Is there any end in sight for the coronavirus? Until there is, you can anticipate the demagogues will be out in full force, exploiting Covid-19 to advance particular agendas. The trade protectionists are grandstanding by postulating that the virus outbreak that has infected more than 100,000 people is justification for killing off global supply chains and insulating the economy. But should a pandemic be enough to destroy a system that has generated enormous wealth for the entire world?
Global Supply Chain Reaction
The U.S. economy is immensely connected to global markets. The biggest American corporations depend on computer chips manufactured in China, palladium mined in South Africa, and labor in Vietnam. It is a real-life case study of Milton Friedman’s iconic I, Pencil. It may seem convoluted to rely on multiple nations for supplies, but the results have been largely effective until now. What started as a shrug a couple of months ago has metastasized into an international meltdown, with financial markets wiping out trillions of dollars over fears that the outbreak will only worsen on every level.
China’s manufacturing operations have cratered to the lowest level on record, resulting in supply fears. Now that Beijing is gradually reopening factories and facilities, the world’s second-largest economy will still be unable to recover because demand will now come into question until at least the summer.
U.S. retailers are already facing a hit of more than $700 million as the virus disrupts ocean shipping. Everything from travel restrictions to the extended shutdown of manufacturing outfits in China has impacted the movement of containers. Experts say that U.S.-bound clothing, electronics, and furniture have had the largest supply chain interruptions so far. As a result, you could begin witnessing a tipping point as early as next month. Overall, the number of departures from Chinese ports has plunged by as much as 30% year-to-date.
The upside in the global supply chain is a crash in energy prices. Because of the spat among Saudi Arabia, Russia, and OPEC, crude oil prices are forecast to plummet to as low as $20 a barrel within the next month. This could offer some relief for a whole host of industries in the near-term since energy is a huge cost for business in every sector.
In the end, should the coronavirus serve as a warning about the hazards of global supply chains?
Demagogues, Ideologues, and Doomsday
It is about as common as former Vice President Joe Biden flubbing: Anytime a significant event happens, people go on television and spout doomsday nonsense, even though they have no clue. It is comparable to the man standing on the street corner in his underwear, holding a sign that reads “The End Is Here.”
When it comes to the coronavirus, things are going to get a lot worse before they get better – in the United States and Europe. But while things do seem bleak right now, the odds are high that we will eventually pull through. The invisible hand, the division of labor, and the profit incentive – hundreds of elements are working in harmony to combat Covid-19, from vaccine development to preventive-gear manufacturing. Even the consuming members of the public, prone to irrational panics, are doing their part by sending supply and demand signals to producers.
Perhaps we have become so accustomed to just how great things have been that any hiccup – large or small – rains on our parade. To put this into context, look at the Dow Jones Industrial Average since President Donald Trump moved into the White House. In January 2017, the leading U.S. stock index was trading at around 20,000 and surged past 29,000 last month. Following the recent market crash, the Dow has fallen more than 11% to about 24,000, which is still near all-time highs.
Global supply chains are a boon to economies across the globe. To suggest otherwise is disingenuous.
Jeff Deist, president of the Mises Institute, may have said it best when he recently wrote:
“Sometimes, bad things simply happen. The best hope is market incentives, the rapid application of individual human ingenuity and self-interest to the situation. Liberty is better, not perfect. And governments, including the Chinese government, are clueless as always.”
Off to the Bunker
Global financial markets are crashing, business operations are halting, trillions of dollars are being wiped out, and the marketplace is in havoc. The chaos is real, and whether it is justified or not is left up to you. That said, eliminating integral elements of wealth creation and the free-enterprise system is counterintuitive, for when the bottom is hit, the outbreak will subside, and everything will return to normal. In the meantime, hide in your bunker, put in a limit order for stocks you always wanted, and play the waiting game.
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Read more from Andrew Moran.
