Abstract

This paper explores the economic and national security implications of United States (US) trade policy with China. It first describes the current US-China relationship, with a focus on China’s ambitions in the South China Sea.  It then explores the benefits and downsides of restricting trade with China, specifically focusing on advanced technologies such as semiconductors. Further, the paper explores how the United States’ trade policies with other countries in the region impact US national security with respect to China. Throughout the paper, multiple historical case studies are used to analyze the economic and security implications of the proposed policies. The paper concludes with the recommendation that the United States should use its power to restrict the development of advanced Chinese technology while continuing to trade in other goods with China. It also recommends that the US reduce barriers to trade with other nations, both to strengthen its economy and build relationships beneficial to national security. 

Introduction 

Rivalry between states is a concept as old as the concept of states themselves. Before the invention of the atomic weapon, great power rivalry involved large-scale warfare, economic intimidation, and overt threats. Since the Cuban Missile Crisis and the collapse of the USSR in 1991, states have recognized that such tensions must be limited to certain spheres and in ways that ultimately prevent rivalries from turning into wars. However, rivalries still exist.  This paper focuses on the increasing tensions between China and the United States (US) as China acts in ways contrary to US interests and security. Economic pressure is increasingly being utilized by the US in order to confront China and decrease the threat it poses to US interests. However, because of the complex nature of global supply chains, any actions the US takes against rivals negatively impacts the US. Recognizing that China is the largest trading partner of the US, the goal of this paper is to articulate the economic policies capable of limiting the threat posed by China while avoiding unnecessary collateral damage; the goal of these policies is to ultimately strengthen the US economy in the long-term, rendering it capable of flourishing despite any damage caused by a confrontation with China. 

Status of US-China Relations

The United States has an interest in creating a world where its citizens can participate in global trade based on fair rules. Its main goal in this respect should be creating and maintaining a system based on rules and values that are conducive to trade flourishing. These include ensuring the freedom of navigation, encouraging the free and fair exchange of goods and people between countries, and assisting in the protection of the territorial integrity of other nations so that they can engage in trade. The United States has for many decades worked to implement these goals through international institutions and should continue to further implement these goals. These goals are not shared by all countries, and China in particular has sought to undermine them. 

The region of Asia which China seeks to influence is vital for the global economy and for securing the US policy goals mentioned above. The South China Sea, a body of water more than double the size of the Mediterranean Sea, is crucial to the world economy and thus crucial for the health of the US economy. It is estimated that 3.4 trillion dollars of goods pass through the South China Sea every year.  In addition, the South China Sea is critical for US allies and trading partners’ supply of energy since more than 80% of the crude oil that goes to South Korea, Japan, and Taiwan passes through the South China Sea.¹ Furthermore, 12% of the world’s fish are caught in the sea and there are estimated to be more than 11 billion barrels of oil and 190 trillion cubic feet of natural gas available in the sea.² One-third of the world’s crude oil and half of its liquefied natural gas passes through this region.³ The island of Taiwan located within the South China Sea produces 65% of the world’s semiconductor chips including over 90% of the most advanced chips crucial for the technology the US and its partners rely on for their economies and militaries. ⁴

China, in its official public statements and in its actions, has shown itself to be in opposition to US interests. For example, the Chinese Government has openly interfered with the stability of this important trading region vital to US interests and security. China has acted in ways that actively interfere with the US goals mentioned above in order to increase its own regional influence. China has claimed large parts of the South China Sea as its own territorial waters and has taken aggressive measures to interfere with the freedom of the seas. China has built multiple artificial islands in disputed sections of the South China Sea and has built military bases on them as a means to further expand its power in this disputed region. The Chinese military has also sent its forces into the South China Sea to harass and intimidate its neighbors. They have seized islands claimed by other nations, for example, the Scarborough Shoal from the Philippines, in an attempt to assert their dominance in the region. The Chinese have used armed civilian ships, as part of the People’s Armed Forces Maritime Militia (PAFMM), along with other military units to interfere with non-Chinese fishing operations.⁵ China has also repeatedly attempted to prevent other nations from exploiting oil reserves and other natural resources inside the South China Sea.⁶   In addition, China does not recognize the sovereignty of Taiwan and claims it as a part of its own country. It has claimed Taiwan is “indispensable for the realization of China’s rejuvenation” and has promised to use force to incorporate Taiwan into China if necessary. China has routinely conducted military drills in Taiwan’s air and water territory and has begun to modernize its military, one of its explicit goals being to force Taiwan under Chinese rule. ⁷

If China is allowed to grow its power unchecked, it could become a real threat to the United States. However, the United States’ relationship with China is not entirely negative. China is the third largest export market for the United States behind only Mexico and Canada.⁸ The large Chinese population offers US companies access to one of the largest markets in the world making the US hundreds of billions of dollars every year.  The United States also imports hundreds of billions of dollars worth of goods from China including over $120 billion in electronics, over $100 billion in machinery and appliances, and tens of billions more in industries such as textiles, chemicals, metals, rubber, and other products on which the US economy thrives. In 2022, US imports of goods and services from China totaled over $560 billion and S&P 500 companies received more revenue in China than the next three countries combined.⁹

US Policy Options

The economic and political goals of the United States with respect to China should be to balance the economic opportunities that support large sections of the US economy with the need to preserve a free and open East Asia based on fair rules. The clearest area where China needs to be limited is the technological growth and development of its armed forces. As mentioned in the preceding paragraphs, the Chinese have goals to dominate the larger South Asian region and impose an authoritarian system on it. They have already taken action toward this end. If China’s military is allowed to further strengthen and develop, the Chinese government can take any number of negative actions. The most drastic action China could initiate would be invading the island of Taiwan. If China is unwilling to launch an invasion it could use its military to enforce a naval blockade or no-fly zone surrounding Taiwan. Chinese forces could use their power to further exert control over commercial activities in the South China Sea including oil and gas exploration, internet and communication cables, and fishing. The government could also use its power to pressure or coerce nations into actions that are contrary to the interests of the United States. The United States also has an interest in preventing the growth of Chinese control over its own semi-autonomous regions, such as Hong Kong and Xinjiang, since a stronger internal government allows China to project its power outward.  

The United States has many tools available to counter the threats posed by China and to achieve its goal of furthering economic growth and regional stability. Traditional methods like building up US and allied militaries are, to some extent, clearly necessary.  However, these actions are expensive and may lead to misinterpretation and unnecessary military escalation. Instead, by utilizing economic tools, the United States can find a middle ground between doing nothing and preparing for war. A two-path approach to economic confrontation is necessary in this case. The first is to take the necessary actions to prevent the growth of the Chinese security apparatus. This can be accomplished primarily by restricting China’s access to advanced technologies. The goal is to ensure that for as long as China remains a threat to US interests, the US and its allies have a strategic advantage over China. While the primary goal is to deter China, in a worst-case scenario that leads to war (especially with a nation that does not have a mutual defense pact with the US), US allies would be able to stand their ground with minimal US involvement. Restricting advanced technology to China will also prevent China from having access to the most advanced tools necessary to control its own population (such as artificial intelligence-powered surveillance). This will make China less internally stable and less confident in its ability to project power abroad. In this respect, general trade sanctions may also be effective, for example, a law passed by the US Congress preventing most imports from the Xinjiang region of China.¹⁰ What needs to be analyzed is the economic consequences of these actions and whether they are justified to achieve the stated political ends. China is far from a friend to the US and the US should not seek to appease it, but it would be counterproductive for the US to unnecessarily damage the Chinese economy and by extension its own. 

The actions mentioned in the preceding paragraph are existing or potential punitive actions against China.  However, there is another side to this coin. Positive relations with other countries, particularly in South East Asia are essential to deterring Chinese aggression against US interests. Creating a freer exchange of goods and people between the United States and other nations can be an effective way to limit Chinese influence. This can include actions such as the expansion of trading blocs such as the aborted Trans-Pacific Partnership (TPP) which did not include China. Unfortunately, the nationalist views of the Trump administration meant the TPP goals were short-lived. Strengthening the economic bonds between the US and other nations is a way to give others a stake in US interests and thus make them more amenable to helping the US defend them. Demonstrating the superiority of a system based on liberal values through free trade deals and loosening immigration restrictions between nations may incentivize them to turn away from the much more authoritarian Chinese model. 

Deciding how the United States should work to counter Chinese influence is just as important as determining the areas where the United States should choose to not counter Chinese influence. For instance, as part of China’s Belt and Road initiative, large amounts of public money are being transferred from China into infrastructure projects in many other, mainly underdeveloped, nations. A strong argument can be made that these policies are not in China’s public interest as they necessitate large amounts of debt and taxes for projects that do not provide the necessary returns to cover these expenses. They are therefore detrimental to the health of the economy. China, being a nation strongly influenced by Marxist ideas and a desire for political power, will oftentimes implement policies that are detrimental to its economy. It is important for the US to identify these policies and not take similar actions in the name of countering China. 

Analysis of Punitive Actions against China

Actions aimed at crippling the Chinese economy may be necessary to achieve US national security goals, but they need to be targeted and not cause unnecessary damage to the US economy. During the Trump administration, the US began heavily increasing tariffs on multiple countries and industries, with the government specifically targeting China. In large part due to these increased tariffs and Chinese retaliation, multiple US industries and the economy as a whole suffered. One clear negative effect was the decreased US agricultural exports to China. American agricultural exports dropped by over 60% between 2014 and the end of 2018 which led the US government to spend 28 billion dollars of tax money to subsidize the farming industry.¹¹ In addition between 2018 and 2019, US exports to China of petroleum and coal products dropped by 75% and metal exports dropped by over 50%.¹² Contrary to the policies implemented above, future actions against China should be limited and serve specific defined goals. 

Limiting China’s Access to Semiconductors 

The semiconductor industry has been a particular target for US actions. This is because semiconductors are essential in military and security technology. Consequently, in order to weaken China’s ability to effectively exert control over disputed territory, limiting access to semiconductors is essential. The Trump administration began restricting access to semiconductors to major Chinese companies as punishment for violating US national security sanctions on countries such as Iran and North Korea. The Biden administration escalated this effort on October 7th, 2022 by authorizing sweeping restrictions designed to limit Chinese access to foreign advanced semiconductors and stifle Chinese efforts to design and manufacture them themselves. The Biden administration’s policies include expanding the foreign direct product rule which allows the US to control the transfer of technology made with US technology regardless of the country of origin. Given that so many products within the global supply chain are developed in the United States, the new rule prohibits the transfer of a multitude of advanced technologies necessary to manufacture advanced semiconductors. Furthermore, US nationals are now prohibited from assisting Chinese companies in the manufacturing of these semiconductors.¹³ There are clear national security benefits to these actions. Chinese entities will now have a harder time acquiring advanced technology to transfer to powers much more hostile toward the United States, most notably North Korea and Iran. China itself will no longer have the ability to use Western technology to threaten Western interests and nations. These moves will limit the advancement of Chinese military technology and temporarily, if not permanently, secure the US and its allies’ military superiority in relation to China.¹⁴ 

It is clear that these export restrictions set China and its armed forces back technologically. While for many years it has been a goal for China to increase its domestic production, the government had to balance the goal of producing semiconductors domestically with the fact that foreign semiconductors were by and large more economical.¹⁵ The question that remains is whether this setback is permanent or temporary. Even before the October 7th, 2022 export controls, China was investing heavily in onshoring its semiconductor manufacturing, including in 2021 when it is estimated China invested over $50 billion in the industry. Following the Biden administration’s controls, China no longer has to make that choice: the choice has been made for them – China will need to produce all semiconductors domestically. 

Following the American sanctions, Chinese intentions are increasingly clear: devote as many resources as possible to creating domestic capacity to design and manufacture advanced semiconductors. However, assuming the US is able to continue to convince its allies that the export controls are in their self-interest which so far it seems to be doing, the Chinese goal is easier said than done. The financial cost itself is staggering. One estimate of the cost to create a fully localized and self-sufficient supply chain for the manufacture of semiconductors is at least one trillion dollars in upfront investments and an increase of semiconductor prices between 35 and 65 percent.¹⁶ The financial cost is not the only obstacle in the path of China’s goal. 

The global semiconductor industry that has developed over at least the last 70 years is a complex system that includes a multitude of trade secrets, research institutions, and manufacturing facilities spread across many countries and companies. The difficulty of recreating the supply chain, no matter how much investment or corporate espionage, cannot be overstated. As of 2021, the US contributes 39% of the value in the semiconductor supply chain, and US allies in Asia and Europe contribute an additional 53% of the value while China contributes 6% of the value in the supply chain.¹⁷ With regard to the most advanced semiconductors, China’s position is even worse; three companies based in the US, South Korea, and Taiwan control virtually all of the world’s advanced semiconductor manufacturing capacity.¹⁸ China is advancing in the semiconductor industry, but given the above facts combined with the systematic cutting off of information and technology to China by the US and its allies, it is difficult to imagine a situation where China will obtain superiority over the West in this field.

The Chinese could defeat the export controls by separating the US from its allies. The export controls rely on the cooperation of multiple European and Asian countries such as the Netherlands, Germany, South Korea, and Japan. While all these countries have been victims to varying extents of Chinese economic and political aggression, if China can convince some of these countries to allow the export of their technology, the export control’s effectiveness will be limited.  It is important to note that the US need not hold China to the technological level it currently possesses for the controls to be successful. All that needs to occur is that the US and its allies restrict China enough so that by the time it achieves the current technology, continued R&D by Western nations means they will already have more advanced semiconductors. Thus, so long as China remains a threat, the West will remain dominant with regard to advanced semiconductors. 

Downside of Export Controls 

With the semiconductor example, a compelling argument can be built suggesting export controls are a strong and effective tool for the US to achieve its foreign policy goals; however, they are not consequence-free. Specialization caused by international trade has led to the creation of trillions of dollars in wealth; the disruption of the free flow of goods leads to a decrease in wealth in the same way. It is estimated that every $1 billion of exported US goods supports approximately 6,000 jobs in the United States.¹⁹ Approximately 4,500 US jobs are supported by every billion dollars of exported US services.²⁰ The loss of jobs is not the only consequence that should cause policymakers to hesitate before expanding export controls. 

The loss of American technological leadership is a potential risk with sanctions: with others developing semiconductor technology, they could create a competitor to American firms by making a better chip. In the late 1990s, the US Congress passed export controls on satellite technology which directly resulted in a loss of $2.4 billion, 19% of the market share, for US companies operating in the commercial communication satellite industry over a three-year period.²¹ Furthermore, almost one-third of US technology companies divested resources from the research of new satellites subject to US sanctions.²² It is not unreasonable to assume that if the US continues to expand export controls, a similar fate could await the much larger and strategically important US semiconductor industry. The more regulations which are placed on US products, the less favorably they will be looked at by consumers. Companies will naturally begin moving away from US products and toward foreign products that are less controlled. This is not to say that export controls are inherently wrong, and there are ways to limit the damage caused by these regulations. Most importantly, the US needs to ensure that the export controls will actually be effective. The reason that controls on highly advanced and sophisticated Western products and labor can be so effective is that no economically viable alternative exists. As export controls are applied to less sophisticated goods, viable alternatives begin to exist. If export controls restrict the ability of US companies to provide goods to China, which the country could obtain anyway, it actively harms the US while not holding back China. Thus, export controls have to be continuously updated and specifically focused on unique products to ensure they do not cause damage while providing no strategic advantage. 

