The global outbreak of a novel strain of coronavirus, which causes the disease now called COVID-19, is posing significant challenges to public health, the international economy, oil markets, and national politics in many countries. Brookings Foreign Policy experts weigh in on the impacts and implications.
Giovanna DeMaio (@giovDM), Visiting Fellow in the Center on the United States and Europe: As I write in more detail elsewhere, with almost 7,000 reported cases of coronavirus (including 366 dead), Italy is the European country hardest hit by COVID-19 contagion. While one might expect nationalist narratives to thrive in a time of stress and uncertainty, Italians have actually set aside euro-skepticism and anti-globalization sentiment and have instead embraced international cooperation. The long-term consequences will depend in part on whether the European Union can manage this crisis effectively and as one.
While other European leaders, like French President Emmanuel Macron, have called for more coordination both in the EU and with the United States, Europe is currently facing some protectionist trends that risk undermining a collective approach to handle the crisis. The meeting of EU ministers of health in Brussels on March 6 revealed that for now, Europe is failing this stress test, as it was impossible to convince France, Germany, and Czech Republic to lift the ban on exporting protective medical gear (face masks, mostly) to avoid shortages at home. To address this, President of the European Parliament David Sassoli declared that the EU commission is working to create a centralized agency in charge of buying and distributing this kind of material in order to prevent “useless competition between EU member states and prevent international speculation.” Conversely, the Chinese company Xiaomi has donated thousands of face masks to Italy as a thank-you for having welcomed the firm so warmly two years ago.
Hopefully sooner rather than later, coronavirus will be under control and manageable — but the damages will remain for a long time. At that point, Italy will remember who came to help, and Europe will know the results of the test over its capability to share both risks and prosperity.
David Dollar (@davidrdollar), Senior Fellow in the John L. Thornton China Center: China is getting back to work after a breathtaking drop in economic activity during January and February. Purchasing Manager Indexes (PMIs) come from surveys of firms’ production, employment, and new orders. February PMIs came in at 26.5 for services and 35.7 for industry, the lowest ever recorded. A PMI of 50 is the dividing line between contracting and expanding, and the services PMI had never been below 50 since it was introduced. China will be reporting January and February data together for many variables, since the New Year holiday occurs during different months each year, making a year-to-year comparison of months misleading. January-February exports were down 17%, while imports were down 4%. Pollution data monitored by NASA and European Space Agency satellites show that the mean density of nitrogen dioxide — emitted by motor vehicles, power plants, and industrial facilities — dropped significantly between February 10 and 25 to below 125 micromoles per square meter (compared to more than 200 micromoles between January 1 and 20). That is probably the most accurate picture of the decline in activity at the height of the crisis. More recently, the pollution data shows a significant uptick in activity, but not yet back to pre-virus levels.
Despite the very weak February, China now seems to be getting back to work. Major provinces such as Guangdong started easing their travel restrictions in mid-February. The Transportation Ministry reported that 110 million migrants returned to their work cities just during the one week, February 22-28. Quarantining procedures were also eased. The company Foxconn, for example, has sent workers with fevers to the hospital, but otherwise has “quarantined” returning workers on their campus where they have continued to work. Major employers have offered bonuses of 5,000-10,000 renminbi ($720-$1,440) to get workers to return, with the result that most migrants are back at work and most large companies are operating. Still, there are many reports of supply chain problems, so it is doubtful that their production is back to pre-virus levels. And things are not as positive for small and medium firms. Hence, the return to pre-crisis production level is more likely to come in late April, rather than late March.
What happens to China’s economy for the rest of the year depends on how the world deals with the coronavirus. China will probably report a sharply negative number in the first quarter, but then has the potential to bounce back during the remainder of the year. But there is tremendous uncertainty about any such forecast right now. If the virus leads to sharp slowdowns in China’s major trade partners (Japan, South Korea, the European Union, and the U.S.), then there will be blow-back on China. The factories may be getting back to work, but if worldwide demand declines, then they will soon be idle again. For services, which now make up about 60% of the economy, there will certainly be some bounce-back from the depressed level in February. But it is unlikely that people will take extra vacations, movie visits, and restaurant meals to make up for what was lost during the lock-down. Also, if China’s industrial economy takes a hit from lower global demand, then that has to have some spillover on services, as workers lose jobs and income and become more cautious about spending.
