The whole world of trade is getting sick from the coronavirus

I had previously published an article on 28 January 2020 with some early thoughts on the possible impacts of the coronavirus. However, as matters have progressed, I thought that it warranted an update.

A recent visit to a client in southern China has given the whole ‘virus’ issue a dose of reality when I realised that my client’s employees would be taking a longer holiday for the Lunar New Year and that production at my client’s factory and elsewhere in China would be heavily interrupted with consequences for the remainder of the world. The human toll is devastating but this article addresses the impact for trade with damage having an effect throughout the world’s trade as it is so reliant on supply and demand from China.

The virus has been given a variety of names, ranging from ‘vide coronavirus’, ‘COVID-19’ (its official scientific term) and ‘coronavirus’. For this article, I will stick with the ‘coronavirus’ term as it seems to be the most widely used.

The total effect of the coronavirus on trade is hard to quantify at this stage as it shows no signs of abating in China and is now being found in other countries. It is already clear that Chinese and world gross domestic product will suffer, it is now a question of the scale. The Australian budget surplus is under threat.

However, some effects can be summarised below:

• It has already affected Australian export industries such as airlines, cruise lines, tourism and education which rely on the Chinese market. Seafood exporters lost markets almost immediately with some product being sold locally at reduced prices or being returned to the sea.
• The next ‘wave’ of effect is beginning to be seen for other Australian food and complementary pharmaceutical suppliers as their Chinese consumers are kept at home and are disinclined to go out to buy these ‘luxury’ products reducing projected sales.
• The effect on the demand for Australian coal and iron ore is not clear. It may reduce as Chinese producers rely on stock brought in before the Lunar New Year. It may increase though if Chinese mines do not re-open or only open at reduced capacity.
• Australian producers and exporters who rely on inputs to manufacture from China (steel or aluminium for example) may not be able to produce their products and may need to switch suppliers to other parts of the world or to domestic suppliers
• Consumers and retailers will have orders delayed by the lack of production and availability of air and sea cargo. The cancellation of passenger air services reduced ‘belly space’ in those services, leading to likely massive increases in air freight charges relying solely on air cargo providers. It has also been estimated that shipping lines are losing US$350 million a week during the crisis.
• A traditional response from the Chinese government would be to ‘prime’ the economy through measures to increase consumer demand, but such measures are not useful as populations are being kept at home away from shopping. Further government support to industry or reductions in the price of exported products to stimulate businesses could be the subject of allegations of ‘dumping’ and ‘subsidies’ leading to the imposition of additional duties on goods imported to Australia, notwithstanding the terms of our Free Trade Agreement (FTA) with China (ChAFTA).
• The documents required to claim reduced customs duty under ChAFTA are not being provided so importers will need to pay the customs duty, secure the paperwork later and try and claim refunds which is a complicated process and strains cash flow.
• The expedited movement of goods and services guaranteed by various FTA’s may now be compromised as countries invoke emergency or safeguard measures.
• If there are delays in the production and movement of goods that could lead to claims for damages under contracts and claims for consequential damages by those further down the supply chain. That could also trigger the question of whether the events represent a ‘Force Majeure’ allowing for contracts to be cancelled without penalty. Lawyers will be called on to review provisions of contracts drafted well before these events arose as many Chinese companies are already doing so.
• Insurance policies need to be reviewed to determine if claims could be made for delays, delivery failures or loss of business caused by these coronavirus effects.
• More Australian suppliers to Chinese customers may find demand for their goods and services reduced by the combined effect of the ‘Phase One Agreement’ with the US and reduced domestic demand in China. While it is true that the Chinese economy recovered relatively quickly after the SARS epidemic and the world economy is now much larger, the fact that China is so fully enmeshed in the world economy and already stretched by its obligations under the ‘Phase One Agreement’ with the US may well limit the ability of China to develop effective economic measures to aid recovery.

We are already seeing adverse impacts which are likely to increase in the near future. Best to watch developments closely and start warning clients, customers and others in the supply chain that things may take time to recover their earlier strength. Hopefully, all parties can remain as ‘good neighbours’ and allow that time for recovery while developing more sophisticated ‘contingency plans’ in case of a new and similar event.