As if trade tensions weren’t enough, China and the U.S. have a new dispute, this time over the coronavirus outbreak hampering global supply chains, delaying fashion trade shows and threatening to jeopardize their fragile Phase One truce.
The U.S. has set a “very bad example” with the Trump administration spreading panic over the outbreak instead of providing help, China’s foreign ministry charged Monday. “So far, the U.S. government has yet to provide any substantial assistance to China,” ministry spokeswoman Hua Chunying said.
Developed countries like the U.S. that have strong epidemic prevention capabilities have instead focused on imposing travel restrictions, contrary to World Health Organization guidelines, she claimed.
The U.S. is one of several countries that have imposed entry restrictions on foreigners who have recently visited China. Many countries, including the U.S., have also issued travel bans to China in an effort to curtail the spread of the novel coronavirus.
Addressing the charge that the U.S. has not offered aid, U.S. national security adviser Robert O’Brien said China had not yet accepted U.S. offers of assistance, according to a report from the National Review.
“What I can say is that we have folks ready to go to China as soon as that offer is finalized,” Dr. Nancy Messonnier, director of the Center for the National Center for Immunization and Respiratory Diseases, said during a call to reporters Monday.
In the meantime, the U.S. State Department suggested that Americans still in China stock up on food and other supplies to limit movement outside the home, according to an updated security alert issued Monday. Should the situation deteriorate, the U.S. Embassy and Consulates would be severely limited in their ability to assist U.S. nationals in the country, the alert warned.
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The alert matched Shanghai and Hong Kong residents’ actions over the last few days–stockpiling cleaning products and food staples like rice and instant noodles over fears of either a citywide lockdown or border closure that could stifle the flow of goods.
Trade deal at risk?
Meanwhile, the U.S.-China Phase One trade truce that was supposed to commence on Feb. 14 when signed last month could face delays. Chinese officials are reportedly hoping for some flexibility on Phase One promises to purchase agricultural goods and other U.S. products totaling $200 billion over two years, Bloomberg reporter Saleha Mohsin tweeted Monday. The deal contains a clause stipulating further consultation between the two countries in the case of a “natural disaster or other unforeseeable event,” she said in her tweet.
The crystal ball on economic impact for China and the U.S.
Meanwhile, efforts to contain the spread of the outbreak are still a work in progress.
Beijing extended the official Lunar New Year holiday until this past Sunday, and other provinces and regions have delayed reopening work or school until Feb. 10 or later, according to Coresight Research. Citing an early estimate from the Economist Intelligence Unit, Coresight estimates that the impact from the virus could cut China’s GDP by 0.5 percentage points to 1.0 percentage points, or $7.2 billion to $14.3 billion. And Coresight believes brick-and-mortar retail, domestic travel within China, restaurants and gaming will suffer as consumers choose to stay home.
On the U.S. front, the economic impact so far seems to be minimal, save for select sectors. “Coronavirus could disrupt supply chains for auto, electronics and chemicals,” according to Panjiva, the supply chain research unit of S&P Global Market Intelligence. These three categories are dependent on the Hubei region, where the coronavirus first emerged in Wuhan city, said Panjiva, noting the risk of China failing to meet its 2020 Phase One purchasing commitments.
Provided the current outbreak doesn’t dwarf the 2003 SARS outbreak, there’s a good chance “consumer spending will likely not be materially affected,” said Jay H. Bryson, acting chief economist at Wells Fargo Securities, adding that even production outages will likely be temporary.
Luxury fashion in harm’s way
Luxury fashion will not be immune to the viral epidemic.
“The hit will be on luxury spending for the big European brands, not the American brands,” said Hilldun Factors CEO Gary Wassner, whose specialty is financing for luxury designers. “There’s a handful of American brands in China–such as Michael Kors, Tommy Hilfiger and Tory Burch–but not to the same extent as LVMH and Kering.”
Farfetch, LVMH and Tapestry are among the luxury firms with the greatest exposure to China, while Vera Bradley and Boot Barn Holdings hold the highest supply chain risk, according to Cowen & Co. retail and luxury analyst Oliver Chen.
“Based on Cowen’s sensitivity analysis, the [earnings per share] impact on luxury companies with sales exposure of 6 percent to 17 percent could lead to EPS dilution of low to mid single digits,” said Chen, who is also estimating that the outbreak will be contained by the middle of the year.
“However the secondary effects of lower Chinese tourism globally could potentially further pressure luxury sales,” he added. “Furthermore, both near- and long-term supply chain disruptions could adversely affect supply availability, inflate the cost of producing goods, raise shipping cost and cause other problems.”
Ike Boruchow, senior retail analyst for Wells Fargo Securities, believes the most-exposed brands will face the greatest fallout from the outbreak that is keeping shoppers home in China and holding supply chains in limbo. “In our view, we would expect those companies with the largest revenue bases in China to see the most near-term pressure,” said Boruchow, who covers companies with significant operations in the world’s second-largest economy, including Adidas (20 percent), Nike (18 percent), Skechers (16 percent), Farfetch (16 percent) and Tapestry (15 percent).
For now, though, it’s “still unclear how this situation will ultimately shake out,” he said.