to lengthy scrutiny and, in some cases, 14-day quarantines.
Some factories still have goods that they produced and never shipped in January, before the Lunar New Year holiday that turned into a monthlong nationwide shutdown. “There is a backlog of factory production to be shipped once factories reopen, and there is insufficient trucking capacity,” said Brian Wu, the chairman of the Hong Kong Association of Freight Forwarding and Logistics.
Seaport cranes and other equipment seem to be operating normally in China, although a shortage of trucks has made it hard for some ports to distribute goods once they have been unloaded. “We don’t see any abnormal situation in the ports — most of the ports and for that matter the customs, are working at full capacity,” Mr. Wu said.
About three-fifths of China’s trucking capacity is working again, A.P. Moller-Maersk Group of Denmark, the world’s largest shipping line, said in a statement Thursday. The company said three of China’s biggest coastal ports — Shanghai, Ningbo and Xingang — were clogged with refrigerated containers full of imported vegetables, fruit and frozen meat.
Maersk has responded with a $1,000-per-container fee for electricity to prevent spoilage before trucks can be found to ship the food inland.

The disruption to China’s freight movement is being felt at American ports, including the Port of Oakland.Credit...Jim Wilson/The New York Times

With many factories operating at a fraction of capacity, and with trucks not delivering a lot of finished goods, container-shipping lines have been canceling many sailings. “If there’s nothing coming to the dock, there’s no reason for the ships to come,” said Simon Heaney, senior manager for container shipping at Drewry, a maritime research firm in London.

The disruption is evident across the Pacific.

The Port of Los Angeles, which handles more containers in a year than any other in the Western Hemisphere, expects in the first three months of the year its biggest decline in volume since the financial crisis, according to its executive director, Gene Seroka.
Ship operators have canceled about 40 sailings to the port from Feb. 11 to April 1, a drop of about 25 percent from the typical volume after the Lunar New Year, Mr. Seroka said. Overall container volume at the port is expected to be down 15 percent in the first quarter compared with the same period last year.
At the same time, exports and empty containers are piling up, he said. And even though an eventual recovery should lead to a rebound in imports from China, it will not restore all of the shipments that have been canceled.

A car-seat assembly line at a factory in Shanghai, where officials are now allowing trucks to enter and leave with few health checks.Credit...Noel Celis/Agence France-Presse — Getty Images

“Once a ship sails or is cut, it doesn’t come back again,” Mr. Seroka said.

Shipping lines have also had trouble replacing crews globally after long voyages. About one-seventh of the sailors aboard the world’s commercial vessels have Chinese passports.
“It’s a nightmare to get people from one part of the world to another to join ships,” said Arthur Bowring, a Hong Kong shipping consultant.
Air cargo operations have been differently affected. The cancellation of flights in and out of China has been so extensive that freight forwarders have had a very hard time finding any space at all on planes for their shipments.
“The airline says, ‘I am sorry, I can’t pick it up,’” said Lin Zhenglong, the chief executive of the Nippon K&H Logistics Company in Tokyo.

Keith Bradsher reported from Shanghai, and Niraj Chokshi from New York.

Article originally posted on The New York Times.  By Keith Bradsher and Niraj Chokshi

Published February 27, 2020. Photos courtecy of The New Yourk Times, Getty Images and Associated press

A logistics center near the Chinese port of Tianjin in December. China’s ports are operating smoothly, freight agents say, but getting goods to and from docks has become difficult.Credit...Sun Yilei/Reuters

Employees at a factory in Wenzhou. Many factories in China have been closed since the Lunar New Year because of the coronavirus outbreak.Credit...Noel Celis/Agence France-Presse — Getty Images