In addition to the economic damage directly caused by sanctions, additional damage is caused by the retaliation they invite. The US sanctions against China have instigated retaliatory measures which will only increase in intensity as the US continues to confront China. One of the more overt acts of retaliation since the October 7th, 2022 export controls were instituted, is the ban of equipment produced by Micron, a US-based semiconductor manufacturer, in a wide range of Chinese products. The ostensible reason given for the ban was that the company failed a cyber security review, but it is widely accepted that the Micron ban is retaliation for US sanctions. Micron sales in China totaled $3.3 billion in 2022, a number which will decrease dramatically in future years as the ban takes effect.²³

As tensions escalate with China, more companies will become collateral damage and it will leave US policymakers with a choice: should these firms be compensated as bystanders? A policy could be pursued similar to the billions of tax dollars given to farmers as compensation for the damage the Trump administration’s trade war caused. Alternatively, the US could use the Micron ban and other similar actions as an opportunity to push a narrative that China is an authoritarian regime with arbitrary laws, and companies that engage in business under those conditions do so at their own risk. ²⁴

Possible Retaliation by China 

Any US policy has to be viewed in terms of Chinese retaliation: on the spectrum of retaliatory measures China could take is restricting exports of rare earth minerals. China currently controls over 60% of rare earth metal mining and 80% of refining capacity globally; however, China’s position here may not be as strong as it originally may appear.²⁵ Part of the reason China is so dominant in this industry is that other nations have chosen to artificially limit their capabilities for political reasons. However, political priorities can change; between 2010 and 2015, Japan cut its reliance on Chinese rare metals by over 20%  in response to China boycotting sales of minerals to Japan over a fishing dispute.²⁶ The United States and its allies have the mineral reserves necessary to weaken Chinese dominance in the industry should they ever make that choice.  

There is also a clear risk of runaway retaliation: more radical actions that China can take than those described in the previous paragraph in response to escalating US pressure. One action that could be taken is the voiding of intellectual property rights of foreign entities in China. While the specifics of such an action are difficult to predict, multiple laws and draft laws in Russia provide some clarity into what the Chinese could implement. Following the Russian invasion of Ukraine, the Russian government issued an order eliminating the royalty owed to patent holders from nations Russia viewed as unfriendly.²⁷ Another law waived trademarks for various consumer products heavily targeting computers, clothing, and automobiles. In addition, Russian courts have taken actions to nullify the intellectual property of foreign firms. There have also been other laws drafted weakening intellectual property, for example an order that would legalize piracy of foreign software, a law that would withdraw Russia from the World Trade Organization, and multiple laws limiting or voiding IP protections for firms based in “unfriendly countries.” These laws are at various stages of implementation and some have hit roadblocks within the Russian government, but if China were to pursue actions similar to this, it would have incredibly destabilizing effects for the global economy. There would be a breakdown in international trade cooperation: if such laws were enacted, it would deprive foreign firms of billions of dollars. Furthermore, China uses more intellectual property than it produces; in 2017, over 2.7 times more patents were filed in China by foreign actors than Chinese actors filed in foreign countries.²⁸ In the long-term, this strategy would harm China as much as it harms the rest of the world. China’s expenditure in R&D is increasing rapidly; however, if intellectual property is voided, and assuming nations would not respect the IP of companies that didn’t respect theirs, China will never be able to become a net exporter of intellectual property. Furthermore, nations where China was a net exporter of IP would have little incentive to protect Chinese intellectual property which would further deprive China of funds. Lastly, foreign companies will be deprived of revenue to invest further in intellectual property thus harming China in the long run. 

Another form of retaliation China could implement is to restrict the shipping of foreign goods on Chinese ships. China controls approximately 30% of the world’s shipping, and any restrictions placed on it could lead to a global shipping crisis. China could announce a large increase in the fees companies must pay in order to ship foreign goods on Chinese ships or a total ban on the shipment of foreign goods. Both actions would have similar effects varying only in degree. The immediate effects of such an action would be a shortage of ships transporting non-Chinese goods thus resulting in a price increase, and an increase in the supply of ships transporting Chinese goods resulting in a price decrease. The effects of a law like this on China are complicated. The artificially decreased prices of Chinese shipping would lead to an increase in sales of Chinese goods. This would lead to massive short-term gains for the Chinese economy. However, beneath the surface problems begin to arise. The market for shipping Chinese goods would become oversaturated and as shipping prices decreased, multiple Chinese shipping firms would risk bankruptcy. Companies could, in theory, leave China and provide shipping to the rest of the world. However, due to the nature of the Chinese economy and the fact that the shipping firms are owned or strongly influenced by the government, it is unlikely that shipping companies would pursue this action. Ultimately, China would need to significantly subsidize its shipping industry with state funds. In the long run, the rest of the world would build more shipping capacity and prices would begin to drop for non-Chinese goods. China ultimately would be under economic pressure to allow their shipping firms to compete as subsidies become unsustainable and a drag on the rest of the economy. 

In sum, there is a wide range of retaliatory actions which China can take. While some initial actions have already been taken, others are more probable and some are much less probable. It is clear that US regulation on semiconductors or Chinese limits on shipping cause economic damage whenever these regulations are promulgated. Both the US and China recognize this to some extent; however, there comes a moment where rational long-term judgment may be abandoned in favor of short-term gain. It is unclear when the actions taken by the US, combined with internal political pressure, will cause the Chinese government to reach that point. The US should enact the necessary regulations to defend its interests and security at the same time; however, the US should not needlessly antagonize the Chinese. Whenever possible, the free exchange of goods and services should be encouraged, and when it is not possible, other positive actions to strengthen trade should be enacted. 

Analysis of Positive Actions to Strengthen Trade

The actions discussed above are designed to hold China back in strategically important ways. However, the United States must also take steps to strengthen its economy to ensure it remains an important player in the global system and to mitigate any economic damage caused by the imposition of sanctions and subsequent Chinese retaliation. 

Trade is essential to the economy of the United States and strengthening trade with other nations. Attempting where possible to find common ground with China is necessary even as the US moves to economically confront the Chinese government. The main instrument to strengthen trade is trade deals with other nations. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a trade agreement among multiple countries mainly in Asia, but also including Canada, Mexico, and South American countries. The agreement was created after the US withdrew from the prior proposed agreement, the Trans-Pacific Partnership (TTP) which was designed to limit Chinese influence. The TTP was created to further integrate the US with Asia thus increasing US influence relative to China. The US not participating in a trade deal with three out of its top four trading partners in a crucial region of the world does not bode well for US political or economic influence. Contrary to the actions of the US, the Canadian government participated in the trade deal and has seen substantial benefits. Total merchandise trade between Canada and the five signatories that do not have additional trade deals with Canada (Australia, Japan, New Zealand, Singapore, and Vietnam) increased by 10% in the first three years, representing nearly $5 billion.²⁹ Canadian exports to those five countries increased by 8.3% in the same period, and taxable imports increased by 11.2% mainly in consumer products such as clothing and furniture.³⁰ While the agreement has increased trade and wealth, there are some legitimate issues that make the US reluctant to join, including issues relating to intellectual property and state control. The US, as the world’s largest economy, does have leverage in negotiating a favorable entry into the agreement. The US can insist on strengthening protections for intellectual property and currency manipulation similar to those included in the United States-Mexico-Canada trade agreement (USMCA) that was ratified by Congress in 2019. It can also insist on strengthening protections for companies against government interference and increase regulations on state-owned enterprises.³¹  The US should participate in agreements like CPTPP and others to strengthen its economy and influence, and thus better protect its national interests. 

It is important that the US cements its research and development leadership so that it can continue to have control over the most advanced and best technology. For the US to compete and outperform in the global economy, it needs to increase the number of workers in advanced technology areas. By 2030, it is estimated there will be a shortage of 1.4 million workers, such as skilled technicians, engineers, and computer scientists, in technology fields.³² If current trends continue, 58% of semiconductor jobs risk going unfilled by 2030.³³ Multiple policies have been proposed, such as increasing the number of resources invested in science education; while these policies warrant debate, it is worth noting that, in addition to causing an increase in taxes and debt, attempting to reform the education system is a long term solution to a current problem. 

While some government investment may be necessary, one of the best ways to assist the semiconductor and broader technology industry without sacrificing the rest of the economy is through immigration: at US colleges and universities, over half of the graduates with a master’s degree in engineering are foreigners and over 60% of PhD engineering graduates are foreigners. Approximately 80% of foreigners with a master’s degree and 25% of PhDs in engineering leave the US after graduating. The plurality of foreign students in US universities are Chinese. Instigating an exodus of Chinese tech workers from China would help fill the US worker shortage while depriving China of skilled engineers necessary for the development of strategic technology. A model can be found in the US approach to Cuba during the reign of Fidel Castro. Several factors increased immigration from Cuba: an authoritarian regime had already incentivized many to flee the country, the US put economic pressure on an already fragile communist economy, and the US incentivized the migration of Cubans by making it easier for them to obtain permanent residency, among other actions.³⁴ A more limited, but still effective, policy can be pursued with regard to China. China too is an authoritarian regime that naturally makes many people predisposed to leaving. In the case of Cuba, sanctions were implemented on goods from a variety of sectors further fueling the exodus. In the case of China, limited sanctions on the technology sector would restrict the growth of that industry and thus further incentivize an exodus of Chinese tech workers to the US. This can be done with an action similar to the Cuban Medical Professional Parole Program that specifically incentivized a wide range of Cuban medical professionals and their families to come to the US. Another option would be to announce increased incentives for tech workers to enter the US from any nation, understanding that a large portion of those would be Chinese for the reasons mentioned above. While other actions such as export controls would harm China, such actions also deal damage to the US, while increasing immigration from China would actually be a benefit to the US and should be pursued more aggressively. 

While the United States should join multilateral trade agreements and increase immigration, long-term strategy suggests that the United States should also engage with China directly on issues where both sides can find some common ground. It is worth reiterating that China is the largest trading partner of the US and both countries benefit from the relationship. If the US limits its coercive actions to measures which are necessary to defend national security and the property of US companies, there is still billions of dollars of trade to be done between China and the US. In 2022, US exports to China rose by 12.4% compared to the previous year, to a total of $35 billion. Between the years 2018 and 2022, there was an over 400% increase in US agricultural exports to China.  In addition, US imports of everyday consumer items such as furniture, toys, paint, and other manufactured products increased to a total of $69.4 billion in 2022 constituting 50.7% of total US imports of those product categories. Demand for Chinese textiles in the US also increased by 6.7% to $53.7 billion representing almost 30% of total US imports in that sector.³⁵

The US will also become less dependent on China in time. As more countries are industrializing, the ratio of Chinese exports to the US compared to total exports has been declining even as the amount of Chinese exports to the US has risen. For instance, the total amount of miscellaneous manufactured goods imported from China between 2018 and 2022 increased by $4.5 billion even as the share of US imports from China in that sector decreased by nearly ten percent. The world is diversifying away from China in some ways but the evidence is unequivocal that there is still demand for Chinese products in the United States and there is also Chinese demand for American exports. ³⁶

Political Obstacles to Policy Options

The United States government ultimately relies on the consent of its citizens in order to carry out its foreign policy. Many of the policies proposed in this paper lead to increased economic growth and prosperity for large numbers of Americans and thus can, in all likelihood, be implemented without substantial backlash. However, some of the actions proposed will inevitably result in negative economic consequences for Americans. Currently, China has not taken actions that seriously threaten the way of life of most Americans, and thus targeted sanctions against the Chinese regime can be instituted. These sanctions limit the Chinese’s ability to commit acts of aggression and, due to their targeted nature, allow most Americans to suffer relatively minor economic damage. However, should China choose to escalate matters through further aggressive actions, for example through an incursion into Taiwan’s outlying islands or a blockade of that nation, further US action may be necessary. An effective response to such an escalation would need to involve broad sanctions aimed at crippling the entire economy of China. Such a response would result in significant economic damage to US citizens. 

The question is, in such a circumstance, how much damage should the US be willing to accept in order to limit China’s aggression? If, as soon as such an escalation is made against Taiwan, a forceful response is not implemented, China will be further emboldened which will only fuel its aggression. Given the stakes involved, the ideal response would be a complete cessation of all trade with China thus breaking its economy and its war machine. Such a response would not be undertaken for altruistic purposes; on the contrary, as mentioned before, the US has a strong self-interest in deterring Chinese aggression. The only limitation to a policy of complete secession of trade would be the will of the American people; it is unclear if Americans would be willing to endure higher prices and declining living standards. This is one of the most important reasons to take positive actions to increase the wealth of the US economy; a wealthier population will be more amenable to accepting short-term economic losses in order to preserve their nation’s national security. 

Conclusion 

While there will be some rivalry between the US and China due to their strong economic and political differences, as this paper has suggested, the goal is to confront China and strengthen the United States to prevent unnecessary damage in both the economic and military realms. As this paper has detailed, in order to defend US interests from Chinese aggression, two simultaneous approaches should be taken. The first is punitive measures against Chinese strategic technology: most notably, advanced semiconductors for military technologies such as advanced surveillance technology for warships and hypersonic missiles. The second is increasing positive actions which can strengthen the US economy. This includes increasing trade with other nations and increasing immigration, especially in important sectors such as semiconductors and the wider technology sector. It is necessary to take both actions to maintain economic pressure on China. In order to limit the damage to the US economy, the US should trade with China in fields not related to national security while limiting its growth in the field of advanced technology.  

