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A nation must think before it acts.
Nearly 100,000 people worldwide have been diagnosed with COVID-19, the new coronavirus that emerged in Wuhan, China, in late 2019. The human toll of the new virus has already been vast, with 3,300 deaths worldwide attributed to the virus and probably at least hundreds more that were unknowingly caused by undiagnosed infections. As medical experts struggle to limit the virus’ spread and devise treatments, it is already clear that the ramifications of COVID-19 will be visible beyond the sphere of public health. From Wuhan to Washington, the virus will have a major political and economic impact.
The most obvious economic effect of the virus is in China, which from late January has implemented an extraordinary quarantine, the likes of which had not been seen for decades. Not only Wuhan—a city of over 10 million people—but much of the country was subjected to quarantines of varying severity, preventing work and travel. In February, according to recently released data, Chinese economic activity was only a fraction of its usual level. As the world’s second largest economy, a crisis in China is guaranteed to have a global effect—as Chinese tourists stay home, Chinese consumers buy less, and Chinese factories fail to supply global markets.
The virus’ economic impact did not stop in China. To understand the global effects, start with the countries to which the virus’ spread was first detected after it jumped from Wuhan across international borders. Japan and South Korea have reported substantial local spread of the virus, though South Korea’s confirmed infection numbers are far higher than Japan’s because Seoul has instituted a regime of mass testing, in contrast to Japan, which is only testing high-risk patients. In both countries, the virus will have major economic ramifications. Both trade extensively with China and were already suffering from China’s sharp quarantine-induced economic slowdown. Local quarantines and school shutdowns in South Korea and Japan have been far less disruptive than China’s mass shutdown, but will nevertheless slow these two countries—the world’s twelfth and third largest economies—substantially. The only outlier seems to be Taiwan, deeply integrated with China’s economy, yet having nevertheless succeeded so far in avoiding mass outbreaks.
As the virus spread to Europe, the economic impact did, too. Italy, the European country with the most confirmed cases, is also one of the European countries least able to deal with the economic fallout. Because of its large debt burden, Italy is prohibited by European Union rules from running a substantial budget deficit. It will struggle to boost its economy without additional spending. Meanwhile, the European Central Bank has already cut its main interest rate to negative levels, so it is unlikely to follow the U.S. Federal Reserve in reducing interest rates to deal with the crisis.
The United States, which appears on a trajectory toward levels of infection similar to that of Italy, has more room with which to battle the economic effects of the coronavirus, if policymakers choose to use them. The Federal Reserve has already reduced its main interest rate by 0.5 percentage points, which should encourage businesses and consumers to borrow and spend. Congress just approved some additional spending, though the $8 billion package is tiny compared to the overall size of the U.S. economy, and so will have no macro effect. If Congress wanted to borrow and spend more, it could easily do so. If the United States wanted to borrow and spend more to deal with COVID-19, it easily could. Over the past week, the U.S. government’s borrowing costs have fallen substantially as investors have bought up U.S. government bonds, seeking safe assets in a time of uncertainty.
The political effects of the coronavirus in advanced economies could be as substantial as the economic effects. Leaders from South Korean President Moon Jae-in, Japanese Prime Minister Shinzō Abe, and U.S. President Donald Trump have been sharply criticized for mishandling the virus and allowing cases to increase. Speculation is growing that Prime Minister Abe may be forced to leave office earlier than expected, while if the coronavirus causes an economic slowdown or recession in the United States, then it could reduce the chances that President Trump is reelected. President Moon, meanwhile, faces a petition signed by hundreds of thousands of citizens to remove him from office. Taiwan seems to be the only country where the government’s approval rating has increased, thanks to deft handling of the virus by the Tsai Ing-wen administration.
Other centers of the coronavirus outbreak are far less capable of dealing with the virus. There is little hard data about the virus’ spread within North Korea, but the government has limited capacity to test or treat infections, and the virus could well spread out of control. Iran, too, has had a devastating outbreak, with reports suggesting that several dozen members of parliament are infected, along with probably thousands of others.
The broadest impact of the virus in political and economic terms is likely to be in the epidemic’s epicenter: China. There is little reason to expect that the Chinese Communist Party’s apparatus of censorship and repression can clamp down on dissent—even though it is obvious that the Communist Party covered up the virus’ impact in its early weeks, allowing it to spread. The bigger question is whether and how China can get its economy back running now that the virus is under control.
It has now been several weeks since Xi Jinping called for a full-scale resumption of economic activity, yet the economy is still working below normal capacity. Moreover, the methods by which Beijing is trying to restart the economy—encouraging local governments and state-owned firms to borrow and spend more—only exacerbate existing problems of excessive indebtedness and inefficiency. It is not guaranteed that China’s economy returns to its previous pattern of 6% annual growth. And if it does, this may be achieved only by a new, destabilizing debt binge that further entrenches the role of inefficient state-owned firms in China’s economy. China’s quarantine treatment looks likely to succeed in defeating the virus, but it comes with economically painful side effects.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.