Fears keep rising throughout the world about the increasing cases of the coronavirus. New cases have popped up in such unlikely places such as Italy and Iran. While the health consequences of this new virus are very serious, so is its potential impact on international trade and business in general. Moody’s Analytics economist Mark Zandi estimates U.S. economic growth will drop by 1.7 percent due to the coronavirus crisis. This decline could be even more severe if the crisis deepens.
Firms that have supply chains linked to production in China can face disruption in the flow of production inputs and components due to a shortage of personnel, export/import restrictions, and general delays. U.S. importers of Chinese products face the same challenges.
A colleague of mine told me that he and his suppliers are having trouble receiving adequate production inputs for his U.S.-based plant because many of their suppliers in China have had to shut plants down or are seeing only 50 percent of their workforce report for work on a daily basis, due to the crisis.
To combat delays, many companies have started to stock up on their inventory of products that they import from China and other Asian nations. This can cause the local real estate market to see a spike in requests for short-term leases on warehousing space in order to accommodate the extra inventory. We are beginning to see this happening in the Borderplex region (El Paso, Juarez, southern New Mexico).
The volume of trade through American seaports also is being negatively affected by the coronavirus crisis. According to a February 27 report by The Maritime Executive, the Port of Los Angeles, which is the nation’s largest container port, predicted a 25 percent fall in activity during February. It is predicted that March activity also will be lower than the same period last year. At the neighboring Port of Long Beach, the nation’s second-largest container port, labor is at the lowest level in five years. Both ports had already seen declining numbers due to the U.S.-China trade war, and this has been further exacerbated by the coronavirus crisis. Maritime shippers are now casting a wary eye towards South Korea as the effects of the coronavirus outbreak there unfold.
Businesses can face interruptions because travel to and from foreign countries can be restricted, either by government agencies or by internal company policy. I have colleagues whose companies have cancelled trips to meet with production plants or business partners because of the coronavirus. And these cancellations are also happening domestically. The large Game Developers Conference was to be held on March 16-20 in San Francisco. However, one-by-one, big exhibitors such as Facebook, Play Station, Epic Games, and Electronic Arts pulled their participation, accounting for about 75,000 square feet of space at the trade show. This began to have a ripple effect because smaller companies operating in the gaming industry have as one of their major objectives to pitch to the larger companies such as these. Organizers eventually made the decision to cancel the entire show.
Many companies are attempting to shift production from China to North America. However, this is easier said than done because production space has to be available to do this, along with equipment, personnel, and a logistics chain. A local supply chain will also have to be established – all of this takes time, possibly months, or even years. A looser monetary policy by the Federal Reserve could make capital more readily available to finance production shifts, but time, not money, seems to be the overriding concern in dealing with a supply chain under stress.
As health officials scramble to contain the coronavirus and develop a vaccine, businesses must also fully understand their supply chains and manage risk. While an overreaction is not warranted at this time, good communication and a Plan B can go a long way during this crisis. Going forward, I think there will be a lot of discussion of the balancing act between setting up a supply chain in the most economical manner possible, utilizing facilities in places such as China and South Korea, versus risk management and the ability to manage a supply chain that is closer to the end users in the final market. Many manufacturers might come to the conclusion that it is better to have a supply chain in which expenses are higher, but does not suffer major delays or shutdowns halfway across the globe when a crisis occurs. Remember how the 2011 tsunami that hit Japan disrupted automotive supply chains throughout the world as Japanese suppliers of key components were temporarily knocked offline? This could bode well for North America, which could see an increased interest in the establishment of production plants closer to the U.S. market.
Finally, I had one colleague from Taiwan who lives in El Paso, Texas, tell me that he is very scared that he will catch something as slight as a cold, because being Asian, people’s minds will automatically think that he could have the coronavirus and shun him. This is a very personal way to be affected by this illness, a way that most non-Asian people living in the U.S. do not automatically have to consider.