Congressional Research Service IF11434.3 (The Coronavirus: U.S.-China Economic Considerations)

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A Congressional Research Service product, IF11434 (version 3), updated March 2, 2020, on the U.S.-China economic considerations of the coronavirus outbreak (COVID-19). It says the outbreak is slowing economic activity in China and raising concerns about U.S. supply chain vulnerabilities in sectors that rely on China-based suppliers, including medical supplies, pharmaceuticals, auto parts, microelectronics and strategic raw materials. It describes lockdowns of cities in Hubei and Zhejiang provinces, with an estimated 90 cities across China facing some form of restrictions, and uneven business reopening. It reports that U.S. senior officials have expressed concerns about the completeness and timeliness of the information China is reporting.

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Updated March 2, 2020
The Coronavirus: U.S.-China Economic Considerations
The novel coronavirus outbreak (COVID-19) is slowing New Year was extended from late January until February
economic activity in China and raising concerns about 10, 2020. Business reopening has been uneven across
potential U.S. supply chain vulnerabilities in a range of sectors and locations in China. Many firms are awaiting
sectors that rely directly and indirectly on China-based government approvals to reopen and are facing difficulties
suppliers. These sectors include medical supplies, in meeting new operating requirements, such as providing
pharmaceuticals, auto parts, microelectronics, and strategic masks for employees. Foxconn, a Taiwan electronics firm
raw materials. Similar to the outbreak of severe acute that produces for Apple, has applied to reopen in early
respiratory syndrome (SARS) in China in 2002-2003, most March. Resumption of transportation and travel appears to
cases so far are concentrated in China, but the current be a major obstacle. Chinese media has reported on
number of infections is already an order greater and every employees struggling to return to work amid transportation
Chinese province is affected. U.S. senior officials have shutdowns and contagion concerns. The American
expressed concerns about the completeness and timeliness Chamber of Commerce in Shanghai reported on February
of the information China is reporting, complicating 17, 2020, that most companies surveyed do not yet have
assessments of the scope, trajectory, and economic impact sufficient staff to run a production line and face numerous
of the outbreak. The Chinese government has also imposed logistics constraints. Almost half of the companies surveyed
tight content controls on media reporting and placed Sina report that their global operations are already affected by
Weibo, Tencent, ByteDance, and other Internet firms under the outbreak. These companies expect demand to be lower
“special supervision” of the Cyberspace Administration of over the next several months.
China, further limiting coverage of the outbreak.
The Chinese government has locked down cities in China’s
Figure 1. COVID-19 Regional Case Map provinces of Hubei (e.g., Wuhan, Ezhou) and Zhejiang
(e.g., Wenzhou, Hangzhou, Ningbo, and Taizhou). In total,
an estimated 90 cities across China face some form of
restrictions. The Chinese government has leaned on online
delivery services and the military for logistics support, and
is restricting consumer activity across multiple cities.
Domestic and global transportation links have been
significantly curtailed with ramifications for trade. Air
services face reduced capacity with the canceling of
passenger travel and restrictions on pilots and flight staff on
cargo flights to third countries. Cargo operations in China
depend on port staffing and are reportedly operating at
significantly reduced capacity. While most businesses
typically plan for a shut down during the Lunar New Year,
including some stockpiling, companies are now likely to
experience more serious shortages. Cargo shipments from
Source: New York Times, “Coronavirus Map: Tracking the Spread of China to the United States typically take approximately
the Outbreak,” March 2, 2020. three weeks; slowdowns in maritime shipping could affect a
wide range of industrial and consumer goods.
Economic Outlook
The coronavirus is hitting China during an economic The Chinese government is trying to encourage economic
downturn as the government grapples with U.S. tariffs and activity, but restrictions on business reopening, travel, and
China’s counter tariffs, rising consumer inflation due in part transportation are hampering its support efforts. Unlike
to domestic pork shortages resulting from African swine other types of economic slowdowns, government stimulus
fever, and efforts to rein in local government spending and cannot generate real economic activity on its own if
shadow lending. China’s economic growth could go business operations remain partially or completely shut
negative in the first quarter of 2020 and fall below 5% for down. The Chinese government is issuing economic
the year, with more serious effects if the outbreak continues support measures such as tax exemptions and special-
beyond March. In a sign the slowdown could last past purpose bonds. City governments in Beijing, Qingdao,
March, the Chinese government cancelled several spring Shanghai, and Suzhou are offering small- and medium-
meetings: the State Council’s China Development Forum, sized businesses in hard-hit industries support to reduce
the National People’s Congress annual legislative session, loans and delay payments for rent and social security. With
and the Canton Trade Fair. a priority on social stability, localities are also offering
preferences to companies that retain workers. In early
A key factor affecting the economic outlook in China is the February, China’s central bank pumped $57 billion into the
ability of businesses to resume operations after the Lunar
https://crsreports.congress.gov
The Coronavirus: U.S.-China Economic Considerations