Footnotes

1. O’Rourke, Ronald. “U.S.-China Strategic Competition in South and East China Seas .” Congressional Research Service , 2023. https://sgp.fas.org/crs/row/R42784.pdf 
2.  “Territorial Disputes in the South China Sea | Global Conflict Tracker,” Council on Foreign Relations, 2023, https://www.cfr.org/globa “The South China Sea Is an Important World Energy Trade Route.” Homepage – U.S. Energy l-conflict-tracker/conflict/territorial-disputes-south-china-sea. 
3. Information Administration (EIA), 2013. https://www.eia.gov/todayinenergy/detail.php?id=10671. 
4.   “Territorial Disputes in the South China Sea | Global Conflict Tracker,” Council on Foreign Relations, 2023, https://www.cfr.org/global-conflict-tracker/conflict/territorial-disputes-south-china-sea. 
5.  Francis, Robert, and Roswell Lary . “Winning the Public Diplomacy Battle in the South China Sea.” Council on Foreign Relations, 2021. https://www.cfr.org/blog/winning-public-diplomacy-battle-south-china-sea.   
6.  “Timeline: China’s Maritime Disputes.” Council on Foreign Relations. Accessed August 14, 2023. https://www.cfr.org/timeline/chinas-maritime-disputes. 
7.  “Territorial Disputes in the South China Sea | Global Conflict Tracker,” Council on Foreign Relations, 2023, https://www.cfr.org/global-conflict-tracker/conflict/territorial-disputes-south-china-sea. 
8.  Berman, Noah. “The Contentious u.s.-China Trade Relationship.” Council on Foreign Relations, 2022. https://www.cfr.org/backgrounder/contentious-us-china-trade-relationship. 
9.  Swanson, Ana. “The Contentious u.s.-China Relationship, by the Numbers.” The New York Times, July 7, 2023. https://www.nytimes.com/2023/07/07/business/economy/us-china-relationship-facts.html.  
10.  “Biden Signs Bill Banning Goods from China’s Xinjiang over Forced Labor | CNN Business.” CNN, December 24, 2021. https://www.cnn.com/2021/12/23/business/biden-bans-xinjiang-imports-china-intl-hnk/index.html
11.  Rappeport, Alan. “Farmers’ Frustration with Trump Grows as U.S. Escalates China Fight.” The New York Times, August 27, 2019. https://www.nytimes.com/2019/08/27/us/politics/trump-farmers-china-trade.html
12.  Bekkers, Eddy. “An Economic Analysis of the US-China Trade Conflict.” World Trade Organization, 2020. https://www.wto.org/english/res_e/reser_e/ersd202004_e.pdf.  
13.  Shivakumar, Sujai, Charles Wessner, and Thomas Howell. “A Seismic Shift: The New U.S. Semiconductor Export Controls and the Implications for U.S. Firms, Allies, and the Innovation Ecosystem.” CSIS, 2023. https://www.csis.org/analysis/seismic-shift-new-us-semiconductor-export-controls-and-implications-us-firms-allies-and. 
14.  Ibid 
15.  Ibid 
16.  Varas, Antonio, Raj Varadarajan, Ramiro Palma, Jimmy Goodrich, and Falan Yinug. “Strengthening the Global Semiconductor Supply Chain in an Uncertain Era.” BCG Global, April 25, 2023. https://www.bcg.com/publications/2021/strengthening-the-global-semiconductor-supply-chain. 
17.  Khan, Saif. “The Semiconductor Supply Chain.” Center for Security and Emerging Technology, June 9, 2023. https://cset.georgetown.edu/publication/the-semiconductor-supply-chain/.  
18.  Ibid 
19.  Ryan Hass, David Dollar, and Vera Songwe Witney Schneidman. “New Trade Agreements Lead to More, and Better, Jobs.” Brookings, July 29, 2016. https://www.brookings.edu/articles/new-trade-agreements-lead-to-more-and-better-jobs/.  
20.  Trade Agreements and Jobs.” United States Trade Representative, 2011. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2011/october/trade-agreements-and-jobs#:~:text=Every%20billion%2 0dollars%20of%20services%20exports%20supports%20more,American%20workers%20who%20produce%20Made-in-the-USA%20goods%20and%20services. 
21.  Ezell, Stephen. “How Stringent Export Controls on Emerging Technologies Would Harm the US” information technology and innovation foundation, 2019. https://www2.itif.org/2019-export-controls.pdf. 
22.  Tomoshige, Hideki. “The Unintended Impacts of the U.S. Export Control Regime on U.S. Innovation: Perspectives on Innovation.” CSIS, 2022. https://www.csis.org/blogs/perspectives-innovation/unintended-impacts-us-export-control-regime-us-innovation. 
23.  Mozur, Paul, and John Liu. “With Ban on Micron, China Escalates Microchip Clash with U.S.” The New York Times, May 22, 2023. https://www.nytimes.com/2023/05/22/business/micron-technology-china-ban.html. 
24.  Allen, Gregory C. “China’s New Strategy for Waging the Microchip Tech War.” CSIS, 2023. https://www.csis.org/analysis/chinas-new-strategy-waging-microchip-tech-war.  
25.  Ibid
26.  Hui, Mary. “Japan’s Global Rare Earths Quest Holds Lessons for the US and Europe.” Quartz, April 23, 2021. https://qz.com/1998773/japans-rare-earths-strategy-has-lessons-for-us-europe.  
27.  USPTO OPIA Bulletin Russia – United States Patent and Trademark Office.” United States Patent and Trade Office, June 2022. https://www.uspto.gov/sites/default/files/documents/OPIA-Bulletin-Russia.pdf. 
28.  Schneider-Petsinger, Marianne. “US–China Strategic Competition – Chatham House.” US–China Strategic  Competition The Quest for Global  Technological Leadership, 2019. https://www.chathamhouse.org/2019/11/us-china-strategic-competition.   
29.  “Trade Increases under CPTPP.” Government of Canada, March 27, 2023. https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/access_trade_statistics-accedez_statistiques_commerciales.aspx?lang=eng. 
30.  Ibid 
31.  Cutler, Wendy. “Asia Society.” REIMAGINING the TTP: Revisions That Could  Facilitate U.S. Reentry. Accessed August 18, 2023. https://asiasociety.org/sites/default/files/2022-12/ASPI_CPTPP3_rev.pdf.  
32.  Martin, Dan. “Www.Semiconductors.Org.” semiconductor industry association  , 2023. https://www.semiconductors.org/wp-content/uploads/2023/07/SIA_July2023_ChippingAway_website.pdf.  
33. Ibid
34.  Lopez, Ernesto. (PDF) migration, Brain Drain, and Cuba-U.S. relations – researchgate, 2018. https://www.researchgate.net/publication/324876766_Migration_Brain_Drain_and_Cuba-US_Relations 
35.  “2022 U.S. Trade with China – Bureau of Industry and Security.” US Department of Commerce, 2022. https://www.bis.doc.gov/index.php/country-papers/3268-2022-statistical-analysis-of-u-s-trade-with-china/file. 
36. Ibid

About the author

Alejandro Salas

Alejandro is a senior at The Bronx High School of Science in New York City. He is interested in economics and international trade, and is a Boy Scout who enjoys competitive swimming and debate.

The post United States Policy Options Relating to Trade with China: Economic and National Security Implications appeared first on Exploratio Journal.

Abstract

Moore’s Law observes that the number of transistors on integrated circuits doubles approximately every two years. The accelerating pace of technological development brings about the advent of AI and automation on an unprecedented scale- It is estimated that 40-50% of workers with low education are at risk of automation by the mid-2030s (Hawksworth, John et al. 2018). This report explores the economic conflicts and consequences for Malaysia with a large-scale rollout of automation. I argue that: (i)Large firms will profit the most from automation and will need to be taxed accordingly; (ii) most low-skilled Malaysian workers will be rendered unemployed, thereby inflaming social tensions; (iii) the Malaysian government must play an active role in upskilling and supporting workers in an equitable manner through the introduction of a capital gains tax and stricter anti-corruption laws; (iv) Malaysians ought to establish a worker-cooperative system, much like the Mondragon Corporation so that workers will be able to engage in decisions on technological advancements. This report aims to bring to light the benefits and drawbacks of automation and policy changes with how Malaysia could benefit from them ultimately.

1. Introduction

Being the fourth-largest economy in Southeast Asia, Malaysia’s economy has proven to be incredibly robust. Due to the high concentration of knowledge-based enterprises and the adoption of advanced manufacturing technology, Malaysia enjoys relatively high labor productivity, with labor productivity per hour increasing by 3.4% in 2020 (Department of Statistics, Malaysia, 2020). In addition, it is worth mentioning that a big part of Malaysia’s manual workforce consists of foreign workers, mainly from neighbouring countries like Indonesia, Bangladesh, Nepal and the Philippines. Furthermore, while possessing a strong middle class, Malaysia has a globally recognized friendly business environment, ranked twelfth globally by the World Bank in 2020 (Eknath, 2020). All these points to Malaysia having a healthy economy to adapt to the ever-changing global environment often disrupted by advancements in technologies.

As of 2021, Malaysia is still heavily reliant on its manufacturing and agricultural industries, which accounted for 44.7% of the GDP in 2019 (O’Neill, 2021). The automotive industry alone contributed to more than 4% of GDP and employed 700,000 workers in 2016 (Malaysia Automotive Institute, 2017). However, this is changing as Malaysia transitions to a post-industrial economy. The tertiary sector accounted for 48.84% of GDP in 2009 and has grown to 54.17% in 2019 (O’Neill, 2021). As a result, the tertiary and quaternary sectors will only grow in importance, and traditional manufacturing, mining and agricultural jobs will be, by and large, replaced with machinery. 

Moore’s Law (Fig.2) observes that the number of transistors on integrated circuits doubles approximately every two years. This aspect of technological progress is essential as the capabilities of many digital electronic devices are strongly associated with Moore’s Law (Max Roser and Hannah Ritchie, 2013). This progress in technology is increasingly replacing labor. In an estimation by McKinsey & Company in 2020, automation could displace up to 25 per cent of hours, or 4.5 million equivalent workers, in Malaysia by 2030. Automation will have profound effects on the Malaysian economy, and the government will need to implement policies to ensure the welfare of the people. Increasing spending on education to produce a more highly skilled and adaptable workforce-as of 2019, only 21.3% of the working-age population are graduates with tertiary education. The demand for this skilled labor is only rising and will be a necessity in the digital age.

2. Benefits

Large firms who control the capital would benefit the most, should they replace half of their labor with technology. Technology requires an initial investment and regular maintenance. Still, it will cut production costs and increase overall productivity as machines can work 24 hours a day with little to no interruptions. As a result, firms’ revenues and profit margins will increase substantially. As firms’ profits increase, they can invest in training new workers and increase the wages of their employed workers, increasing their disposable income. This increase in disposable income would increase spending and drive more economic growth in the Malaysian economy as consumption makes up around 60% of nominal GDP in Malaysia(CEIC, 2021).With this rise in profits, firms will also have more capital to invest in research & development, further accelerating the advancement of technology and providing even more opportunities to expand by creating new products and exploring new markets.

Does it mean that 50% of the Malaysian labor force will be rendered unemployed if technology replaces 50% of the current jobs in the country? I believe that this will not be the case. Whilst old jobs will be displaced by automation, opportunities for new jobs and industries will also open up. We have seen this trend in the rise of the internet, with computer scientists in high demand as they have the skills and knowledge to maintain and operate the new technology. Of course, complete automation is not a process that will happen overnight. Displaced workers, who are willing and able to learn, will inevitably have to upskill their labor to adapt to the evolving labor market. Moreover, there will be opportunities for individuals who are ready and able to exploit new industries and markets built upon these new technologies.

Workers may stand to benefit as technology plays a more significant role in their jobs. It can help increase their productivity, raising their income and shortening their working hours as a result. Malaysian exports could become more competitive globally due to a fall in price thanks to the increase in productivity from technology. Lower production costs in Malaysia would incentivize multinational companies to raise their foreign direct investment, stimulate the economy, encourage more job growth, and improve the workforce’s skills.

Another consequence of automation is that it protects workers from dangerous jobs. Sarawak, Johor and Selangor alone account for around 15%(Ayob, 2018) of fatalities from occupational accidents, from which industries such as manufacturing, construction and agriculture contribute significantly. In 2013 alone, 26 fell to their deaths working in Malaysia’s construction sector. Accidents are disastrous for all parties involved and are likely to halt production and increase costs to the firm. In addition, organizations can be forced to pay for compensation to the affected family, and even OSHA fines spanning upwards of RM200 000 (Kamel, 2021)if an inspection deems a regulation to be broken in the course of the fatality. However, Malaysia has been adopting the use of machinery in production over the past few decades. With 2019 marking the official use of 373 000 industrial robots (International Federation of Robotics, 2020) installed in manufacturing facilities, there is no doubt that such workplace incidents will continue to fall. Cobots or collaborative robots designed to work directly with humans have seen an 11% increase in demand than their traditional counterparts, assisting workers in carrying out tasks more safely while keeping them employed. The move to introduce technology to take on more hazardous tasks is likely to result in a net social gain to society, preventing such tragedies while preserving able workers who can contribute to the economy. 

3. Implications

Due to the lack of tertiary education credentials, low-paying and low-skilled work are often taken up by the less educated. Advanced technologies quickly substitute such workers, and the tragic yet inevitable result is structural unemployment, meaning unemployment caused by changes in industrial structures and innovation of production technologies in this context. This would result in the reduction of income for lower-income groups, hence worsening the income disparity. Most workers in primary and secondary sectors, which compose 37% of the Malaysian workforce (Fig.1), could face unemployment due to automation in industries. Structural unemployment will prove an immense challenge for Malaysia’s limited welfare system. As of 2021, Malaysian citizens working in the private sector who have been made redundant can claim benefits through the Employment Insurance System Act 10, in which the unemployed can receive financial assistance for up to 6 months while continuing to look for a job . The Malaysian government will need to widen the scope of the unemployment benefit system and provide retraining schemes to maintain an active workforce. 

Technological advancement is guaranteed to face much resistance from displaced workers who lack the ability and willingness to adapt to the changes. Facing a lack of labor market competencies, this phenomenon creates a series of problems for the unemployed:

1. The unemployed would struggle to meet their everyday expenses such as food and accommodation costs due to not having a stable income, leading to a decrease in their living standards.
2. A rise in the unemployment rate would worsen social problems and cause a rise in crime rate, eroding social cohesion and discouraging investors.
3. Unemployment would mean that Malaysia’s labor resources are not being fully used in production, limiting national income.
4. Unemployment significantly stifles economic development while decreasing effective demand at the same time. The unemployed, who have little to no purchasing power due to insufficient disposable income, would subsequently prove ineffective in contributing to the national aggregate demand in Malaysia, in which consumption plays a significant role.

Having millions of workers requiring government assistance would almost certainly trigger a recession. It will be essential to introduce the automation of industries in phases to ensure that there will not be an unsustainable spike in unemployment. The planned restructuring of production and service can open up new avenues for employing those whose work has been automated. Rather than working unnecessarily long hours, workers could work fewer hours and let the new technologies carry the heavy workload under this system. Increased unemployment from automation will be juxtaposed with the increase in profits and revenue for owners of firms, leading to higher levels of income inequality. In addition, the Malaysian government ought to increase taxes to fund its welfare system and improve its infrastructure. This could be achieved by introducing a capital gains tax, which Malaysia currently does not implement (Deloitte, 2017), raising the tax on the upper tax brackets, and introducing heavier penalties for corruption- a serious issue amongst the political and social elite.

