January 30, 2020
Coronavirus Update: Supply Chain and Economic Impacts
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At Flexport, we’re keeping a close eye on the developments and impacts of the Wuhan Coronavirus. First and foremost, we’re focused on keeping our employees in China and around the world safe. We’re also watching for impacts on the supply chain as the virus causes more and more business interruptions.
We’ve already seen a steady stream of major airlines canceling flights to and from China. In some cases, the cancellations are comprehensive. Others have focused on specific routes. Most of the reductions are until the end of March—well beyond the Chinese New Year holiday.
A supply contraction like this is likely to cause volatile air cargo rates on multiple trade lanes, although the cancellations follow a period of excess capacity and low prices in air cargo. That alone will likely push up airfreight prices.
On the other side, there is an open question about when Chinese travel restrictions will lift and when factories will resume operations. A prolonged delay in production would cause a negative demand shock. With that in play, this would give us a clear indication of a decrease in trade volume, with ambiguity about the price movement.
The Economic Impact
How will all this affect the global economy? The full impact will depend, in great part, on how long business interruptions last. Because we expected a supply chain lull during the Chinese New Year period anyway, most shipments had already been pushed through before then. Now that the holiday has been extended, an important question is how much of post-Chinese New Year freight will ultimately be impacted.
How long factories remain shut, and the extent to which cargo movement is interrupted along with passenger travel will be determining factors.
Unlike airfreight, ocean freight is usually pretty independent of passenger traffic and accounts for the bulk of supply chain shipments. But the Yangtze is a very important internal waterway running through Wuhan. When traffic is disrupted, the effect can be significant.
While we do not yet know how this Coronavirus outbreak will play out—and we obviously hope it will be very limited—one estimate of the immediate economic impact of the 2003 SARS outbreak was a cut to Chinese GDP of just over 1 percent and a hit to Hong Kong GDP of over 2.5 percent.
Taiwan was estimated to have lost just under .5 percent of GDP. The authors of this study found longer term drags (over 10 years) of 2.3 percent of GDP for China, 3.2 percent for Hong Kong, and just over 0.5 percent for Taiwan. Those are significant, though not enormous numbers over a longer term. But such a reaction to the new Coronavirus would come on top of slow-downs we have already seen in China and Hong Kong. Meanwhile, China has already reported more cases of the new virus than it had of SARS.
Flexport will continue to monitor the impact of the Coronavirus on global trade and provide updates from our experts, including those in mainland China. Keep checking back to Flexport.com and our blog for the latest. Also, subscribe to Freight Market Update for weekly news on what's happening across tradelanes worldwide in both ocean and air.
If you’d like to help, please join Flexport’s efforts to provide aid to those in need. Organizations with freight quantity of unused medical masks, N95 masks, sanitizer, medical caps, protective clothing, goggles, eye guards, or any other supplies can donate to relief efforts by contacting firstname.lastname@example.org.
And, if you ship with Flexport, your Squad will provide ongoing updates on any potential impact to your shipments. Please don’t hesitate to reach out to them with questions.