By Samuel Leach, Founder and CEO of Samuel & Co. Trading
In contract law, there is a very common clause known as “force majeure“. This French phrase means “superior force”. Another form of the clause is “cas fortuit“, which translates, perhaps more aptly, to “chance occurrence” or “unavoidable accident”.
And according to economist Willy Shih, China may have grounds to claim force majeure following the far-reaching economic impacts of the coronavirus outbreak.
Shih, a professor at Harvard Business School with expertise in Asian industrial competitiveness, recently conducted a Q & A where he elaborated on his thoughts regarding the state of China and the world’s economy in the wake of the coronavirus outbreak.
“Well, China can easily declare force majeure here,” Shih explained, referencing the U.S.-China trade deal in which China committed to importing more American goods. “[China has] no ability to absorb that level of imports.”
But it’s not just China and America that will be impacted. In fact, Shih believes the outbreak will be the biggest event affecting the global economy in 2020. A similar study conducted by Oxford Economics predicts the spread of the coronavirus will reduce global economic growth by 1.3 percent, a number equivalent to $1 trillion in lost income worldwide.
Impacts of products are likely to include many electronics, such as for Apple and Android phones, due to the shutdown of Foxconn’s Longhua complex. Apple has reportedly informed its investors that the company will most likely fail to meet its quarterly goals due to the “temporarily constrained” supply of iPhones, exacerbated by a staggering decline in Chinese retail spending since the outbreak occurred.
Carmaker Jaguar Land Rover is just one among many automobile manufacturers reporting severe supply problems. The British company says it is near to running out of car parts in their U.K. factories due to the prevention of parts arriving from China.
Some products are virtually exclusive to Chinese manufacturing: many toys and electronics as we know, but also a wide range of active pharmaceutical ingredients. Thus, the outbreak appears poised to affect the world’s pharmaceutical supply chain, a dire projection considering the medical demands of a viral pandemic.
Other impacts on global companies and markets include the shutting down of more than half of the Starbucks locations in China — a number surpassing 2,000. Additionally, China has closed all movie theaters, in attempts to dissuade large gatherings of crowds. China, it should be known, is the second-largest motion picture market in the world. Major American film markets, namely Hollywood, are poised to experience a significant blow to their box office sales.
Another facet to be aware of is that of Chinese outbound tourism: a French report indicates that the revenue generated by Chinese tourists in Paris has plummeted. Chinese tourists are a major factor in retail revenue across numerous regions, including the U.S., Singapore, Macau, and Europe.
But what are the interior factors making the outbreak so challenging to counteract? For one, much of Chinese public transportation has shut down, barring the re-entry of workers who rely on such transit into cities where manufacturing plants and other businesses operate. City-imposed quarantines make this even more difficult in certain parts of the country.
Factories in China also tend to have workers on assembly lines in high numbers and very close proximity. Factory managers much then weigh the risks of the contagion spreading rapidly among their workforce, and the subsequent difficulty of instituting a quarantine. Understandably, many managers are extremely hesitant to resume production.
Much of this has already occurred, such as factory shutdowns and supply shortages, but some of these projected scenarios are just that — scenarios and projections. Something to consider is that the situation currently is greatly worsened by the outbreak coinciding with China’s Lunar New Year break, which is already a typical disruption during this time of year. The break has certainly compounded the economic situation, but one may optimistically hope that the break has skewered the predictions for the worse. Either way, as Shih says, the coronavirus outbreak is set to be 2020’s greatest economic disruption, and perhaps the greatest global economic disruption in recent memory.