4. Conclusion

So would Malaysians be better off ultimately? As with most things in economics, the answer is rarely blunt. I may have painted a grim future for the socioeconomic impacts should technology replace half of the current jobs in Malaysia. There are feasible solutions to all the problems mentioned above. Rather than having machines put large swaths of the population out of work, Malaysia ought to build a system in which the technological advancements would be used as intended, which is to reduce the amount of work that workers need to do without dropping people from the workforce. I believe that such a reality could only be made true if Malaysia can establish a truly democratic economy, one in which the workers control some of the production of goods and services, as well as the implementation of technologies through worker cooperatives, unlike under a completely free-market economic system in which the industrialists do. Only then can technological advancements be used to serve the interests of the broader Malaysian populace rather than for the profit of a select few industrialists. Under this system, Malaysian workers would be able to democratically engage in their corporation’s decision-making process, which places the welfare of the workers and the nation at the centre of its mission. To establish such a system,  Malaysian policy-makers and workers can try to emulate the Mondragon Corporation, a highly successful federation of worker cooperatives employing over 70,000 in the Basque region of Spain.

There is a possibility that Malaysian workers could be freed from mundane work with technologies such as artificial intelligence, machine learning, and automation becoming universal. Instead of being an appendage to the machines, workers would now have the work of designing and maintaining the machines, a form of work that is more versatile and requires education and creativity. On top of this, Malaysians could devote more time to their creative development and leisure, allowing everyone to maximize their creative potential for arts, innovation or literature. Technology ought to be used as a liberating force instead of a divisive force in society. 

All in all, there remains no doubt that technology replacing half of the current jobs would result in many Malaysian workers being displaced, creating and leaving jobs only for those who are sufficiently skilled. This would certainly result in various social problems like unrest, much like the First Industrial Revolution did. In the short term, it would appear that the industrialists have the most to benefit while the ordinary worker has the most to lose. However, observing current trends, it is likely that technological advancements would culminate in a positive scenario for all parties involved.

References

Max Roser and Hannah Ritchie. (2013). “Technological Progress”. Published online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/technological-progress

Ayob, Afizah et al. (2018). Fatal occupational injuries in the Malaysian construction sector–causes and accidental agents. IOP Conference Series: Earth and Environmental Science. Retrieved from: https://www.researchgate.net/publication/324443457_Fatal_occupational_injuries
_in_the_Malaysian_construction_sector-causes_and_accidental_agents

O’Neill, Aaron (2021).  Malaysia: Distribution of employment by economic sector from 2009 to 2019. Retrieved from: https://www.statista.com/statistics/319036/employment-by-economic-sector-in-malaysia/

Ee Huei Koh and Nimal Manuel. (2020). Automation and adaptability: How Malaysia can navigate the future of work. McKinsey & Company. Retrieved from: https://www.mckinsey.com/featured-insights/asia-pacific/automation-and-adaptability-how-malaysia-can-navigate-the-future-of-work

Kamel, Harizah (2021). “DOSH prosecutes 47 cases worth RM740,000 in 1Q”. The Malaysian Reserve. Retrieved from: https://themalaysianreserve.com/2021/04/06/dosh-prosecutes-47-cases-worth-rm740000-in-1q/#:~:text=THE%20Department%20of%20Occupational%20Safety,to%20March%2028%20this%20year.

Malaysian Automotive Institute. (2017). “The Automotive Industry”. Retrieved from: http://www.mai.org.my/index.php?option=com_content&view=article&id=32&Itemid=111&lang=e

Hooi Beng, Tan (2017). “International Tax: Malaysia Highlights 2017”. Deloitte. Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-malaysia-int-tax-en-2017.pdf

International Federation of Robotics. (2020) “Executive Summary World Robotics 2020 Industrial Robots” . Retrieved from:https://ifr.org/img/worldrobotics/Executive_Summary_WR_2020_Industrial_Robots_1.pdf

Department of Statistics, Malaysia. (2020). “Graduates Statistics 2019” Retrieved from: https://www.dosm.gov.my/v1/index.php

CEIC. (2021). “Malaysia Private Consumption: % of GDP”. Retrieved from: https://www.ceicdata.com/en/indicator/malaysia/private-consumption–of-nominal-gdp#:~:text=Malaysia%20Private%20Consumption%20accounted%20for,an%20average
%20share%20of%2047.4%20%25.

Hawksworth, John et al. (2018). “Will robots really steal our jobs?” PricewaterCoopers. Retrieved from: https://www.pwc.com/hu/hu/kiadvanyok/assets/pdf/impact_of_automation_on_jobs.pdf

Eknath, Varun. (2020). “Malaysia Doing Business 2020: Pursuing reforms at the top” The World Bank”. Retrieved from: https://blogs.worldbank.org/eastasiapacific/malaysia-doing-business-2020-pursuing-reforms-top

About the author

Jordan Tan

Jordan is currently a Year 13 (Grade 12) student at the Alice Smith School in Kuala Lumpur, Malaysia. His academic interests are in Economics, History, and Politics. Jordan’s experiences in Malaysia’s multicultural society have inspired him to learn more about how sociopolitical factors influence everyday life in Malaysia. Outside of academics, Jordan’s biggest hobby is soccer, having played the sport all his life; he is also involved in his school’s student council as the treasurer.

The post Automation in the Malaysian Workforce: The Future Challenges and Consequences of Replacing Labor appeared first on Exploratio Journal.

Abstract

The main goal of this essay is to try linking the effects of the traditional values and ideals of both the People’s Republic of China and the United States of America to their contemporary economic policies. The methods used to conduct this research use both historical and contemporary sources as well as data to justify some present day economic policies and reforms in said countries. For the United States, since there are vastly different ideals that branch off the same foundation within individuals and presidents. I would be using Donald Trump’s ideals, arguably one of the more popular presidents in the last decade, as the main American ideology. Overall, through this research I gained insight on the United States’ stress on individualism and liberalism that allowed it to push for policies that limited the government’s ability to influence the economy and tried to keep individual’s ability as the main factor in market competition. While China’s promotion towards collective, stable, and authoritarian society creates room for the government to limit individual’s capital, especially the ones who are wealthier, and restricting certain industries that is deemed to give unfair advantages.

Introduction

For decades, the People’s Republic of China and the United States of America have been competing for first and second place in terms of their GDP. However, one might be curious about how a socialist country and a capitalist country come toe to toe in terms of their economic might. Both countries, with completely different ideologies, cultures, and traditions are economic giants globally. With this in mind, this paper argues that traditional cultures and values do have a distinctive effect on the makings of contemporary economic decisions, and do provide reasonings for economic policies and reforms for the respective country.

What are Chinese Ideals:

Ever since the communist takeover of China in 1949, the definition of being a Chinese has changed. In half a century, China has transformed from an agrarian based, shattered feudal society to a communist, economic powerhouse. Even though the large economic boost puts China right behind the United States in terms of GDP, the average Chinese citizen has a completely different definition of what a successful society is than the average American citizen.

How would a Chinese citizen define a successful society? One of the main things that
Chinese culture stresses is stability. In Chinese history

The traditional moral-political model was able to withstand or absorb outside influences. Buddhism came from India, Mongol and Manchu invaders swept in from inner Asia, and traders from the Near East arrived along the Silk Road and by sea, but the system held fast. Chineseness was too powerful to be dislodged; it was the invaders who adapted. (Link, 2015)

With Chinese culture and traditions being kept static for such a long duration of time, it is not surprising that the Chinese would go out of their way to see a stabilized society. This is another reason why the Chinese seem to prefer more authoritarian governments. Ever since the Xia dynasty, absolute monarchies have held the reins in China, whether the ruler was Han, Mongol, Manchu, or even the self-proclaimed “democratic” leaders in the early twentieth century. Under authoritarian governments, politics is one factor that the public would not have to worry about. Even in Taoism, one of the leading philosophies throughout Chinese history, states, “those who followed the way did not try to give people knowledge, but kept them ignorant. People are difficult to rule because of their knowledge. To rule by knowledge ravages the country. To rule not by knowledge blesses the country” (Stendudd, Tzu, n.d.). With his reasoning being:

Not praising the deserving, prevents envy. Not valuing wealth, prevents theft. Not displaying what’s desirable, prevents confusion of the senses. Therefore: the sage governs by emptying senses and filling bellies, curbing strife and strengthening backs, keeping the people ignorant and without desire, making the learned afraid to act. If he acts without action, order will prevail. (Stenudd, Tzu, n.d.)

Lao Tzu’s ideals are still widespread in contemporary China, and one could definitely see why. With the stress for stability in Chinese society, the citizens believe that the government would do the best for the country, even if it means that some are sacrificed for the greater good, and that they are being good citizens simply by not interfering with the government. With the mentality of pursuing stability, this also requires the factor of collectivism, which is another strong trait found in Chinese ideologies. An additional factor for collectivism has been stated in Wong’s work, which they identified as the since relationship’s in Chinese society start with family but further extends to their extended family and village, and that any honor or face “bestowed upon a family member is shared by the family and beyond” (Wong, 2001). This further stresses the importance of collectivism in society, since if an individual
brings disgrace onto themselves, they would also affect their entire family (and possibly more). This ideology would not stop at the familial level, but also nationally and ethnically. In the end, the pursuit of stability and collectivism in contemporary China has largely influenced the current government’s economic policies and goals.

Contemporary Chinese Economic Policies

After the takeover of mainland China by the Communist Party of China (CPC), the party has taken advantage of the collective identity and utilized it to strive for a more egalitarian society, beginning with the Land Reform in 1948. Though the Economic Reform pioneered by Deng Xiaoping has altered the path to a more individualistic approach, famously saying, “Let some people get rich first” (Deng, n.d.). This method is slowly being adjusted back to its roots by recent policies rolled out by President Xi Jinping. According to Inman, Xi, in his recent meeting with the Financial and Economic Affairs Commision has stressed that the government should “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society” (Inman, 2021).The policies that Xi has pushed out in order to “encourage high-income groups and enterprises to return more to society” (Inman, 2021)7 have shown to line up with the contemporary and historical Chinese ideals of a collective, stable, and egalitarian society.

Some of the policies that were pushed out with the intent of redistributing wealth and achieving wealth and education equality were heavily imposed restrictions on both the online gaming industry and the private education industry. The restrictions imposed on the private education industry were said to be made in order to “reduce the cost of child-rearing”, due to the high competitiveness of the higher education system (Goh, 2021). The guideline,
according to Koty, states that “regional governments are no longer permitted to approve new off-campus tutoring centers providing core/compulsory education. Existing ones must become registered as non-profit institutions” as well as an excessive restriction on online classes (Koty 2021). Knowing this, it could be inferred that the “unfair” advantage that certain students with high-income families would be heavily limited. Needless to say, this policy economically impacted the education industry in China significantly, causing one of the leading private education enterprises, New Oriental Education, to suffer a seven billion dollar loss in market value, about 50 percent of their market worth in Hong Kong (CNN, 2021). In similar fashion, the online gaming industry has also been thoroughly restricted, though this time with the aim “to help prevent young people becoming addicted to video games” (CNN, 2021). This policy prevented anyone under the age of 18 from partaking in any forms of online gaming during weekdays, and only allowed a one hour session per da from Friday till Sunday. Although this policy could be seen as trying to rid the younger population of this so-called “spiritual opium” (CNN, 2021), it could also be interpreted as a means to further restrict the elite class from gaining more capital. As there are over 110 million minors that game regularly in China, there would surely be a decline in game time and money spent gaming as Niko Partners senior analyst Niko Ahmed believed according to a report by CNBC (Feiner, 2021). In the end, these policies have shown to promote, or at least used traditional and contemporary Chinese ideals to justify their means.

In addition, President Xi has also been adopting alternative ways to make sure that the top entrepreneurs in China get the memo on the country’s new campaign to recreate an ideal society. And as Standaert puts it, “many of the activities these entrepreneurs had become accustomed to […] expressing their individuality, starting charitable foundations and educational institutions in their name – are increasingly unlikely to be tolerated in President
Xi Jinping’s China in the coming years” (Standaert, 2021)14 Using the “common prosperity agenda” as a vehicle, the country has already received donations from some of the richest individuals in China. Based on the reports of Buckly, Stevenson, and Li, both Alibaba and Tencent would donate $15.5 billion towards that goal, which includes but not limited to, “rural health care and insurance for delivery workers” (Buckley, 2021). Though that is not all. An article from the New York Times claims that some of the more extreme reforms could include higher taxes on capital gains, inheritance and property, and higher public sector wages to limit corruption and bribery -which has been rampant during the post Deng era- (Inman, 2021). These reforms and pressure towards the ultra-wealthy using the goal of common prosperity could be linked back to the ideals to create the Party’s and the people’s view on creating an utopian society.

Defining American Ideals

The United States, though still a young country compared to its counterpart in Asia, has quickly solidified its position as a world superpower after the second World War. Compared to China, the United States’ national ideology could be identified as liberalism, which pushes for democracy, limited government, republicanism, the rule of law, equality. According to the reports of Tierney, “Americans without liberalism have no idea who they are” (Tierney, 2011). With liberalism stressing for more autonomy for citizens and restrictions on the government, and a protest-heavy culture, it could be inferred that the United States also has a strong individualistic value. This could be backed up by Barone’s article “American Dream”, in which he defines the American Dream as “the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society in which upward mobility is possible for everyone. The American dream is believed to be achieved through sacrifice, risk-taking, and hard work, rather than by chance” (Barone, 2021). Its individualistic approach is even more clear in the Declaration of Independence, which states, “we hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights,
that among these are Life, Liberty, and the pursuit of Happiness” (Jefferson, 1776). Notice how in the definition of the American Dream, and present in the Declaration of Independence, there is a strong emphasis on individualism qualities, whether it is to restrict the power of the government, to promote individual economic achievements and fair competition, or the right of equality towards all regardless of ethnicity, social status, or economic situations.

American Economic Policies

For the past 40 years, United States presidents have used such ideologies to push for a Neoliberal economic policy. Neoliberalism, which pushes for deregulation of the market, celebrated cosmopolitanism (the idea that all human beings are members of a single community), and pushed for globalization (Grestle, 2021). This closely relates back to the ideals that founded the United States: deregulation of the market allows more autonomy for the citizens, cosmopolitanism relates back to values that were present in the American Dream, such as the right to give everyone a chance to succeed, and globalism also allows more autonomy for the citizens, allowing for more choices for citizens to choose and trade from. After being kick-started by president Ronald Reagan, it has been the primary economic ideology of presidents in the United States. This, with most of the Neoliberal ideals matching
with traditional American ideologies mentioned in the previous section, makes its policies a prime source for identifying how Neoliberal policies are impacted by current American beliefs.

In recent times, the Trump administration, one of the most significant and controversial administrations, a man which 25% of the nation (as of 2021) still sees as the “true president” of the United States, has pushed out policies that are easily justifiable with traditional American ideals (Brown, 2021). To demonstrate, the Tax Cut and Job Act, which allowed “significant and permanent tax cuts to corporate profits, investment income, estate tax, and more” (Floyd, 2021). At the same time, personal tax bracket rates (percentage of tax based on income level) were also being lowered. According to Investopedia, the top bracket dropped from 39.6% to 37%, while the lowest bracket dropped from 15% to 12%. As seen in Figure 1, the tax percent of the total GDP for both individuals and corporations notably dropped after President Trump was elected into office.