Federica Saini Fasanotti, Nonresident Senior Fellow in the Center for 21st Century Security and Intelligence: As I write in more detail elsewhere, I have just returned to Italy from a trip to the United States — on a deserted flight — and I’ve found my home city of Milan to be empty. The schools are closed, while hospitals are working 24/7 in full emergency mode. But compared to the panic of a few weeks ago, when much uncertainty loomed, my country now appears more focused.
Its leadership shared all decisions with the population. There has been a succession of detailed medical bulletins and press releases. Italians have been made aware of the problem and many of them, particularly in the critical areas, are responding to the huge sacrifices the government is requesting.
In the United States, the Trump administration should share every decision with the population — if Italy’s case is any guide, the public will likely prove extremely collaborative. The president must not try to minimize the importance of the science, nor the aggressive nature of the virus. Similarly, the administration should not attempt to censor any news, even the most alarming, and let specialists handle the matter publicly. At the end of the day, this challenge can be overcome if treated with the right procedures.
Samantha Gross (@samanthaenergy), Fellow in the Cross-Brookings Initiative on Energy and Climate: The coronavirus has claimed another victim. The OPEC+ alliance passed away on Friday, March 6, 2020, at the age of three years.
OPEC and its partners met in Vienna March 5 and 6 to discuss production cuts in response to plummeting demand due to the coronavirus. OPEC ministers argued for an additional 1.5 million barrels per day of production cuts, on top of the 2.1 million barrels per day of cuts that the OPEC+ group agreed to last year. However, the Russians said no.
The OPEC+ arrangement between the Saudis and Russians was always a marriage of convenience, not a love match. The oil price Russia needs to balance its budget is lower than that in Saudi Arabia, meaning that the Russians can more easily weather a period of low oil prices. The Saudis have taken on more than their fair share of the production cuts as a result. The arrangement was thus a good deal for the Russians, on balance. However, word is that the Russians became tired of cutting their production while U.S. oil production surged. This situation feels like déjà vu from the price crash of 2015, with the Russians playing the role that the Saudis did then — wanting to maintain market share and hoping that low prices will push U.S. oil out of the market. In response, the Saudis started a price war, promising to increase crude oil production and lowering prices for their crude. Markets have responded, with U.S. crude prices reaching a four-year low on the morning of March 9. The International Energy Agency predicted a year-on-year decline in oil demand in its March Oil Market Report, released on March 9. We are likely seeing only the beginning of a severe oil price collapse.
U.S. production stands to be disproportionately impacted by a period of low oil prices, not because it is expensive, but because of its unique, price-responsive cost structure. U.S. tight oil wells decline quickly, meaning that drilling must continue to keep production flowing. The variable cost of production that U.S. drillers see will therefore be higher than producing from many existing fields in other places, even if those existing fields have higher costs overall. However, the reverse is true when prices rise — U.S. production can ramp up more quickly than other sources of oil. Thus, any market share gains for other producers during the crisis are likely to be lost as soon as demand comes back and prices recover.
Additionally, the U.S. industry is in better shape than it was during the 2015 price collapse. Low prices then brought production efficiencies and consolidation among producers. The producers that remain are stronger financially and better able to weather a low-price period. Some U.S. producers locked in higher prices earlier in 2020, meaning that their production will not respond to the price drop until those contracts expire, in some cases in 2021.
Where oil demand goes from here is an epidemiological question, not an oil markets question. There’s no question that the industry will be hurting, and if trade, travel, and other economic activity continue to be depressed as the virus spreads, this could be just the beginning of a crisis for oil producers. Only time will tell.
Cheng Li, Senior Fellow and Director of the John L. Thornton China Center and Ryan McElveen, (@RyanLMcElveen), Associate Director of the John L. Thornton China Center: As we write in more detail elsewhere, while the coronavirus crisis has led many states and non-state actors to behave in their own self-interest, viewing the distribution of masks and other medical supplies as a sort of zero-sum geopolitical game, others have selflessly endeavored to distribute supplies to those who need them most, engaging in “mask diplomacy” despite needs in their own countries. In turn, the exchange of masks has taken on a new meaning of goodwill. Perhaps nowhere has that act of goodwill been as pronounced — and surprising — as the generous gifting between Japan and China.
