Coronavirus Outbreak Could Have Major Economic Impact

Original Post: Nickels/McHugh/McHugh, Understanding Business: From the News to the Classroom

Last week, the world learned that a deadly, fast-moving disease called the coronavirus had appeared in several Chinese cities. The mysterious illness has already killed more than a hundred people and infected thousands more, leading the World Health Organization to declare the coronavirus a global health emergency. Despite its potentially worldwide implications, though, right now the disease is primarily localized in China. Along with placing entire cities on quarantine, Chinese authorities have also extended the annual Lunar New Year holiday so that businesses will remain closed until at least next week.

Many American companies are following the government’s lead and also taking time off until the coronavirus can be possibly contained. Ikea announced that it would close all 30 of its Chinese stores and send its more than 14,000 employees home on paid leave. Starbucks, meanwhile, shut down half of its 4,292 stores in China, which is the coffee chain’s second biggest market. On the manufacturing side, Apple is changing the routes of its supply chains away from China and looking for factories in other countries where it can make up for shortfalls. The appearance of the coronavirus has also stalled production at many automobile plants operating in Wuhan, the Chinese city considered to be the epicenter of the outbreak. With the entire city on lockdown, car companies like General Motors, Honda, Nissan, and many others have halted their assembly lines completely. 

At this point in time, it remains unclear when these companies will resume normal operations. What’s more, they represent just a small selection of the thousands of organizations that have ground to a halt since the coronavirus outbreak. Restrictions on Chinese travel outside of the country could also have a big impact on global tourism revenue. Each year, Chinese tourists spend more than $258 billion when traveling abroad, nearly twice what Americans spend. The loss of that income could damage the bottom lines of countless companies around the world. Analysts fear that China could see a drop in growth similar to what it experienced in the early 2000s during the SARS outbreak. Of course, right now only time will tell how this tragic situation affects China as well as global economic systems. “There will clearly be implications, at least in the near term, for Chinese output,” said Federal Reserve chair Jerome Powell. “We just have to see what the effect is globally.” 

Discussion Questions:

1. In 2018, Chinese tourism to the US accounted for $36.5 billion in sales. With total US GDP of $20.5 trillion in 2018, this represented 0.18% of all US output that year. Use Okun’s Law to determine how much the US unemployment rate would increase if all Chinese tourism stopped as a result of the Coronavirus.

2. Suppose that a significant percentage of the output that is normally produced, and that is currently being halted due to the Coronavirus, is normally exported abroad to the US. What effect would such a dramatic decrease in exports from China to US have on the foreign exchange market (in terms of yen per dollar)? If the exchange rate is not fixed, does this make the dollar appreciate or depreciate? What effect might this then have on US exports to China?

3. The spread of viruses like SARS and the Coronavirus are an unfortunate negative consequence of globalization and expanded travel. In this world that has become more interconnected than ever before, what are some of the costs and benefits to individuals and economies? Discuss