This policy disallowed financial restrictions that the government could utilise against corporations and individuals, which could be argued that it also limited the government’s financial abilities, which could be related back to Americans’ uneasiness with governments which have more authority and resources. Additionally, the reforms towards welfare and medicare programs, which claimed to already drop five-million citizens from its food stamp program, have similar reasoning as the tax reforms (Tankersley, 2020). These welfare program reforms raise requirements that are needed to apply to medicare, food stamps, checks for the disabled, and utilities for households (Kogan 2019). These reforms, justified by the fact that some do not think these social welfare programs are effective at creating equal opportunities, but rather wasting tax money on freeloaders. By these means, it would be easy to spot why president Trump made more restrictions for applying to these programs, which tries to create an equal opportunity for those in need and to keep out those who just want to take advantage of the system

In the end, though it is generally hard to define certain policies with a single ideology, with the evidence and justification, it could be said that these policies are definitely motivated by Neoliberal ideologies. From the impactful tax and welfare policies, it has shown to be used to limit the government’s financial abilities and as well as create a more equal and just competitive market for individuals as well as corporations.

Conclusion

Overall, using contemporary and historical ideologies to try and define economic policies and their goals has created a distinct but reasonable logic for both countries. For China, the belief of working towards a common goal (and under CPC’s rule, this has gotten even more apparent), the stress of stability, and the distinction between the common citizens and government created policies that aimed to even out individuals who have gotten too
much capital, to eliminate private education, which was seen as a mean for the wealthy to try and gain an upper hand in life, and also trying to create “common prosperity agenda” for everyone. On the other hand, the United States, which pushes for a limited government, autonomy for citizens, and equality (though it is for social equality, while China strives for economic equality), pushed Neoliberalist principles onto its economic policies. With some of the biggest examples being the tax and welfare reforms, which tries to limit the government’s participation in the market and as well as creating unfair advantages for certain individuals. These policies push the agenda that aims to promote an individual’s entrepreneurial abilities instead of working collectively to pursue state set goals.

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About the author

Qitian Huang

Qitian is an 11th-grade student at The Houde Academy in Shenzhen, China. Having lived both in China and the United States, he has a unique insight into the daily life and cultural differences between both countries. Qitian has taken great interest in both politics and history, and is seeking to learn more about political and cultural differences around the world. When he is not pursuing his academic interests in politics and history he likes to indulge himself in classic horror movies.

The post Cultural Ties with Contemporary Economic Policies and Reform: A Case Study Comparing China and the U.S. appeared first on Exploratio Journal.

Abstract

Over the past 20 years, China could be seen rising steadily to one of the world’s great powers. Politically, China has an active foreign policy, and actively engages in protecting territorial sovereignty and gaining international influence. Economically, by joining the WTO, China has since transformed into a world economy. Externally, these changes also result in a variety of economic and political counterattacks by the US. Internally, the Chinese Communist Party’s determination to consolidate its power has led the nation into increasingly centralized both economically and politically. This paper is going to argue that attempting to reconcile economic liberalization with authorization is not sustainable.

Challenges Faced by China amid Economic Liberalization

China’s economic rise in the past 20 years saw the nation emerge as a world superpower thanks to free-market reforms undertaken in the 1990s. Externally, it has been active in asserting control over a large share of territory in the Pacific and more generally, in exercising international influence; internally, it is focused on solidifying the CCP regime by more tightly controlling the country and its citizens. However, these changes are increasingly at odds with
economic liberalization; the benefits that come with opening the market cannot coexist with tighter control by the party. As a result, because it is not possible to reconcile authoritarianism with free markets and private property, the Chinese government’s current policy is not sustainable.

Literature Review

China’s economic rise to one of the world’s great powers is undeniable. But opinions differ on whether China will compete with the International order created by the US hegemony 3 and whether it has the ability to become the next hegemony. Some findings suggest that there are critical barriers China must cross in order to create a hegemony like the US.

In “China’s rise and US hegemony,” Rosemary Foot argues that despite China’s material resurgence, it is not able to become a true hegemon due to its inability to find a balance between protecting its own interests and reassuring its neighbors that it does not threaten their interests (Foot, 2019). China’s material resurgence in recent years is evidenced by increased exports, investments, and trade, a growing scientific, particularly space ambition, and having the world’s second-largest defense budget. China’s management strategy in East Asia, despite attempts to reassure its neighbors through creating international organizations, is characterized by its determination to protect its sovereign claims and engage in bilateral relationships such as in the BRI. As Foot argues, China would be at most a restricted constituency due to the leveraging of its economic and military power against seeking bilateral relationships which create normative order and stabilize the region.

Some findings suggest that China is beginning to compete with the US, and possibly create a new international order.

Mearsheimer uses the concept of offensive realism to argue US engagement policy with China is doomed to fail, and this paper takes this as the point of departure to argue that China’s expanding power to protect its interest is inevitable (Mearsheimer, 2001). In international anarchy, a world absent of a central and dominant authority, since states can never be sure of others’ intention, in order to maximize security, a state would always compete with each other. Mearsheimer uses this to predict that in order to achieve maximum security, China would want to create a regional hegemon, hence it would not settle with US possible containment policies.

Findings from Cooley and Nexon further discuss China’s threat to US hegemony and suggest that China is beginning to compete with US hegemony and possibly create a new international order (). According to their paper, since 1997, China and Russia made it clear their goal was to promote a multi-polar world; they allied in the UN, tolerated each others’ international projects, and both created international institutions to gather more allies. China also routinely provides economic aid to other countries, with the goal of gaining allies in these international institutions. These countries, which before were either directly or indirectly a part of the US hegemonic project, now have a choice to join China. The post-Cold War liberal international order was also challenged by illiberal competitors in many areas. Far-right organizations in traditional western liberal countries have gained increasing international recognition and support from Beijing and Moscow; many countries such as China began to sponsor their own NGOs to compete with western ones; authoritarian countries began to believe liberal ideals are a threat to their security. These movements can be understood as evidence of China’s increasing power in the world.

Malkin takes on a different approach and argues that China has the potential to challenge the US structural power from the aspect of productive power (Malkin 2020). He argues that the recent Chinese policy MIC 2025 had allowed it to ascend in the global value chain. China is able to increase its influence by capturing more global intangible assets and raising its market share using favorable IP commercialization, standardization, and competition policies. This paper is going to evaluate China’s aggressive economic approaches like this.

China’s foreign strategy

Over the past 20 years, China’s foreign policy can be described as highly active. This paper will categorize its policy as both protection of territorial sovereignty and attempting to gain international influence.

Protecting territorial sovereignty has long been one of China’s biggest foreign policy goals. One of the most important strategic competitions China is involved in is over the South China Sea (SCS). With an estimated 11 billion barrels of untapped oil and 190 trillion cubic feet of natural gas, SCS, countries around the region such as China, Brunei, Indonesia, Malaysia, the Philippines, Taiwan, and Vietnam have been vying for control over the region (Territorial disputes in the South China Sea). Recently, China has been seen through satellite images working to increase the size or even build new islands in an attempt to gain more control. China’s strategy in SCS can be seen as an attempt to gradually shift the status quo in its favor without engaging in actual military conflicts. Some refer to this as a salami-slicing strategy where China slowly captures and sets up defenses around new territories to gradually wear its opponents down.

Another strategy China uses to create influence is by engaging with international alliances and organizations while also building regional institutions. For example, China’s power and influence in the UN are increasing significantly as it provides economic support to other countries. In a United Nations Human Rights Council in 2020, a total of 53 countries supported China’s new national security law, overwhelming the 27 members that were against it (Landslide support for Hk law at UNHRC). China has also been actively creating and joining regional economic institutions and signing trade agreements as a means to better connect with other countries in the regions such as Regional Comprehensive Economic Partnership, Comprehensive Agreement on Investment, Shanghai Cooperation Organization, and Asian Infrastructure Investment Bank.

Alongside this is the promotion of the Belt Road Initiative (BRI). BRI manifests China’s attempt to use its economic leverage to gain allies and influence their policies to oppose the US existing order. However, there are a few problems with this kind of foreign policy. First, using economic leverage to build relationships is not secure. It is likely that once China becomes unable to provide economic support, its allies will quickly turn away. Second, China’s showing off its military power, as in the case of SCS, undermines its credibility that it would be able to maintain safety and order in the region. Third, China’s activity is predatory: many countries China works with have low credit rankings. This slows BRI investment deals and raises concerns inside China regarding the implementation of BRI

US policy on China

American activity has largely been to engage with China economically, believing this would push China towards free-market principles. In 2001, the House of Representatives approved the US-China Relations Act of 2000, which essentially showed their support for China to join the WTO. Consisting of 164 members as of 2021, WTO encourages freer trade, fewer economic barriers, and better trade deals among its members. Then-president Bill Clinton hoped that by joining the WTO, China could accelerate the progress of opening up its economy to the rest of the world, and naturally move away from the communist political model and join the US-led liberal democratic order. Specifically, China would have to reduce tariffs, guarantee intellectual property rights. Politically, WTO and its members can serve as a check for the Chinese communist government. In reality, while China’s economy grew remarkably, its political transformation did not go as the US hoped it would. From 1990 to 2012, the number of people in China living in extreme poverty had fallen two-thirds of the population to under 0.5% ); China’s economy now is 11 times larger than it was in 2001 (China Poverty and Equity Brief). However, the CCP was able to use economic growth to legitimize its rule in China. During the past 20 years, it maintained tight control in Chinese private and public businesses, with an estimated 70% of about 1.86 million private companies having internal CCP-ties.

Clinton also hoped Americans would profit economically from China joining the WTO. In reality, while American consumers benefited from cheaper Chinese products and corporations took advantage of China’s large market, much American labor in the manufacturing industries lost jobs due to China’s competition. President Trump, during his 2016 presidential campaign, used this as rhetoric, saying “They’re using our country as a piggy bank to rebuild China,” Trump said. “We have to stop our jobs from being stolen from us.” A report by the Economic Policy Institute estimates the growing trade deficit with China has cost 3.7 million American jobs since China joined WTO in 2001. It is notable the report also found job losses from the trade deficit in the electronic and computer parts industry accounted for 36.2% of all job losses (Scott & Mokhiber, 2020). The US used to have a comparative advantage in advanced technology, but the fact that China now dominates manufacturing in this industry shows that the former took full advantage in using the opportunity to join the WTO to transform its industrial focus.

While the US economic policy on China at the start of the century was mainly concerned with helping it open up its market to the world, its policy has since changed rapidly in the last 5 years. The US began to pass tariffs and impose sanctions aimed to discourage China’s acquisition of America’s technological expertise. To the US, China’s use of industrial policies, subsidies, and regulatory authorities to acquire technological skills is aggressive. The Made in China 2025 policy, for example, was aimed to improve China’s competitiveness in technological industries by gaining expertise from the US firms. The US suspects IP theft and cyber espionage may be ways that China uses to achieve its goals.

In a 2018 report, the US trade representative found China engaged in (1) forced technology transfer, (2) cyber-enabled theft of U.S. IP and trade secrets, (3) discriminatory and non-market licensing practices, and (4) state-funded strategic acquisition of U.S. assets. Subsequently, the US Congress passed a tariff on Chinese imports worth approximately 250 billion dollars, while China countered with a tariff of about 110 billion. The US imports from China had fallen from 538 billion to 434 billion dollars from 2018 to 2020, just under 100 billion dollars in 2 years (United States Census Bureau).

Imposing tariffs, though significant, was not the only action taken by the US on China, however. The Trump Administration tightened technology exports to China’s Huawei and restricted the use of universal funds to buy the company’s equipment. The Administration also posed sanctions on certain entities and officials in Xinjiang due to the findings on crime against humanity and genocides. Reacting to the National Security Law in Hong Kong, the US passed a series of sanctions and began to eliminate Hong Kong’s special economic status in American trade law. Although the two countries signed a phase one agreement in January of 2020, easing the tensions from the trade war, the economic competition between the two countries is very much alive and has not de-escalated.

Cybersecurity is one of the aspects that intensified China-US relations. The US accused China of endorsing or supporting espionage attacks about a decade ago. On May 19, 2014, for example, the US indicted 5 Chinese military hackers suspected of cyber espionage against 6 US nationals in nuclear power, metals, and solar products industries (The US Department of Justice).

Since this was a hack carried out by members of the Chinese military, it represents the first charge by the US against a state actor in hacking. In July of 2021, the Biden administration accused China of cyberattacks, and according to their findings, China’s hacking has transformed into a far more sophisticated satellite network that perpetuates American companies and interests. The US position on Taiwan (ROC) also causes issues with China. Taiwan’s strait issue has long been the main focus of China’s foreign relations, and China strongly asserts sovereignty over Taiwan.

The US position on Taiwan can be seen as a strong indicator of the relationship between the two countries. While the US had ceased recognizing ROC since 1979, due to the Taiwan Relations Act in 1979, the US continues to provide military support to maintain Taiwan’s self-defense capability. The US policy on Taiwan had been purposely kept ambiguous, in order to stabilize cross-strait relations. However, during President Trump’s administration, US-Taiwan ties became significantly stronger following a series of new laws passed by the US. Following the Taiwan Travel Act in March of 2018, high-level diplomatic officials from two countries were encouraged to visit each other. In March of 2020, Trump passed the TAIPEI Act, which further increased the scope of their relationship. Additionally, the Trump Administration escalated arms sales, totaling 18,277.8 million dollars worth of arms to Taiwan in 4 years. In comparison, in 8 years as president, Obama sold only 14,070 million dollars worth of arms.

China has increasingly pressed the Taiwan issue. It has not held back from taking action. In fact, in 2020, a year where most countries were affected by the Covid-19 pandemic, China made a record 380 incursions into Taiwan’s air defense identification zone (China’s record entry of Taiwan Airspace, 2021). This may be in part because Taiwan’s ADIZ actually stretches into China’s mainland border as shown in Figure 1, so the incursions may not necessarily threaten Taiwan. However, these actions could be seen merely as a political choice by China directed at the US and its allies for their continuous support for Taiwan; most countries believe that a settlement should be reached on this issue.

Internal Issues

Doing business in China is not necessarily straightforward. It ranks well in the World Bank’s ease of doing business index. But there are some areas of weakness. For example, China is ranked 105 in the world for tax collection. Transactions were not adequately protected by laws and that the government reserves the right to make changes in favor of domestic firms. The ranking is measured by the number of payments, time, and the total tax rate of a case study firm, usually a foreign one. This shows that China imposes a lot of restrictions on foreign firms in order to protect the domestic ones, showing that China is very internally centralized, with a top-to-bottom system. China is ranked 80 in ease of getting credit, which, according to the World Bank “measures the legal rights of borrowers and lenders in secured transactions (or collateral) laws and bankruptcy laws to assess how well these laws facilitate lending.”

