Over the past three years, a fundamental problem with the Trump administration’s economic policy approach has been its insularity. Rather than seeing the U.S. economy as being integrally interconnected with and influenced by the global economy, the administration has chosen to run economic policy with little regard to the rest of the world. It has paid little attention to the potential economic and financial market spillovers to the U.S. that might result from economic troubles abroad. Amid a global epidemic, their myopia is more troubling than ever.
Judging by Secretary of Commerce Wilbur Ross’s recent statement that the coronavirus will prove to be beneficial to the U.S. economy, the insularity of U.S. economic policy is unlikely to change anytime soon. This could prove economically costly, especially at a time when the coronavirus epidemic is threatening the world economic outlook.
The tally of Chinese coronavirus infections makes nonsense of any notion that the current health scare will be but a passing phase. Already more than 17,000 cases of the virus have been reported with more than 350 fatalities. Worse yet, it seems that there is currently an accelerating daily increase in the number of people being infected, and by now the virus has traveled well beyond China’s borders, including to our shores.
If that’s not enough, there are more reasons to believe that the coronavirus could have a more pronounced and prolonged impact than the SARS outbreak. For a start, although SARS had a much higher mortality rate than the coronavirus, in total there were only around 8,000 SARS incidents, a fraction of the number of coronavirus cases already reported.
To make matters worse, the economic context of the coronavirus outbreak is worse than it was with SARS. In 2003, the Chinese economy was growing by around 11 percent per year. The SARS outbreak reduced Chinese GDP by an estimated 2 percentage points in a single quarter. The blow now being dealt to China’s economy by the coronavirus adds to those it has received from the U.S.-China trade war and from the Chinese government’s attempts to wean the economy from its credit addiction. As a result, already before the coronavirus scare, the Chinese economy was growing at only 6 percent – or about half the rate it was growing during the SARS period.
In Secretary Ross’s world view, the current coronavirus scare, coupled with the earlier SARS and Chinese swine flu episodes, will cause U.S. companies to re-evaluate their decisions to base crucial parts of their global supply chains in China. That will cause U.S. companies to relocate their investment away from China and towards the United States, resulting in a boon to U.S. wages and employment.
A basic flaw in Secretary Ross’s thinking is that, while there very well might be a reallocation of U.S. investment away from China, that reallocation need not necessarily be to a high labor cost country like the United States. Indeed, in response to the U.S.-China trade war, U.S. investment has already started moving away from China and toward low-wage-cost countries like Vietnam and Thailand.
It seems to have escaped Mr. Ross’s notice that China now boasts the world’s second largest GDP, and as such it is a crucial player in the global economy. Over the past decade, China has been the main engine of global economic growth and the world’s largest international commodity consumer. Any further slowing in the Chinese economy risks dragging down the rest of the Asian region, major exporters to China like Germany and Japan, and the other commodity-producing emerging-market economies.
With global equity valuations already stretched thin and with widespread global credit risk mispricing, Secretary Ross also seems to be underestimating how a further world economic slowdown could roil both U.S. and international financial markets. He also seems to be overlooking how damaging Chinese supply disruptions could be for the bottom line of U.S. companies like Apple that have major Chinese production facilities and major earnings from China.
The last thing that a vulnerable world economy needs is a marked economic slowdown in China. France, Germany, Italy, and the United Kingdom all now seem to be on the cusp of economic recessions. The Indian economy is experiencing a major economic slowdown. South America is being roiled by social and political unrest that is casting a dark cloud over that continent’s economic outlook. Even the United States is experiencing a manufacturing slump.
If Secretary Ross is relying on a global viral epidemic to boost the U.S. labor market, he shouldn’t hold his breath.