Coronavirus Outbreak: How will Supply Chains and the U.S.-China Trade Agreement Hold up?

Alexa Browning – Right now, the coronavirus outbreak is instilling panic and chaos throughout not only Wuhan, China, where the virus originated, but across the entire globe. The World Health Organization has called it a global public health emergency. Coronavirus is similar to a respiratory illness in that it causes symptoms of runny nose, fever, cough, and sore throat.  One of the most devastating aspects of the virus is its incubation period of two to fourteen days, which means that people can have the virus before showing symptoms and, consequently, pass it onto others.  Unsurprisingly, given China’s role as the world’s second-largest economy, the fallout from the coronavirus outbreak has unnerved markets outside China’s borders and instilled fear among many for what is yet to come.

More specifically, this incubation period and uncertainty as to the duration of the outbreak has had damaging implications for Chinese-based factories. Approximately two-thirds of the country’s workforce is on lockdown and cannot go to work, meaning factories will have a hard time meeting their supply requirements. In turn, this poses a serious risk for many U.S. companies which rely on these factories to maintain their supply chains, such as Apple, General Motors, Starbucks, and General Electric, among others. Supply chains play an extremely important part in these business’ well-being because, without them, they cannot efficiently produce or deliver their products to consumers.

The fact that supply chains have become larger and more complex over the years makes it difficult to predict the extent to which the virus’ effects will be felt. However, some supply chain disruptions have already begun to show. For example, Starbucks closed over half of its storesin China and had to adjust its menus based on supply chain availability, while factories for General Motors are delaying production until more workers are able to return to work. Likewise, United States trading markets have seen their worst performances since 2002.

Additionally, another issue the coronavirus presents is whether China will be able to comply with Phase 1 of its trade deal with the U.S., in which it agreed to increase its imports of US goods and services by $200 billion over the next two years. China is already requesting that the U.S. show flexibility in applying deadlines. However, an inability from China to live up to the agreement would put the highly anticipated trade deal to a rough start and risk putting the two countries back in an adversarial position. In any event, Chinese government officials will likely rely on a clause in the agreement which states that the two countries will consult “in the event that a natural disaster or other unforeseeable event” prevents either from living up to the agreement’s terms.

It will be interesting to see what measures China takes to deal the with fallout, especially the impact on supply chains and the newly implemented trade agreement. Chinese companies, should they be unable to meet contract obligations, will likely rely on force majeure provisions, stating that their companies are victim to events beyond their control. Already, the Chinese government has attempted to shield a car parts supplier from a breach of contract claim by issuing it a force majeure certificate. Moreover, while most companies dependent on Chinese goods for production likely have short-term remedial actions in place, they cannot rely on these in the long run. Therefore, until these companies can be assured that China is taking proper measures to contain the outbreak, markets across the globe—and global health—face uncertain futures.

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