This spills over into other areas of business.

Most recently, through passing a series of laws aimed at limiting the expansion of big tech companies, the Chinese government shows its determination to prevent the tech titans from gaining too much political power and limit external, western influence. In April 2021, China imposed a series of restructuring on Jack Ma’s Ant Group, which not only undermined its values but also split the powerful tech firm into several independent businesses. With over 730 million monthly users per month, Ant’s Alipay has a huge amount of consumer data that not only gives it a big advantage in competition but also prompted the government to take action. Other major tech companies such as Tencent and Didi, also faced a crackdown. Since being fined for monopolistic behavior, their stock values had fallen 7% and 27% respectively (Grothau, 2021).

In 2018, the National People’s Congress passed a constitutional change that removes the presidential term limit and allows President Xi Jinping to serve as president for life. This change effectively centralized political power in China into the hands of a single man. Just 10 years ago, within the CCP, there were various factions and then-president Hu had to listen to different opinions. Now, Xi was able to elevate his status and ideology, which possibly meant a more centralized and authoritarian communist government that reduces market power.

According to the analysis by the World Bank, China’s rising inequality from 1990 to 2010 can be attributed to the rapid growth of income from the richer group, growing rural-urban difference, and income from private property, which in turn was a result of China’s opening up its market during the 1990s (Sicular, 2013). Xi’s policy of focusing on internal centralization of power over market growth had led to an improvement in China’s income inequality. According to the World Bank, China’s Gini coefficient data rose steadily from 1990 and peaked at 43.7 in 2010, as shown in Figure 2. Then declined sharply until 2016, the last year for which the World Bank has data.

The fact that the income of the richer group is growing faster than the poorer group is a reflection of a capitalistic market that China was gradually transforming into. While people who live in cities have access to a more modern and capitalistic market and experience rapid income growth, the income of rural households, though growing, is not increasing nearly as fast (China Poverty and Equity Brief from World Bank).

The trend changed in the 2010s. Besides the increasing number of SOEs and tech companies crackdown by the Chinese government, it also implemented a series of pro-farmer policies, personal income tax reform, and financial inclusions, which were aimed to reduce the rural-urban gap. With the “Grain for Green” program aimed to mitigate flooding and soil erosion, the Chinese government sent 124 million people from rural areas, mostly farmers, to transform farmland susceptible to soil erosion into forests. The program not only successfully grew its forest area from 16.74% to 22.5%, an amazing achievement, but it also helped improve the economic situation for millions of rural Chinese people, showing the government’s determination and ability to greatly influence the nation’s economy (How China brought its forests back to life in a decade).

The growth of SOE involvement in Chinese Economic life, instead of reform and reduction of state-owned enterprises (SOE) in China, is also an indicator of Xi’s relentless effort to increase the state’s involvement in the economy. In the 1990s, China went through a series of market reforms under Deng Xiaoping. As a result, state-owned enterprises began to adopt western governance structures and aimed to improve efficiency and productivity. In the 2000s, with the creation of new government bodies such as the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the central government began to exert more control over the SOEs.

The Xi Jinping era saw an even larger role played by the SOEs. Since 2003, central SOEs in China have grown from 96 to 189, according to the SASAC website. And, according to the World Bank, although it only accounted for around 25% of the economy, these SOEs were involved in key industries such as energy, aviation, finance, telecoms, and transportation (Zhang). CCP also uses these SOEs to implement its policies, such as the development of semiconductor industries and participation in projects related to the Belt Road Initiative. These actions undermine free-market principles.

Megamerger and global implication

The monopolistic position of these SOEs also gives them an advantage in competition against foreign firms. The government will bail out the troubling SOEs by either giving them lower interest rates or helping merge the companies in megamerger deals. Through these megamergers, China would be able to create large competitive firms that can compete on the global stage. This would undermine global competitiveness in certain sectors as these Chinese firms can offer products at much lower prices with support from the Chinese government.

Media Control

Another way that the CCP uses to gain internal control is through repression of ideas that threaten the legitimacy of the party. There are two forms of repression: media censorship and suppression of minority groups. The Chinese government had long kept control over traditional and new media by using firewalls, jailing up journalists, or targeting publications or websites. Chinese internet censorship is especially notorious for its strict censoring system, known as the Great Firewall. Western websites such as YouTube, Facebook, and some Google services are banned. For two consecutive years, Freedom House ranked China last out of 65 countries in media freedom.

This kind of repression by the Chinese government was not done without a reaction from the public. In more subtle ways, bloggers in sites like Weibo develop an extensive series of pubs, slangs, and memes to avoid censors and voice their own opinions. Some Chinese Internet users also use software programs such as Ultrasurf, Psiphon, and Freegate to get around the firewall. In fact, according to the US Congress, around 1 to 8 percent of Chinese Internet users use proxy servers or VPNs to get around the government’s censor (China, Internet Freedom, and U.S. Policy). Public dissent of government restrictions is rare, but not completely unseen in China. Nobel Peace Prize laureate Liu Xiaobo was a prominent activist who opposed the CCP’s oppressive regime and censorship in China. In short, despite CCP’s wide-reaching measures to impose restrictions on Chinese people, their actions are not completely accepted and there are voices of dissent in China.

China also suppresses minority groups that are culturally different from the Han ethnic group. A prominent example is the Uyghurs in Xinjiang. They are a mostly-Muslim ethnic group in the northwestern region of Xinjiang, and China has been accused of committing a crime against humanity and genocides. The Chinese build re-education camps that use Uyghurs as forced labor. They also create an extensive network of surveillance, including police, cameras, and checkpoints that scan and record individual faces. They actively target religious figures in the regions, in an attempt to eradicate Uyghurs culture.

Conclusion

On weighing up the evidence, we find that CCP is trying to walk a very tight line between authoritarianism and free-market principles, a difficult policy to achieve. Centering around territorial sovereignty protection and gaining international influences, China’s foreign policies are very active. Its activities in the SCS, involvement in international institutions such as the UN, and promotion of the BRI show its commitment to become a global power.

The USA’s relationship with China has intensified in the past 30 years as China swiftly grew to great power. Economically, China’s joining of the WTO has benefitted China significantly, as the former was able to maintain its authoritarian political structure while reaping the benefits from opening its international market. Therefore, the US has taken a variety of economic counterattacks, ranging from tariffs to sanctions on Chinese officials. The two countries also engaged heavily on other issues such as cybersecurity and cross-strait relations. Although a direct conflict is unlikely to happen between the two nations, they were actively opposing each other in a variety of ways.

Internally, under President Xi’s leadership, China is gradually heading towards a more authoritarian government, which will very likely be at the expense of its economic growth. China’s crackdown on tech companies, removal of Xi’s term limit, and policy addressing income inequality, and the number of SOEs can all be seen as evidence of Xi’s relentless effort to centralize the government’s control. As China’s internal repression begins to extend, the legitimacy of the ruling party will very likely be called into question.

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About the author

Cheng-Chieh Chiang

Cheng-Chieh is interested in political science, economics, and sociology and loves golfing

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Introduction

This paper will examine and evaluate the current condition of the Indian economy the problems encountered in the last 5 years, including the Covid-19 crisis 2020-21, demonetization in 2016 and the introduction of the Good and Service Tax (GST) in 2017. In 2014, the people of India, evidently dissatisfied with ten years of the Indian National Congress in power, elected the BJP to the Lok Sabha (House of Commons). Boasting a landslide victory, Mr. Narendra Modi became the 14th Prime minister of independent India. Although the pandemic opened the floodgates to an economic turmoil that was long in the making, the abysmal mismanagement and incompetence of the government have made this more complicated. 

The paper will give you a detailed account of the policies and problems with the Indian economy since June 2016. The paper will focus on the impact of demonetization, the introduction of the Goods and Service Tax and the devastation caused by the Covid-19 pandemic. The paper shall also give attention to the impact on investment in the country (namely FII, Institutional and Retail) in similar context. 

Looking at the historical developments, after the decline in economic growth in the wake of the global financial crisis in 2008, Indian economy started its recovery in March 2013, more than a year before the Modi government came to power. According to RBI’s annual report for FY21 released on May 27, the recovery cycle lasted until September 2016. After it became a secular decline in growth since the third quarter of 2016-17. While there is no official explanation for the deceleration in growth, many economists believe Modi government’s sudden decision to demonetize 86 per cent of India’s currency on November 8, 2016, was the trigger that set the economy on a downward spiral.

The demonetization was followed by the hurried implementation of a poorly designed GST. As the combined effect of demonetization and GST spread through the economy that was burdened with massive bad loans in the banking system, the GDP growth rate steadily fell from 8 per cent in FY 2017 to 4 per cent in FY 2020, before Covid further damaged growth. The result of the GST was a drop in per capita GDP, rise in unemployment, increase in poverty and a diminution in the size of India’s middle class. India’s per capita GDP has dropped to Rs 99,700; this was the level in 2016-17. On the unemployment front, India has performed even worse: against the norm of an unemployment rate of 2 to 3 per cent, the new norm in the unemployment rate was 6 to 7 per cent in the years leading up to Covid-19. The pandemic has made matters worse.

The pandemic had a further negative effect on economic development, according to the latest CMIE data, the unemployment rate is 14.5 per cent as of the end of May 2021 and the rural unemployment rate has crossed 7 per cent. This comes at a time when the labor force participation rate, which maps the proportion of people who are looking for a job, is falling. As growth has slowed, poverty has increased: according to Azim Premji University’s ‘State of Working India’ report, 2020, almost 230 million people have fallen back into poverty, against 270 million lifted out of poverty between 2000 and 2016. That’s not all. According to a new Pew Research Centre Report published before the second Covid wave surge, the Indian middle class has shrunk by almost 32 million people in 2020.

The consistent policy failures in demonetization and GST tax, exacerbated by the Covid-19 pandemic has meant a loss of jobs, lower wages, loss of savings, low consumer spending, lower business investment and lost capital. But these policies failures also mean slower growth prospects, rising poverty and shrinking middle class. The main indicators of a sound economy are weak and continued policy problems will have a further adverse impact on livelihoods. Surprisingly, while we are in the midst of a pandemic and talking mainly about how soon we will come out of it, there is little anxiety and concern about the economy’s huge underperformance, because of bad policies and mismanagement. [1]

Impact of Demonetization on the Indian Economy

Demonetization was a policy failure which has damaged the Indian economy. Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency in circulation from one unit to another. Normally the current form or forms of money are pulled from circulation and retired, often to be replaced with new notes or coins which are regularly used. Sometimes, a country completely replaces the old currency with new currency. Demonetization is a drastic intervention into the economy that involves removing the legal tender status of a currency. Demonetization has been used as a tool to stabilize the currency and fight inflation, to facilitate trade and access to markets, and to push informal economic activity into more transparency and away from black and gray markets; but that was not necessarily the case in India. 

Demonetization across the globe

Demonetization has traditionally been used as a way to solve confidence problems about the currency. In the USA, the Coinage Act of 1873 demonetized silver as its legal tender, to fully adopt the gold standard. This move was made to ward off any disruptive inflation as significant as new silver deposits that were discovered in Western America. The circulation of various coins, including two-cent piece, three-cent piece, and half-dime was suspended. The removal of silver from being circulated in the economy led to the contraction of the money supply. In turn, it contributed to a downturn throughout the country. The Bland-Allison Act remonetized silver as a legal tender in 1878, to put an end to recession and political stress from farmers and silver miners. More recently, the government of Zimbabwe demonetized its dollar in 2015. It was a measure to fight the hyperinflation recorded at 231,000,000 per cent. It removed the Zimbabwean dollar from the country’s financial system. It fixed the Botswana pula, the U.S. dollar, and the South African rand as the country’s legal tender to stabilize the economy.[3] [4]

Demonetization in India

Demonetization was tried as a tool to modernize a developing economy that is cash-dependent and to fight crime and corruption involving counterfeiting and tax evasion. Accordingly, the Indian government demonetized the Rs 500 and Rs 1000 face-valued currency notes in 2016, the two most prominent denominations in its currency system. These notes accounted for 86% of the country’s circulating cash. With no indications, India’s Prime Minister Narendra Modi announced to the country’s citizens on 8th of November 2016, these notes would have no value with immediate effect. As an alternative arrangement, citizens could deposit or exchange these old notes for newly introduced Rs 2000 and Rs 500 bills by the end of the year.

Theoretically, the Indian demonetization solved a serious problem. India suffers from a large informal (underground) economy, which is estimated at 25% to 40% of the nation’s GDP. Individuals working informally pay little or no taxes because their incomes are unreported. Regardless of whether the underground activities are legal (cleaning, gardening, or selling groceries) or illegal (unlawful drug dealing, gambling, terrorism, arms trafficking, corruption, or money laundering), they enable tax avoidance, evasion, and fraud, which reduces government revenues. As a result, community betterment projects, such as infrastructure repairs and improvements, may go unfunded, and for those projects that are funded, underground tax evaders are able to freeload off the nation’s taxpayer base. This fact helps to explain why initial reactions by India’s taxpayers were often ones of pride because the government seemed to be striking openly at those who flaunted their wealth without paying nearly their share of taxes.

Stopping or slowing the growth of India’s illegal underground activities was a desired goal because they undermine the nation’s moral fabric, but as a matter of social fairness, the government’s intent was broader, aiming to expose both the legal and illegal layers of its informal economy. Currently, fewer than 4% (and perhaps as low as 1%) of India’s population pays taxes. By making the ₹500 and ₹1,000 notes illegal, Modi hoped India’s thriving informal economy would be legitimized. Individuals who exchanged excessive amounts of old notes would be required to explain their sources. Old currency notes that were held beyond the deadline would lose their value, and those who continued to use, transfer, receive, or even hold the old banknotes would be subject to fines of either ₹10,000 or five times the value of the banknotes. By promoting the use of checks, credit cards, and other forms of electronic payments, demonetization might make underground transactions more difficult to hide. And, if demonetization was able to broaden the nation’s tax base and increase government revenues, it held the potential to reduce Indian tax rates, which could increase domestic investments and spur meaningful growth.[2]

Demonetization also tackled an economic distortion that currently favors India’s low-productivity, informal sector. High-productivity sectors, such as those in which multinational firms and export-oriented domestic companies compete, are visible and, therefore, less able to escape taxes. By bringing the informal economy above ground and taxing it at reasonable rates, demonetization could bring symmetry to India’s tax-based incentive structure. As a result, relative underground returns should fall, supplying more capital to relatively high-productivity sectors and, thereby, stimulating the nation’s growth and development.

The rationale behind this herculean task was to crackdown on the black money in the shadow economy of India. The government also hoped demonetization would be an effective measure to combat counterfeit notes, and cash being used to fund illicit activities such as terrorism and drug trafficking. An adjunct motive the government had was to push the economy towards a cashless one. It was thought that the cash crunch caused due to this legislation would encourage individuals to adopt cashless transactions using mechanisms such as credit cards and online banking.

