The world has finally taken notice of COVID-19, or the coronavirus in layman terms. It is not just a China problem or even an Asia problem; it is one that has affected thousands of lives in the short term and will have large scale macroeconomic impacts in the long term.
The economic impact of the coronavirus is magnified by how connected people are now as a result of global trade. Countries don’t produce everything they need anymore. Trade allows countries to produce what’s most efficient for them and import other goods. The closing of borders, stoppage of factory refinement of raw material and intermediate goods (parts used to produce other goods) has resulted in several large scale financial consequences.
These effects can be analyzed in three distinct categories. There is a direct impact on the production of generics and intermediate goods, a disruption of consumer markets and volatile downward fluctuations in financial interest markets.
The lack of generics and intermediate goods disrupts the functionality of several industries due to relative labor costs and manufacturing specializations. Companies, like countries, are also specialized in what they do and struggle similarly when trade and output efficiency slows globally. This is especially blatant in the pharmaceutical industry as the slowing of generics imports has slowed down drug development research, made drugs more expensive to produce and will consequently make them more expensive for consumers. The Council of Foreign Relations has stated that India and China, who have recently closed international borders and have been conducting nationwide quarantine operations, supply 90% of over the counter medicines in the United States. Furthermore, the CFR has reported statements from the Food and Drug Administration (FDA) stating that China is currently the largest exporter of medical devices and exports 80% of basic drug components to the United States, exacerbating the current pressure on medical infrastructure and personnel.
While biotech is just one example, consumer markets in nearly every sector have been affected. Dr. Daniel Bachman, an analyst at Deloitte Insights, writes, “For companies that rely on intermediate goods from affected regions, and that are not able to easily switch sourcing, the size of the impact may depend on how quickly the outbreak fades. Small and medium-sized firms may have greater difficulty surviving the disruption. Businesses tied to travel and tourism are facing losses that are likely not recoverable.” This shows that industries have varying levels of resilience due to relative profitability, the elasticity of their prices and demand and their perceived necessity in the current global health crisis.
Lastly, the stock market and federal interest rates have been put in serious limbo as investor confidence has plummeted due to the slowing of international trade and manufacturing. On March 15 the Federal Reserve announced that interest rates would be slashed to near zero to compensate for the hit the financial market endured to reencourage investors. Additionally, the federal reserve launched a $700 billion quantitative easing (QE) to prevent a greater economic downturn. Quantitative easing, colloquially known as money printing, puts more money into the economy and in the hands of businesses so that the transactions of sales that make the economy tick don’t slow down. This is only done when the economy is in need of a jumpstart as overdoing it results in excessive inflation. Furthermore, President Trump has approved a two trillion-dollar stimulus package to support hourly-paid Americans, struggling corporations and restabilize the stock market which has lost over 11.5 trillion dollars since February 19. The goal is to prevent companies from laying off workers, protect small businesses and assist smaller banks to keep the backbone of the American economy from imploding.
With the emphasis currently being on saving as many lives as possible, the economic implications of the issue have rightfully taken a backseat, but it is critical to analyze the situation to prevent lasting economic damage.
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Karthik Iyer is a campus correspondent for The Daily Campus. He can be reached via email at firstname.lastname@example.org.