Could the COVID-19 outbreak be a detonator for the mass relocation of industries? This could be one of the consequences of the production breakdown caused by the epidemic, according to The Economist’s business analysts.
Since its initial identification in China in December 2019, the novel coronavirus (COVID-19) outbreak has taken thousands of lives, affecting more than 20 countries and making a significant impact on trade, travel and the global economy.
During a webinar held by The Economist Intelligence Unit (EIU), China Analyst, Dan Wang; Tom Rafferty, Principal Economist for China and Imogen Page-Jarrett, Research Analyst looked in detail at the recent coronavirus outbreak and the impact it is likely to have on the Chinese and worldwide economy and businesses.
Many regions of the world including the US and Europe are immensely dependent on China in terms of supply. Any production disruption in China, especially in the coastal provinces which are the country’s trade hubs and account for 40 per cent of its GDP, will have an impact on the global economy. Therefore, should the production hiatus persist, industries such as consumer electronics, pharmaceuticals, automotive and fashion will struggle to find alternative suppliers outside of China, which dominates global production of the goods offered by these sectors.
According to the EIU’s Observatory of Economic Complexity, China manufactured more than 40 per cent of global textile exports in 2017. The pressure is mounting in terms of supply chain and if production does not pick up soon, fashion brands may face operational disruption and may be forced to seek alternative suppliers from outside the country.
Today’s Chinese government is faced with a dilemma between enforcing strict quarantine rules to avoid the spread of the virus and getting employees back to work to answer the world’s demand for China’s products and mitigate the outbreak’s far-reaching impact on its economy. So far, the government has opted for the former course of action, especially in rural cities where medical facilities are less accessible. Once the epidemic crisis has passed, hopefully by the month of April as The Economist predicts, the government’s policy response and incentive package to re-launch the economy will have to be both substantial and steady.
However, it is likely that this new epidemic will awaken large western industrial groups and states to the risk associated with having such a significant proportion of their consumer products manufactured in China and they may feel additionally compelled to relocate their industries back home.
The negative global impact of the epidemic is also fueling and vindicating the arguments of many political groups such as environmental parties who advocate against the current system of global trade. The high profile of the issue of climate change and the growing economic isolationism worldwide are causing the voices of those demanding a return to local production to be amplified. They say the relocation of the economy favoring short circuits would make it possible to reduce CO2 emissions generated by transport, while at the same time creating jobs in areas devastated by offshoring. The actual long-term global economic impacts of COVID-19 remain to be seen; in the meantime, the Chinese people should be respected for their resilience and deserve all our compassion.