The Coronavirus: U.S.-China Economic Considerations (IF11434, Version 1)

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A Congressional Research Service report, IF11434, dated February 19, 2020, on the economic effects of the coronavirus outbreak in China and the U.S. supply chain exposure it revealed. China locked down cities in Hubei and Zhejiang, and an estimated 90 cities faced some form of restrictions, cutting air and cargo capacity. Sectors that rely on China-based suppliers include medical supplies, pharmaceuticals, auto parts, microelectronics and strategic raw materials. The American Chamber of Commerce in Shanghai reported that most surveyed companies lacked staff to run a production line and almost half said their global operations were already affected. China's growth could fall below 4% in the first quarter of 2020, and U.S. officials questioned the completeness of the information China was reporting.

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February 19, 2020
The Coronavirus: U.S.-China Economic Considerations
The novel coronavirus outbreak (COVID-19) is slowing 10, 2020. Business reopening has been uneven across
economic activity in China and raising concerns about sectors and locations in China. Many firms are awaiting
potential U.S. supply chain vulnerabilities in a range of government approvals to reopen and are facing difficulties
sectors that rely directly and indirectly on China-based in meeting new operating requirements, such as providing
suppliers. These sectors include medical supplies, masks for employees. Foxconn, a Taiwan electronics firm
pharmaceuticals, auto parts, microelectronics, and strategic that produces for Apple, has applied to reopen in early
raw materials. Similar to the outbreak of severe acute March. Resumption of transportation and travel appears to
respiratory syndrome (SARS) in China in 2002-2003, most be a major obstacle. Chinese media has reported on
cases so far are concentrated in China, but the current employees struggling to return to work amid transportation
number of infections is already an order greater and every shutdowns and contagion concerns. The American
Chinese province is affected. U.S. senior officials have Chamber of Commerce in Shanghai reported on February
expressed concerns about the completeness and timeliness 17, 2020 that most companies surveyed do not yet have
of the information China is reporting, complicating sufficient staff to run a production line and face numerous
assessments of the scope, trajectory, and economic impact logistics constraints. Almost half of the companies surveyed
of the outbreak. The Chinese government has also imposed report that their global operations are already affected by
tight content controls on media reporting and placed Sina the outbreak. These companies expect demand to be lower
Weibo, Tencent, ByteDance, and other Internet firms under over the next several months.
“special supervision” of the Cyberspace Administration of
China, further limiting coverage of the outbreak. The Chinese government has locked down cities in China’s
provinces of Hubei (e.g., Wuhan, Ezhou) and Zhejiang
Figure 1. COVID-19 Regional Case Map (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,” accessed February 14, 2020. three weeks; any slowdown 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 fall below business operations remain partially or completely shut
4% in the first quarter of 2020, with more serious effects if down. The Chinese government is issuing economic
the outbreak continues beyond March. In a sign the support measures such as tax exemptions and special-
slowdown could last past March, the Chinese government purpose bonds. City governments in Beijing, Qingdao,
cancelled several spring meetings: the State Council’s Shanghai, and Suzhou are offering small- and medium-
China Development Forum, the National People’s Congress sized businesses in hard-hit industries support to reduce
annual legislative session, and the Canton Trade Fair. loans and delay payments for rent and social security. With
a priority on social stability, localities are also offering
A key factor affecting the economic outlook in China is the preferences to companies that retain workers. In early
ability of businesses to resume operations after the Lunar February, China’s central bank pumped $57 billion into the
New Year was extended from late January until February banking system, capped banks’ interest rates on loans for

https://crsreports.congress.gov
The Coronavirus: U.S.-China Economic Considerations