banking system, capped banks’ interest rates on loans for Broader Considerations for Congress
major firms, and extended deadlines for banks to curb Phase One Trade Deal: The crisis is calling into question
shadow lending. The central bank has been setting the China’s ability to implement the U.S.-China phase one
reference rate for China’s currency stronger than its official trade deal signed in January 2020. Transportation
close rate to keep it stable. constraints and a slowdown in demand could affect China’s
import levels. The agreement has a force majeure provision
There have been press reports of shortages of medical that could give China flexibility in implementing its
supplies—N95 respirator masks, medical protective commitments. The deal was finalized in December 2019,
equipment, antiviral drugs—and food. In response, the when Chinese officials reportedly knew about the outbreak,
government has repurposed some production facilities to which raises questions about the rationale and timing of the
meet health and medical needs, including the facilities of decision to include the force majeure provision. As part of
U.S. firms such as General Motors (GM) and 3M. In early the phase one trade deal, China and the United States on
February, the Commerce Ministry directed local February 14, 2020, cut by 50% the tariffs they imposed in
governments to increase imports of medical supplies, September 2019. China also announced a tariff exemption
production materials, and agricultural products, potentially process for 700 tariff lines that include some agriculture,
providing U.S. export opportunities in these sectors. medical supplies, raw materials, and industrial inputs.

Global Economic Impact Pharmaceutical Market Access and IP: Pharmaceuticals
China’s economy is globally connected through trade, are a component of Made in China 2025 industrial plans
investment, and tourism, and any slowdown and persistent that aim to create competitive advantages for China in
travel and transportation restrictions beyond March are certain strategic industries. The Chinese government
likely to pressure global supply chains and potentially restricts market access for foreign pharmaceutical firms,
create worldwide economic fallout. Measures to contain the including the disclosure of proprietary information for drug
outbreak have significantly curtailed domestic and global trials and sales. The Wuhan Institute of Virology and
transportation links, preventing the transport of many China’s military recently applied to patent an adaption of an
products and manufacturing inputs. Passenger air traffic has antiviral drug developed by California-based Gilead
slowed significantly, taking offline significant air cargo Sciences, Remdesivir. Also, Chinese firm BrightGene Bio-
capacity for microelectronics and other products that ship Medical Technology Co. announced it can produce a
by air. Production has slowed across China, with sharp generic alternative to Remdesivir, potentially complicating
slowdowns in sectors concentrated in Hubei, such as auto Gilead’s way forward in China. Gilead’s patent application
parts, LCD panels, and pharmaceuticals. Manufacturing in China for Remdesivir use in coronaviruses has been
that recently shifted offshore to other parts of Asia still pending since 2016. The Chinese government is also
often depends on intermediate inputs from China and thus conducting an antitrust review of AbbVie’s acquisition of
is not insulated from China’s production slowdown. Allergan, Inc. and could set terms for the use or transfer of
AbbVie’s antiviral intellectual property to benefit Chinese
Disruptions in Chinese supply chains are expected to have a industry. China has required technology transfer in other
limited macroeconomic effect on developed markets in the antitrust reviews of foreign firms in China 2025 sectors.
short term but developing markets and Asia’s developed
Table 1. Select U.S. Imports of Healthcare Products
economies, are more vulnerable. Vietnam, Taiwan,
from China
Malaysia, South Korea, Japan, Thailand, and Singapore all
have strong supply chain links with China and are reporting 2019 value 2019 % of U.S.
supply shortages. South Korea’s Hyundai and Kia, for Product U.S.$ imports
example, announced production slowdowns in response to
problems in securing auto parts from China. While Antibiotics $302,866,251 35%
developed economies might be insulated in the short term,
PPE $1,852,214,083 30%
the economic risks grow the longer the outbreak continues.
Medical Devices $3,911,308, 981 8.6%
At the firm level, companies in sectors such as technology
Source: U.S. International Trade Commission, Assessed Customs
and autos or that are exposed to China’s tourism, retail, or
Value.
other services businesses could take a significant hit.
According to the United Nations World Tourism Supply Chain Vulnerabilities: China’s role as a global
Organization, China’s outbound tourism spending in 2018 supplier of medical personal protective equipment (PPE),
was $277 billion, of which an estimated $36 billion was in medical devices, antibiotics, and active pharmaceutical
the United States. U.S. business will likely be affected by ingredients means reduced production or exports from
China’s slowdown, including through shortages of inputs, China could lead to shortages and increased costs of critical
the cancelation of some commercial activity, and potential medical supplies in the United States. The outbreak is also
increased costs related to a strengthening U.S. dollar. likely to create shortages in China-sourced raw materials,
China’s Commerce Ministry is helping firms obtain free manufacturing inputs, microelectronics, and finished goods.
force majeure certifications—which allow firms to opt out
of contractual obligations without legal recourse because of Karen M. Sutter, Specialist in Asian Trade and Finance
developments beyond their control—and China National Michael D. Sutherland, Analyst in International Trade and
Offshore Oil Company declared force majeure in cancelling Finance
some LNG imports.
IF11434

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The Coronavirus: U.S.-China Economic Considerations

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