The contrast in the global response to the coronavirus outbreak has been stark. While China levied criticism on the United States for its miserly initial offers of aid to China, on Taiwan for cutting off exports of masks to the PRC, and on countries around the world for closing borders to Chinese travelers, Japan was upheld for setting a more magnanimous example. Japanese entities — from the central and local governments, to NGOs and and corporations — joined together in common cause to help their neighbors across the East China Sea.
Through the gifting of masks and other supplies, Japan rebuilt a bridge to China that had long been severed. In response, Chinese social media quickly filled with gratitude for the Japanese well wishes. The Chinese people, as well as the Chinese government, have sought to return the kindness, even amidst their own precarious situation. Chinese Foreign Ministry Spokesman Geng Shuang expressed China’s willingness to reciprocate Japan’s kindness with a quote from the Book of Songs: “You throw a peach to me, I give you a white jade for friendship.” In the wake of the coronavirus outbreak on the Princess Diamond cruise ship which docked in Japan, China donated testing kits to the National Institute of Infectious Diseases of Japan. Even China’s richest man, Jack Ma, has stepped up to help, not only by pledging $14.5 million to fight the coronavirus, but also by donating one million masks through his foundations.
The coronavirus has done what few observers thought possible: quell generations of China-Japan antagonism. And for the immediate future, both countries are now bound together in the same public health crisis—the full political and economic implications of which are yet unknown—and neither side would gain from halting the mutually-beneficial collaboration now.
Mireya Solís (@solis_msolis), Senior Fellow and Director of the Center for East Asia Policy: As I write in more detail elsewhere, Japan is a frontline state in the ongoing global health crisis brought about by the emergence of a highly infectious viral disease quickly spreading from China to its neighbors and beyond. The coronavirus crisis stands to deal a severe blow to the Japanese economy, has raised significant questions of the government’s ability to deal with a pandemic, and has altered both domestic political dynamics and Japan’s diplomatic calendar in a landmark year. The associated disease, COVID-19, is likely to extend a large shadow on the remainder of the Shinzo Abe era.
The economic impact of the coronavirus crisis stands to be severe, hitting Japan at a moment of particular vulnerability due to the sharp economic downturn in the aftermath of the consumption tax increase last fall. A new pathogen triggering a global pandemic is the ultimate black swan. For Japan it has brought back the prospect of a recession, as it negates the possibility of a V-shaped recovery from the severe downturn registered in the last quarter of 2019: an annualized contraction of 7.1% with sharp drops in business investment and private consumption.
Meanwhile, as cases of community dissemination continue to grow and testing for COVID-19 moves at a sluggish pace, broader questions have emerged on the government’s ability to act decisively. Without question the Abe team has boosted Japan’s executive decisionmaking capabilities: The prime minister’s office has operated as a “control tower” taming endemic bureaucratic sectionalism, and it instituted a new National Security Council to provide a whole-of-government response to Japan’s national security threats. But COVID-19 bedevils these structures and hinders an effective government response.
Finally, 2020 was geared to be a major year for Japanese diplomacy, with a number of signal events that would also marshal Prime Minister Abe’s legacy. A state visit by President Xi Jinping to herald the stabilization of Japan-China relations has been postponed. And the fate of the summer Olympics hangs in the balance of a still little-understood new global health risk.
Thomas Wright (@thomaswright08), Senior Fellow and Director of the Center on the United States and Europe: As Kurt Campbell and I recently wrote in more detail elsewhere, the coronavirus may be another once-in-a-century event. If some of the gloomier projections of COVID-19 play out, the world will face one of its worst peacetime crises of modern times. Unfortunately, this crisis occurs in a dark political climate, more similar to that of the early 1930s, when many governments pursued nationalist, beggar-thy-neighbor policies such as the Smoot-Hawley Tariff, and international cooperation was very limited. Over the past decade, the world has grown more authoritarian, nationalistic, xenophobic, unilateralist, anti-establishment, and anti-expertise. The current state of politics and geopolitics has exacerbated, not stabilized, the crisis.
COVID-19 is becoming the third major crisis of the post–Cold War period, following the terrorist attacks of September 11, 2001, and the financial collapse of 2008. This crisis may exact a greater toll than the other two and has demonstrated the limits of populism as a method of government. Expertise matters. Institutions matter. There is such a thing as the global community. An enlightened response, even if it’s unpopular, matters. The system must be made to work again.