Provisions were made by the government for people to deposit cash they had in their homes into their bank accounts until the end of the year. Banks would only notify tax authorities when deposits above Rs 250,000 ($3,800) were made. This would aid the tax department in tracing individuals guilty of tax evasion due to hoarding of black money. People were also allowed to exchange their old notes for new ones at bank offices in the country. They could continue to withdraw cash of other denominations at ATMs. However, a cap of Rs 10,000 ($150) per day was placed in order to ensure that there was sufficient cash for everybody.

Impact of COVID-19 on the Indian Economy

The Indian Economy was significantly damaged by the Covid-19 pandemic. Losses from organized sectors amounted to an estimated nine trillion rupees in late March, projected to increase with the prolonging of the lockdown. Unsurprisingly, the most affected industries included services and manufacturing, specifically travel & tourism, financial services, mining and construction, with declining rates of up to 23 percent between April and June 2020. Towards the end of 2020, however, India saw some semblance of recovery across certain sectors. This was a result of easing restrictions, controlled infection rates and the festive season between October and November 2020. However, this did not last long. 

Economic activity started to decline again from March 2021, as the country faced its second wave of the pandemic and a harsh lockdown. As a result, GDP forecasts were expected to fall, putting losses at over 38 billion U.S. dollars if local lockdowns continued till June 2021. Unprecedented numbers in terms of infections and deaths recorded across the country led to another set of lockdowns in some parts, burdening the healthcare system in the midst of government controversy. International aid in the form of oxygen cylinders, PPE kits, ventilators along with funding was being sent from various countries to what looked like a dire situation.

Overall, from April to June 2020, India’s GDP dropped by a massive 24.4%. According to the latest national income estimates, in the second quarter of the 2020-’21 financial year (July-September 2020), the economy contracted by a further 7.4%, with the third and fourth quarters (October 2020-March 2021) seeing only a weak recovery, with GDP rising 0.5% and 1.6%, respectively. This means that overall rate of contraction in India was (in real terms, adjusted for inflation) 7.3% for the whole 2020-21 financial year. While economies worldwide have been hit hard, India has suffered one of the largest contractions. During the 2020-’21 financial year, the rate of decline in GDP for the world was 3.3% and 2.2% for emerging market and developing economies. Table 1 summarizes macroeconomic indicators for India, along with a reference group of comparable countries and the world. The fact that India’s growth rate in 2019 was among the highest makes the drop due to Covid-19 even more noticeable.[10]

In the post-Independence period, India’s national income has declined only four times before 2020 – in 1958, 1966, 1973 and 1980 – with the largest drop being in 1980 (5.2%). This means that 2020-’21 is the worst year in terms of economic contraction in the country’s history and much worse than the overall contraction in the world. The contraction is solely responsible for reversing the trend of global inequality, which has now started to rise after three decades (Deaton, 2021; Ferreira, 2021).

Macroeconomic indicators:

Despite India being ahead of most countries in being able to implement work-from-home measures, specifically in white collar work, jobs and earning deficits, along with instability in prices was expected. The months of the lockdown resulted in the free fall of employment, which slowly stabilized after the economy steadied in most parts of the country. Segments including consumer retail expected to see sharp falls ranging between three and 23 percent depending on the market. For the big players across segments, this meant operating at less than full capacity; for small businesses, however, it depended on how long they could ride out the storm. Overall, the pandemic changed daily lifestyles drastically.

If we compare India’s unemployment rate in 2020 with other countries, India has performed relatively poorly – both in terms of the world average and compared with a set of reference group economies* (with similar per capita incomes to India’s). Unemployment rates were more muted within the reference group economies, and were also kept low by generous labor market policies to keep people in work.

Despite the scale of the pandemic, additional budgetary allocation to various social safety measures has been relatively low in India compared with other countries. Although India might look comparable to the reference group in non-health sector measures, the additional health sector fiscal measures are less than half those in the reference group. More worryingly, the Indian government’s announced allocation in the 2021 budget for such measures does not show an increase, once inflation is taken into account.

Income, expenditure, consumption, poverty and unemployment

While the macroeconomic statistics provide a snapshot of India’s economic position, they hide the large and unequal impacts on households and workers within the country. An estimated 230 million people have fallen into poverty during this crisis at the same time both wealth and income inequality has been on the rise in India. Estimates suggest that in 2020, the top 1% of the population held 42.5% of the total wealth, while the bottom 50% had only 2.5% of the total wealth. Post-pandemic, the number of poor in India is projected to have more than doubled and the number of people in the middle class to have fallen by a third.

During India’s first stringent national lockdown between April and May 2020, individual income dropped by approximately 40%. The bottom decile of households lost three months’ worth of income. Microdata from the largest private survey in India, the CMIE’s Consumer Pyramids Household Survey or CPHS, shows that per capita consumption spending dropped by more than GDP. GDP recovery did not follow the bounce back in consumption during periods of reduced social distancing. Mean per capita consumption spending continued to be over 20% lower after the first lockdown (in August 2020 compared to August 2019) and remained 15% lower year-on-year by the end of 2020.

Official poverty data are unavailable and the CPHS data come with a caveat of “top” and “bottom exclusions”. For example, official statistics show a rural headcount ratio of 35% in 2017-’18. But the CPHS data estimate it at 25%, which suggests exclusions at the lower end of the consumption distribution. 

Despite these statistical concerns, CPHS does provide consumption numbers for a large sample of individuals, which can provide insights into changes in consumption levels arising from the pandemic. Table 2 reports the percentage of people who have monthly consumption expenditure below different cut-off values. The different cut-offs encompass the official poverty lines (which, in any case, have been considered too low by some commentators). Based on the latest CPHS

Essentially, expanding the money supply in the economy lowers interest rates enough for crucial investments in the economy to continue; this bypasses the otherwise impairing effects of rising borrowing costs at the time of recession and a cash crunch. 

Globally, the case for deficit financing through private borrowing varies vastly for different countries. In the USA for example, there is plenty of private funding that has now been pushed to savings because of the economic slowdown. This, coupled with the fact that interest rates are slumped to near zero and the real interest rate is negative, provides an opportunity for the government to go on a borrowing spree without care despite the debt to GDP ratio climbing up. Essentially there is almost no cost of borrowing this money and high debt levels may be sustained because there is no inflationary pressure. In countries like India, however, the inherently weak fiscal situation of Indian banks and actual deficit levels aside, the question of inflation remains a big challenge. [7] [8] [9] [10] 

Money Supply

India has been experiencing stubbornly high inflation, meaning that the average price level is structurally increasing. The CPI print for August 2020 came in at 6.7% (YoY), which means that in 2020 (with the exception of April) inflation had hovered above the 6% upper band inflation target range of the Reserve Bank of India (RBI). Core inflation rose despite an unprecedented -23.9% contraction of the economy in Q1. During an economic slowdown, lower demand for goods and services normally leads to lower price pressure, but the opposite is true for some goods in the COVID-19 crisis. This is due in part because money supply in the economy has been increasing at 20% annual rate. Monetary policy tried to bring cash in the hands of people and increase consumption following Covid 19. If inflation is not systematically controlled, we could be looking at much worse inflation numbers and a situation of hyperinflation in the long-term. The current situation also solves the dilemma of euphoria in the Indian equity markets. The bull run in the markets is being fueled by the immense amount cash which is being circulated in the economy, thus pushing the prices up. [28]

Impact of the GST on the Indian Economy

The Goods and Services Tax (GST) is a large project which aims to simplify the complex tax structure and enhance the economic growth of the country. GST is a comprehensive tax levy on manufacturing, sale and consumption of goods and services at a national level. The Goods and Services Tax Bill or GST Bill, also referred to as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, initiates a national Value Added Tax (VAT). GST will be an indirect tax at all the stages of production to bring about uniformity in the system. On bringing GST into practice, there was an amalgamation of many central and state taxes into a single tax. It would also enhance the position of India in both, domestic as well as international market by decomplicating existing systems. At the consumer level, GST reform removed the overall tax burden, which was estimated to be as high as 25-30%. A conclusive evaluation of the estimate is yet to be comprehended. Under this system, the consumer pays the final tax but an efficient input tax credit system ensures there is no cascading of taxes: tax on tax paid on inputs that go into manufacture of goods. In order to avoid the payment of multiple taxes such as excise duty and service tax at central level and VAT at the State level, GST would unify these taxes and create a uniform market throughout the country. Integration of various taxes into a GST system will bring about an effective cross-utilization of credits. GST aims to tax consumption, whereas the previous tax regime aimed to tax production. 

Impact

The introduction of the GST  meant the government forecasted the lowest economic growth rate of 6.5% for the financial year 2018, in the prior four years. Further, the central statistical organization has anticipated the negative growth (-3.3%) for the Indian manufacturing sector in the financial year 2017-18 as compared to FY 2016-17. In addition to above, a reduction was also been reported in the Indian Industrial Production. Moreover, the contribution of agricultural sector to the Indian GDP was reduced about 652.11 INR billion in the third quarter as compared to that of second quarter of the year 2017 . The Central Statistics Office has also predicted the negative impact of GST over the agriculture and farm sector. The GST has also influenced the Real Estate sector due to the enhancement in the cost of land, material and building. Further, the aviation sector had a yearly hit of Rs. 5700 crores. Of course there are some bright spots: with the implementation of GST on medicines, 1% tax has been reduced, resulting in cost reduction for the consumers. However, prices increase is expected over the diagnostics tests because of GST. Due to reduction of new work orders, and low activity, the service sector has been particularly affected by the GST. In July 2017, the output of service sector has been reported at lowest level in comparison to past four years. The Nikkei India Services Purchasing Managers’ Index (PMI), has indicated 45.9 for the service output in the month July 2017 which was lowest since 2013 September; this shows a start level of contraction.

On the other hand, the GST is a significant step in Indian taxation: One Nation, one market and one tax has proven popular. It has transformed the India into a single and unified market of 1.3 billion citizens. As per a survey, 50% enhancement has been reported in the base of indirect taxpayer. Further, automobile and real estate sector has expected the benefit due to the implementation of lower sales tax level in the GST. In line with above, the detailed impact of GST over the various sectors of economy has been as appended below. 

Indian economy is classified in three sectors — Agriculture, Industry and Services. Agriculture sector includes Agriculture (Agriculture proper & Livestock), Forestry & Logging, Fishing and related activities. Industry includes ‘Mining & quarrying’, Manufacturing (Registered & Unregistered), Electricity, Gas, Water supply, and Construction. Services sector includes ‘Trade, hotels, transport, communication and services related to broadcasting’, ‘Financial, real estate & professional services’, ‘Public Administration, defense and other services’. Further, every global, international and nation developments have significantly influenced on the Indian economy. Subsequently, the Indian economy has also been influenced due to the implementation of GST. The impact of GST implementation has also been felt in different segments of Indian economy, as per the below.

Agriculture

Agriculture, the primary sector of Indian economy provides employment to large proportion of Indian workforce and economic activity. However, it was damaged most by the GST. The contribution of agriculture sector to the Indian GDP has reduced to 3245.21 INR Billion in the third quarter of 2017, from 3897.32 INR Billion in the second quarter of 2017. With the implementation of GST, the prices of various agricultural inputs have also increased due to enhancement in GST rates. Further, Central Statistics Office (CSO) has forecast about the negative impact of GST on agriculture and farm sector. 

Manufacturing sector 

According to RBI, the manufacturing sector of India had felt the adverse impact due to implementation of GST. RBI has also forecasted for unfavorable conditions regarding revival of Investment activity in manufacturing section due to implementation of GST. Further, a downfall has also been observed in the industrial production in India.

Real Estate 

One of the most significant sectors of economy which had an adverse impact due to GST. With the implementation of GST, buyers will be paying 12% GST, which will be 3.5% more when compared to earlier taxes (4.5 percent Service Tax and around 4 percent of VAT). Further, the costs of land, material and building have also been increased due to GST. 

Textile industry & handicraft

With the implementation of the GST India’s apparel export was reduced 39% in value terms in October 2017. Further, GST has given a boost to textile import. Additionally, handicrafts industry has been badly hit due to implementation of GST. Earlier, handicraft was exempted from tax in more than 15 Indian states. However, 8 Indian states were imposing 5% VAT on handicraft items. At present, Handicraft has been bought within the GST tax slab of 12% and 18%.

Aviation sector and Banking Sector

Due to implementation of GST, the aviation industry may experience the yearly reduction in revenue of Rs. 5,700 crores (as reported by domestic airlines to Finance Minister). Further, GST has also severely influenced the Indian Banking Sector. 

Pharmaceutical Industry 

The Pharmaceutical industry has benefitted. Previously, medicines were taxed at about 13%, but fortunately only 12% GST has been introduced on medicines including ayurvedic. It may result in cost reduction for consumers. However, prices on diagnostics tests are expected to rise due to GST. 

Service sector

India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction. GST has had a mixed impact on service sector. It is beneficial in some areas, but at the same time it is creating hurdle in ease of doing business. It is beneficial in items like seamless flow of credit, avoidance of double taxation but has increased a lot of compliance burden. Due to reduction of new work orders, and low activity, the service sector has felt the downturn particularly harshly, after the implementation of GST. In July 2017, the output of service sector has been reported at lowest level in comparison to past four years, immediately after the implementation of GST. The Nikkei India Services Purchasing Managers’ Index (PMI), has indicated 45.9 for the service output in the month July, 2017 which was lowest since 2013 September. 

Petroleum Industry 

The petroleum industry experienced a boost in its sales, as the GST was reduced on in comparison to the old taxes. Presently, the Petroleum products like peat, ores & concentrates, kerosene, tar, coal & ignite, petroleum coke & petroleum have a GST of 14.5%, 13.5%,12%, 7%, and 9.5% less as compared to the old tax rates, respectively. 

Finally, it is important to note, the implementation of GST has posed a great challenge to the Indian government. The shift from destination based taxed to the origin-based taxed has emerged as a big challenge for business organizations. Further, for proper implementation and administration of GST, adequate Information Technology (IT) infrastructure has also become the need of hour. The IT based skilled manpower having complete knowledge and training of GST has also been needed for achieving the objectives of GST. Further, the training and development of citizens has also been required for registration, filling and payment of GST. Due to the enhancement in tax rates in many items, the Indian economy may experience the inflation. [17] [18] [19] 

Comparison of Three Events

In order to examine the effects of the problems, it is necessary to compare the three events across a number of criteria and note what is most effective. 

GDP

From April to June 2020, India’s GDP dropped by a massive 24.4%. According to the latest national income estimates, in the second quarter of the 2020/21 financial year (July to September 2020), the economy contracted by a further 7.4%. The recovery in the third and fourth quarters (October 2020 to March 2021) was still weak, with GDP rising 0.5% and 1.6%, respectively. This means that the overall rate of contraction in India was (in real terms) 7.3% for the whole 2020/21 financial year. [9] [5]

Demonetization

With the gross domestic product (GDP) for the April-June quarter slipping to 5.7%, the reality of the economic slowdown could not be ignored. The World Bank had reduced the India GDP growth forecast to 7% for 2017-18 owing to demonetization and GST (Goods and Service tax). The slowdown was being cited as a delayed consequence of demonetization by the World Bank and while there were various other reasons at play, the steep decline had been credited to be an effect of demonetization.