major firms, and extended deadlines for banks to curb Broader Considerations for Congress
shadow lending. The central bank has been setting the Phase One Trade Deal: The crisis is calling into question
reference rate for China’s currency stronger than its official China’s ability to implement the U.S.-China phase one
close rate to keep it stable. trade deal signed in January 2020. Transportation
constraints and a slowdown in demand could affect China’s
There have been press reports of shortages of medical import levels. The agreement has a force majeure provision
supplies—N95 respirator masks, medical protective that could give China flexibility in implementing its
equipment, antiviral drugs—and food. In response, the commitments. The deal was finalized in December 2019,
government has repurposed some production facilities to when Chinese officials reportedly knew about the outbreak,
meet health and medical needs, including the facilities of which raises questions about the rationale and timing of the
U.S. firms such as General Motors (GM) and 3M. In early decision to include the force majeure provision. As part of
February, the Commerce Ministry directed local the phase one trade deal, China and the United States on
governments to increase imports of medical supplies, February 14, 2020 cut by 50% the tariffs they imposed in
production materials, and agricultural products, potentially September 2019. China also announced a tariff exemption
providing U.S. export opportunities in these sectors. process for 700 tariff lines that include some agriculture,
medical supplies, raw materials, and industrial inputs.
Global Economic Impact
China’s economy is globally connected through trade, Pharmaceutical Market Access and IP: Pharmaceuticals
investment, and tourism, and any slowdown and persistent are a component of Made in China 2025 industrial plans
travel and transportation restrictions beyond March are that aim to create competitive advantages for China in
likely to pressure global supply chains and potentially certain strategic industries. The Chinese government
create worldwide economic fallout. Measures to contain the restricts market access for foreign pharmaceutical firms,
outbreak have significantly curtailed domestic and global including the disclosure of proprietary information for drug
transportation links, preventing the transport of many trials and sales. The Wuhan Institute of Virology and
products and manufacturing inputs. Passenger air traffic has China’s military recently applied to patent an adaption of an
slowed significantly, taking offline significant air cargo antiviral drug developed by California-based Gilead
capacity for microelectronics and other products that ship Sciences, Remdesivir. Also, Chinese firm BrightGene Bio-
by air. Production has slowed across China, with sharp Medical Technology Co. announced it can produce a
slowdowns in sectors concentrated in Hubei, such as auto generic alternative to Remdesivir, potentially complicating
parts, LCD panels, and pharmaceuticals. Manufacturing Gilead’s way forward in China. Gilead’s patent application
that recently shifted offshore to other parts of Asia still in China for Remdesivir use in coronaviruses has been
often depends on intermediate inputs from China and thus pending since 2016. The Chinese government is also
is not insulated from China’s production slowdown. conducting an antitrust review of AbbVie’s acquisition of
Allergan, Inc. and could set terms for the use or transfer of
Disruptions in Chinese supply chains are expected to have a AbbVie’s antiviral intellectual property to benefit Chinese
limited macroeconomic effect on developed markets in the industry. China has required technology transfer in other
short term but developing markets and Asia’s developed antitrust reviews of foreign firms in China 2025 sectors.
economies, are more vulnerable. Vietnam, Taiwan,
Malaysia, South Korea, Japan, Thailand, and Singapore all Table 1. Select U.S. Imports of Healthcare Products
have strong supply chain links with China and are reporting from China
supply shortages. South Korea’s Hyundai and Kia, for
example, announced production slowdowns in response to 2019 value 2019 % of U.S.
Product
problems in securing auto parts from China. While U.S.$ imports
developed economies might be insulated in the short term,
Antibiotics $302,866,251 35%
the economic risks grow the longer the outbreak continues.
PPE $1,852,214,083 30%
At the firm level, companies in sectors such as technology
Medical Devices $3,911,308, 981 8.6%
and autos or that are exposed to China’s tourism, retail, or
other services businesses could take a significant hit. Source: U.S. International Trade Commission, Assessed Customs
According to the United Nations World Tourism Value
Organization, China’s outbound tourism spending in 2018 Supply Chain Vulnerabilities: China’s role as a global
was $277 billion, of which an estimated $36 billion was in supplier of medical personal protective equipment (PPE),
the United States. U.S. business will likely be affected by medical devices, antibiotics, and active pharmaceutical
China’s slowdown, including through shortages of inputs, ingredients means reduced production or exports from
the cancelation of some commercial activity, and potential China could lead to shortages and increased costs of critical
increased costs related to a strengthening U.S. dollar. medical supplies in the United States. The outbreak is also
China’s Commerce Ministry is helping firms obtain free likely to create shortages in China-sourced raw materials,
force majeure certifications—which allow firms to opt out manufacturing inputs, microelectronics, and finished goods.
of contractual obligations without legal recourse because of
developments beyond their control—and China National
Offshore Oil Company declared force majeure in cancelling Karen M. Sutter, Specialist in Asian Trade and Finance
some LNG imports. Michael D. Sutherland, Analyst in International Trade and
Finance

https://crsreports.congress.gov
The Coronavirus: U.S.-China Economic Considerations

IF11434

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