COVID-19: Economic Implications for Travel and Trade

As of March 7, over 70 countries have confirmed cases of COVID-19, a respiratory coronavirus that originated in China in December. Since the initial outbreak, there have been 101,583 confirmed cases and 3,460 deaths. The U.S. alone has reported over 250 cases. The coronavirus and corresponding containment efforts have led to decreased demand within the tourism industry, factory closures, port congestion, and the disruption of trade routes and supply chains around the world. The virus has illustrated the complexity of modern-day global interconnectedness and inspired fears of a global economic crisis.

Travel

The outbreak has significantly impacted every sector in the hospitality and tourism industry. The Chinese are the world’s largest consumers of automobiles, smartphones, and luxury goods. As such, they represent an important segment of demand within these industries. Additionally, Chinese tourists account for a significant portion of demand in the tourism industry, with 180 million Chinese citizens holding passports. The travel industry produces $5.7 trillion in revenue and supports 1 in 10 jobs. China is the largest travel market in terms of spending, and Chinese tourists spent about $277 billion in 2018. As Chinese shoppers and tourists suspend activity, the backlash of decreased demand has been felt across the world. American hotels and retailers rely heavily on Chinese consumers and visitors, and the decline in travel from Chinese and other Asian countries is expected to result in a loss of $7.7 billion in visitor spending by the U.S.

The virus has already impacted every sector of the industry, from air carriers and cruise ships to hotels and international business conferences. Most airlines, including Delta Airlines, United Airlines, and American Airlines, have cancelled, suspended, and postponed services to mainland China and Hong Kong, with some airlines including suspensions of operations to and from Japan, South Korea, Singapore, and Italy.

On February 3, U.S. Customs and Border Protection (CBP) issued a bulletin detailing travel restrictions for travelers who had visited China within 14 days of visiting the United States. These entry restrictions were carried out in response to the January 31 Presidential proclamation titled “Suspension of Entry as Immigrants and Non-immigrants of Persons Who Pose a Risk of Transmitting 2019 Novel Coronavirus and Other Appropriate Measures to Address this Risk.”

According to the International Civil Aviation Organization (ICAO), foreign airline capacity for travelers to and from China has decreased by 80%. As a result, airlines have been forced to implement cost-cutting measures that negatively impact workers. Lufthansa requested that its employees take unpaid leave, and both Lufthansa and Singapore Airlines issued recruitment freezes. The International Air Transport Association estimates the total revenue loss for commercial airlines due to the outbreak could amount to between $63 billion and $113 billion.

Corporate travel has declined sharply, with major companies such as Goldman Sachs, JP Morgan, Salesforce, Amazon, Nestlé, and Twitter canceling business trips and conferences, implementing non-essential travel bans, and encouraging employees to work remotely. Worldwide, conferences have been cancelled, postponed, or shifted to a digital platform. Affected major conferences include Facebook’s F8 conference, the Global Marketing Summit, the Game Developers Conference, EnTech Asia, Google News Initiative Global Summit, and the ASEAN Summit.

Continued cancellations from both corporate travelers and tourists have already begun to damage the hotel industry. Various hotels and resorts rely on China for large portions of their profit, like Las Vegas Sands, which earns 90% of its income in China. Hilton estimated that its full-year adjusted earnings would take a loss between $25 million and $50 million, and Hyatt noted that the decline in Chinese travel had already impacted hotels in Singapore, Japan, and Bali.

Trade

The mass quarantine of employees led to factory shutdowns and delays that ultimately created challenges for 7,000 Chinese exporters. As China’s factories account for a quarter of global manufacturing output, these delays and barriers to production have affected supply chains worldwide. Many companies have found themselves unable to obtain necessary raw materials produced in China. Some have lost contact with their Chinese suppliers, or do not trust that they will ultimately receive shipments they order.

Apple serves as an example of the precarious choice to concentrate manufacturing activity heavily in a single region. The company’s market value has declined by more than $100 billion as a result of the virus. Other large companies such as McDonald’s and Starbucks have also been forced to reduce activities in China. Small businesses have seen activities stop completely, finding themselves particularly vulnerable to the disruption caused by coronavirus. In the United States, a congresswoman introduced legislation to assist small businesses in the U.S. suffering economic harm.

About 80% of the volume of trade in goods worldwide is carried by sea, and seven of China’s ports rank in the top ten world container ports by volume. Large shipping companies have reduced vessel numbers, and others idle while port officials examine crew to ensure they are virus free. Singapore, for example, began requiring health declaration forms for any vessels that called at ports in mainland China within 14 days.

The Port of Los Angeles facilitates more containers per year than all other ports in the Western Hemisphere. In the first quarter, 60 container ships were cancelled at ports in Los Angeles and North Beach, California. Between February and April, 110 trans-pacific sailings to North America were cancelled. As factories fail to meet production capacity, container shipping lines lack a reason to sail. In the U.S., goods that cannot ultimately be exported often end up being sold at a loss in the domestic market.

Approximately 30 million Chinese truckers were prevented or hampered from working due to the coronavirus outbreak. The cost of transporting a shipping container 1,000 miles in China has increased from $1,500 to $3,000. France’s railway company SNCF continues to lose several million euros per month due to its reliance on Chinese production of goods and services. In the U.S., analysts predict that the coronavirus outbreak will continue to prolong the decreased traffic in the shipping industry. The Cass Freight Index saw its largest decline since 2009 with a decrease of 9.4% from the same month one year prior.

How to protect your company against potential disruptions

The coronavirus outbreak represents an opportunity to think more broadly about health epidemics as a business risk and to establish best practices for future disruptions.

  • Create an emergency response plan based on a comprehensive risk assessment that considers protocol for decision making and communication.
  • Establish business continuity plans for transportation, supply, cash flow, and human resources. FEMA offers a guide on developing a Pandemic Influenza Continuity of Operations Plan.
  • Adjust your budget and cash flow plans and understand how the virus could impact your future performance.

Supply chain visibility

Companies who know their supply chain thoroughly will be best prepared to handle disruptions such as the coronavirus. Remain in contact with each of the suppliers in your supply chain and engage with them to understand the difficulties they experience. Rely on safety stocks and alternative sources to ensure the stability of your supply chain.

Be aware of the components of your supply chain that hold the highest risk – for example, do you rely heavily on a single firm that may soon be affected by the outbreak? Expect disruptions within your supply chain and consider alternate methods of obtaining materials that could become unavailable. Find a backup source for supply, production, and distribution, and seek alternate vendors outside of affected areas.

Human Resources

Explore methods to ensure the well-being of your employees. Encourage employees in affected areas to report symptoms and stay home during the incubation period. Be prepared to implement remote and flexible-working arrangements if your area experiences an outbreak. Communicate clearly and work to ensure that employees throughout your supply chain are practicing prevention methods and remaining home if they could be infected. Quality communications can help you avoid negative public opinion and accusations of mishandling the situation.

CT Strategies offers a variety of advisory services that can help your company navigate supply chain and customs-related challenges. To learn more about our service offerings and find out how we can help you minimize supply chain risks, please get in touch with us at https://ct-strategies.com/home/