[The Editors' Verdict] If the Novel Coronavirus Becomes Prolonged

The novel coronavirus infection (Wuhan pneumonia) is reported to be spreading faster than any previous infectious disease. The number of deaths and confirmed cases is increasing much more rapidly than during the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak. As a result, several countries are taking measures such as banning entry of foreign nationals who have visited China, closing borders, and suspending approval of flights originating from China, all in the name of protecting their citizens.

The fastest-moving country is the United States. The U.S. has declared a national public health emergency and decided to block entry of foreign nationals who have visited China within the past 14 days. International airlines have suspended flights to and from China or begun reducing the frequency of their operations. The Chinese central government extended the Lunar New Year holiday, and local governments in cities such as Shanghai have implemented additional extensions. Furthermore, lockdown measures have been enforced not only in Wuhan but also in other major cities.

Among the approximately 27,000 Korean companies operating in China, many will face suspension or disruption of operations. Since three-quarters of South Korea’s exports to China consist of intermediate goods needed by local companies, a serious blow to exports is expected. This will directly translate into difficulties for domestic manufacturing businesses and worsening employment conditions.

At the end of last year, the mysterious disease was reported, and its infectiousness and risks were assessed, but the Chinese authorities, accustomed to a socialist control system, initially covered it up. When rumors spread and the situation worsened, they informed the international community. We have seen repeatedly in the past that infectious diseases subside when detailed information is disclosed and individuals pay attention to hygiene. Despite international efforts, infectious disease experts predict that fear of the novel coronavirus will not diminish for several months. Accordingly, travel to China and overseas travel by Chinese nationals will be restricted.

Mutual travel restrictions mean loss of business opportunities. China, which accounts for 16.2% of the world’s Gross Domestic Product (GDP) (International Monetary Fund (IMF), 2019) and is a core axis of the global value chain (GVC) along with the United States, will deliver a decisive blow to the global economy through mutual travel restrictions. The international financial markets have already been severely shaken in response. South Korea’s stock market prices have fallen more than those of other countries, and the won-dollar exchange rate has risen to 1,195 won (as of January 31).

The government was able to barely achieve 2% GDP growth last year by injecting trillions of won in fiscal spending during the second half of the year. In a situation where it aims to maintain 2% growth this year as well, the spread of the epidemic originating in China is an unprecedented negative factor. If the epidemic worsens in China, which accounts for 25% of South Korea’s exports, even defending a growth rate in the 1% range may become difficult.

Our economy, which has been on a downward path due to regulatory bad laws such as minimum wage increases and the 52-hour workweek, is sinking into deeper stagnation. The service sectors such as travel, aviation, accommodation, and food and beverage have already been hit first, and soon the weakening of domestic demand will affect the goods sector. Additionally, as risks rise, global capital is moving toward safe assets, which will also severely impact the financial sector. The impact on China, where the service sector has grown larger than in the past, will inevitably be significant.

Excessive pessimism should be avoided, but failing to see reality properly can lead to disaster. During the SARS outbreak, China’s economy shrank by 1%, and South Korea’s economy declined by 0.1?0.3%. At that time, China was in a high-growth period and could somewhat absorb the impact of a 1% decline, but under the current economic conditions, the damage could be several times greater than during the SARS outbreak. Measures to support affected companies must be established promptly.

Despite the economic damage, the top priority at present must be to block the infectious disease. On the 2nd, the government strengthened measures against the novel coronavirus, but depending on the situation, the alert level should be raised to 'serious.'

Jeong In-gyo, Professor, Department of International Trade, Inha University