Covid-19’s Effect on Global Economics:  Small Firms at Risk

Lynx Fellow John Milton

 

There has been no shortage of news concerning Covid-19’s (Coronavirus) effect on global trade.  Stocks are in decline, and federal and local governments are asking for nonessential parts of the economy to suspend operations.  This should not be surprising as global crises, such as pandemics, have often had a similar effect on international trade. Global shipments of goods have served as a catalyst for the spread of diseases in several cases, most notably the bubonic plague that ravaged through Europe from 1346 – 1353.  The disease was spread through trade between Europe and the Middle East as Turkish merchants traded contaminated goods with Italy, at the time one of the world’s major commercial crossroads. In the present day scenario, Covid-19 originating in the “world’s factory” of China, caused the virus to spread around the world with Chinese exports. 

As a result, China has taken drastic measures to quarantine its vast population and limit its exports to global consumers.  While these limitations have arguably diminished the spread of the virus, they have taken a significant toll on the global economy.  US stocks have fallen at a record rate as many US producers dependent on Chinese supply have had to massively reduce production or temporarily halt production in some cases.  The effects of the virus goes both ways for the US and China. While the US imports a massive amount of low cost Chinese manufactured goods and raw materials, the US exports a large amount of food and advanced technology to China.  With firms on both sides of the Pacific operating below capacity, the international shipping industry will likely suffer from decreased demand unless other sources of commodities and raw materials are found.

Instead of buying raw materials like steel from China, US manufacturers could buy steel from Brazil.  This will cause an increase in price as Brazilian steel is more expensive than Chinese (Br $546/tonCH $506/ton), but supply can be relatively mediated in the short-run.  However, this assumes US demand for steel has not shifted as a consequence of the pandemic.  According to neoclassical economics, a decrease in demand will cause a decrease in price, causing the remaining goods in the market to be purchased at a lower cost.  This will be good for consumers, as cheaper goods in the marketplace will give Americans more options to spend their money on, preventing the hoarding of currency and the chances for  a recession. However, this assumes the incomes of many Americans will be protected, which we know is not the case as many US firms are laying off employees as they suspend operations.   

While the airlines, cruise lines and big manufacturers will likely be bailed out by the federal government, small US businesses will bear the greatest amount of risk moving forward.  Without advanced logistics or production insurance in place, small US firms may be faced with ending operations if the vast quarantine of workers continues for a considerable period of time.  Small firms in the entertainment and service sectors will be the most at risk as demand for their services is expected to drop to abysmally low levels. While this drop in demand is only temporary, the amount of time until the Covid-19 pandemic passses is still relatively unknown. 

As small US firms generated 44% of US GDP in 2018, the risk small firms face will inevitably lead to a dilemma for the federal government.  That is why the federal government is in the works of providing a stimulus package to small US firms, enabling them to stay in business with production halted or severely limited.  The pandemic will pass, and Americans will go back to work once social distancing is no longer a part of life.  However, to mitigate the long-term effects on the American people and US GDP, federal assistance is needed to keep firms afloat.