Unemployment and poverty levels   

Post-pandemic, the number of poor in India is projected to have more than doubled and the number of people in the middle class to have fallen by a third (Kochhar, 2021). During India’s first stringent national lockdown between April and May 2020, individual income dropped by approximately 40%. The bottom decile of households lost three months’ worth of income (Azim Premji University, 2021; Beyer et al, 2021).

Table 3 shows households in the middle of the pre-Covid-19 CPHS consumption distribution saw large drops in spending after the first wave of the pandemic, helping to create a new set of people entering poverty. The percentage of poor people in the second lowest quintile of pre-Covid-19 consumption jumped from 32% to 60% within a year. This was driven largely by rural areas, where the headcount ratio for the second quintile almost doubled. T

This sharp rise in poverty after the first lockdown is consistent with a variety of surveys that highlighted the depth of the crisis (Azim Premji University, 2021). Year-on-year urban unemployment rate jumped from 8.8% in April to June 2019 to a staggering 20.8% in April to June 2020 (Government of India National Statistical Office, 2020). [10]

Demonetization

According to IAS Score (2019), close to 1.5 million workers were left unemployed after demonetization, but the rates were left largely unchanged. The unemployment rate can be contributed to the lower rates of investments occurring in the market. Ajit Karnik (2016) also agrees that demonetization had a negative impact on employment. The labor force participation rate (LPR) was lower than forecasted in October of 2017. The Centre for Monitoring Indian Economy predicted the LPR to be 49.67%. Once demonetization movement was announced the rate grew to 46.28% (Karnik, 2016). The rate hit a low of 45.8 % in November and December of 2016. For example, the road construction sector had to lay off close to 35% of workers due to demonetization. The manufacturing sector also had to lay off approximately 29% [21]

GST

According to the current weekly status approach or CWS, the unemployment rate stood at 8.9% in 2017-2018. Among women, the rate was 9.1% – higher than in usual status approach at 5.7%. Among men, the rate stood at 8.8%, higher than 6.2% in usual status. Unemployment in urban areas was higher than in rural areas – 9.6% according to the CWS approach, as against 7% in the usual status approach. The rate was at 8.5% in rural areas as per the CWS approach, compared to 5.3% in regular status approach.

A number of sectors were also impacted by these events. 

Tiles & Ply:

The tiles sector has been badly hit post demonetization, and the introduction of GST (rate of 28 percent) has further impacted growth as the price differential between unorganized and organized players increased, leading to tepid revenues. About four-fifths of tile and ply is used as new demand, with the balance being used as replacement demand. With the benign real estate activity post introduction of demonetization and RERA, the growth has been further impacted. Firms impacted include Kajaria Ceramics, Somany Ceramics, Century Ply and Green Ply.

FMCG:

Around 38-40 percent of FMCG sales happen through the wholesale channel which largely deals in cash and is not entirely tax compliant. The lower liquidity situation posts demonetization and prudent tax laws of GST have further reduced consumption. To offset the loss in demand, most FMCG players are increasing their direct reach and bypassing the wholesale channel.Firms affected include Emami, Bajaj Corp, Marico, Hindustan Unilever, Colgate.For FMCG products, the Wholesale channel was impacted due to liquidity crunch which led to increase in the market share for Modern retail. The modern trade which used to be 9 percent of overall FMCG revenue is expected to double in next 5 years. Firms affected include Future Retail, Avenue Super Mart, and V-Mart

Automobile (2 Wheelers):

Post demonetization, cash flows of rural India (majorly a cash economy) were impacted the most due to liquidity crunch. These impacted sales of 2-wheeler companies which have sizable sales in rural parts of the country. Firms affected include Hero Moto, TVS Motor and Bajaj Auto

Consumer Durables:

High ticket purchases, especially in the white goods space, were impacted post demonetization. However, sales did improve over subsequent quarters as the liquidity situation got better. Firms include Whirlpool of India and IFB industries. 

Luggage:

With the luggage industry being levied by a GST rate of 28 percent, it has widened the gap between the organized and unorganized players. This has made it difficult for the large players to completely pass on prices to customers. Firms affected include VIP industries and Safari industries. 

Jewelers:

Demonetization and GST have made it difficult for smaller jewelers to do business as the majority of their transaction were done with cash. As more than 70 percent of the jeweler sales used to happen through unorganized/regional players, there has been a structural shift in demand to organized players leading to strong sales growth. Titan industries, PC Jeweler and TBZ. 

Brokerage houses:

As per estimates, demonetization brought back almost Rs 2-3 trillion of money into the mainstream economy, which was supposedly lying ideal. With real estate in the doldrums and uncertainty in gold prices as well as the low rates of debt instruments, equities have emerged as the only investable asset class leading to huge inflows of money towards the same. This has led to healthy growth in revenues for brokerage houses. Firms who have benefited include Motilal Oswald, Edelweiss, JM Financial

MSME Sector:

The MSME sector in particular faced two major shocks in demonetization and the introduction of GST. MSMEs largely operate in the informal sector and comprise a large number of micro enterprises and daily wage earners,” added the report while mentioning that share of MSMEs in overall GDP is around 30 per cent (GOI, 2018), and the sector accounts for about 45 percent of manufacturing output and around 40 percent of total exports of the country.

MSMEs play a crucial role in the employment generation, and contribute significantly to overall economic activity, despite which the contribution faces several bottlenecks inhibiting them from achieving their full potential. About 97 per cent of MSMEs operate in the informal sector, and their share of informal sector in gross output of MSMEs is about 34 percent. As per National Accounts Statistics 2012, the share of informal (unregistered) sector manufacturing MSMEs in total GDP is estimated at around 5 per cent.

The year-on-year (YoY) growth of bank credit to the MSME sector decelerated gradually during 2015 to 1.6 per cent in April 2016 before exhibiting some recovery till October 2016. The deceleration in credit growth during 2014-16 was partly due to overall slowdown in economic activity, rising non-performing assets (NPAs) and reclassification of food and agro-processing units from MSME category to agriculture sector (as per the revised priority sector lending guidelines, issued to banks in April 2015).

On the exports front, the report added that the MSME sector contributes around 40 per cent to India’s total exports (GOI, 2018).  Among various items of MSMEs exports, gems and jewelry, carpets, textile, leather, handlooms and handicrafts items are highly labor intensive and depend heavily on cash for working capital requirements and payment towards contractual laborer. Hence, export shipments of these sectors were impacted by demonetization. [13] [22-26]

Conclusion

These three devastating events were very similar in the fashion that they disrupted the lives of the people. The magnitude of that disruption in each of the three cases was inversely proportional to the economic status of each individual which is obvious given the socio-economic structure of the Indian society. In theory, the purpose behind the implementation of demonetization and the tax regime of GST cannot be questioned, both these policies were realized with a different set of goals but the purpose, namely the control of black money and the implementation of one umbrella tax could prove to be beneficial. The problem however the fact these policies were not openly debated in the parliament meant they were almost arbitrarily introduced. A similar case could be made for the Covid 19 pandemic. The implementation of untimely lockdowns and then the mishandling of healthcare resources during the pandemic resulted in a hugely devastating second wave. 

This is the reality of an economy that has been severely mismanaged by the government. While many proponents of the current government would argue that business reforms and ease of doing business has improved and the amount of capital that has flooded the nation has created jobs and opportunities, the income gap between the rich and the poor has kept on compounding because of the same reason. Demonetization, GST, Covid 19 have economically worsened the lives of the lower middle class and the lower class and the people who are below the poverty line. On the ground stories and the real impact of covid on rural India can be understood and felt by reading  https://www.firstpost.com/india/how-second-wave-of-covid-19-has-decimated-indias-rural-economy-9689231.html. 

Investment during this time period is a very interesting factor to observe. While GST and demonetization slowed the growth of the Sensex for brief periods, the March 2020 crash was followed by a bull cycle which is continuing despite the worrying economic indicators. This could be because the retail Indian investor got exposed to the markets during the pandemic (include broker stats) and obviously the current fiscal policy of the central bank. Whether there is an alteration in the fiscal policy and the levels of money supply is yet to be seen and thus we cannot conclusively say right now if hyperinflation in the country is bound to occur which will impact the poor even more; or perhaps will there be some moderation and how that affects the market especially with the predictions that a bear market is not that far off. [29]For the lack of a better word, the Indian economy right now is in a confusing state of affairs. On one hand, you can see foreign investment and euphoria in the markets increase quarter-on-quarter and the economic recovery from Covid 19 itself has taken hold. However, there is an immense amount work to be done to pull the MSME sector and the whole informal economy itself, which constitutes nearly 40 percent of Indian GDP, to the levels where it was pre-pandemic, pre-GST and pre-demonetization. Competent government policies are needed to restore economic growth. 

References:

1. Impact of Demonetization, Goods and Service Tax and Covid 19 on the Indian Economy. Article DOI:10.21474/IJAR01/11649   DOI URL: http://dx.doi.org/10.21474/IJAR01/11649
2. https://www.moneycontrol.com/news/business/demonetisation-4-years-on-a-look-at-what-it-achieved-and-didnt-6086571.html
3. https://www.investopedia.com/terms/d/demonetization.asp
4. https://cleartax.in/g/terms/demonetization
5. https://www.babson.edu/academics/executive-education/babson-insight/finance-and-accounting/indias-demonetization-what-were-they-thinking/#
6. The Implementation of Demonetization by Raju Rao https://pmworldlibrary.net/wp-content/uploads/2017/09/pmwj62-Sep2017-Rao-Demonetization-in-India-featured-paper.pdf
7. https://www.freepressjournal.in/analysis/indias-economy-is-ailing-and-its-not-just-because-of-covid-19-writes-a-l-i-chougule
8. Understanding India’s Economic Slowdown by R. Nagaraj https://www.theindiaforum.in/sites/default/files/pdf/2020/02/07/understanding-india-s-economic-slowdown.pdf
9. https://www.statista.com/statistics/1229773/india-estimated-economic-impact-of-coronavirus-on-industry/
10. https://scroll.in/article/999275/the-pandemic-in-data-how-covid-19-has-devasted-indias-economy
11. https://journals.sagepub.com/doi/full/10.1177/0972063420935541
12. https://journals.sagepub.com/doi/full/10.1177/0972262921989126
13. https://rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1315
14. https://journals.sagepub.com/doi/full/10.1177/0019466220983494
15. https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—sro-new_delhi/documents/publication/wcms_798079.pdf
16. https://link.springer.com/article/10.1007/s41027-020-00255-0
17. https://www.phdcci.in/wp-content/uploads/2020/08/Impact-of-GST-on-Economy-and-Businesses.pdf
18. https://madhavuniversity.edu.in/impact-of-gst-on-indian-economy.html
19. https://www.researchgate.net/profile/Mr-A-Dash/publication/318421150_POSITIVE_AND_NEGATIVE_IMPACT_OF_GST_ON_INDIAN_ECONOMY_ A_DASH/links/5968a117aca2728ca67bc406/POSITIVE-AND-NEGATIVE-IMPACT-OF-GST-ON-INDIAN-ECONOMY-A-DASH.pdf
20. http://www.theijbmt.com/archive/0932/2116231109.pdf
21. https://www.civilserviceindia.com/subject/Essay/what-are-the-positive-and-negative-impacts-of-GST.html
22. The Impact of COVID-19 Pandemic on Different Sectors of the Indian Economy: A Descriptive Study http:// www.econjournals.com https://doi.org/10.32479/ijefi.10461
23. https://www.economicsobservatory.com/how-has-covid-19-affected-indias-economy
24. https://www.bloombergquint.com/business/demonetisation-impact-on-indian-economy-what-we-know-three-years-on
25. https://www.moneycontrol.com/news/business/markets/top-five-sector-which-got-impacted-the-most-post-demonetisation-nitasha-shankar-2432495.html
26. https://www.business-standard.com/article/news-ani/msme-worst-hit-by-gst-demonetisation-says-rbi-study-118081800287_1.html
27. https://www.ijiras.com/2018/Vol_5-Issue_3/paper_44.pdf
28. https://tradingeconomics.com/india/money-supply-m3
29. https://economics.rabobank.com/publications/2020/september/indias-worrying-inflation-dynamics/
30. https://www.indiamacroadvisors.com/page/category/economic-indicators/money-and-banking/money-supply/
31. * The ‘Reference group’ refers to the closest peer group statistic under which India falls. The reference group for GDP per capita is the Emerging Market and Developing Economies (EMDEs) classification by the IMF. The reference group for the unemployment rate is the Low- and Middle-Income Countries (LMICs) classification by the World Bank. The reference group for the fiscal measures is the Emerging Market and Developing Economies (EMDEs) classification by the IMF. Source: Data on gross domestic product, constant prices (percentage change) is obtained from the World Economic Outlook Database April 2021, International Monetary Fund. India’s GDP contraction is 8% according to the IMF and 7.3% from recent national estimates. Unemployment rates (for youth, adults: 15+) are ILO modelled estimates as of November 2021 and are obtained from ILOSTAT, International Labor Organization and World Bank. Fiscal measures are obtained from Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic as of April 2021, International Monetary Fund.

About the author

Ishaan Marwaha

Ishaan is a Business Economics, Finance, and Entrepreneurship enthusiast. He currently reads in Grade 12 at Spring Dale Senior School, Amritsar, India. He is a winner of national-level business competitions and debates and takes a great interest in studying equity markets and the behavioral economics behind them. He is an avid investor and occasional swing trader. He wants to study Economics and Management at the University of Oxford at the undergraduate level.

The post Impact of Demonetization, GST, Covid-19 on Indian Economy and Investment appeared first on Exploratio Journal.

Abstract

This paper investigates why the mask compliance rates were significantly higher in Taiwan than in the United States during the COVID-19 pandemic. This distinction can primarily be represented by an individualist vs. collectivist mindset, associated with Western and Eastern countries, respectively. Mask wearing was influenced by collectivism; Taiwan’s proximity to the 2003 Severe Acute Respiratory Syndrome (SARS) epidemic and the subsequent policies implemented; cultural norms; psychological factors including higher risk attitude, sensitivity to social norms, and compliance with personal surveillance; and demographics including race, political ideology, and social class. Mask wearing is negatively associated with infection rates but is not fact based or logical: multiple psychological and cultural factors contribute to this compliance variability. Therefore, those that don’t comply are not purely defiant; individualists and collectivists just have a different belief system in what they value and how they behave. As a paper that explores reasons for noncompliance, from a public policy perspective, the message in compliance requests must be tailored to a specific belief system that serves an individual and group’s best interest while respecting personal values.

Keywords: COVID-19, mask-wearing, culture, individualist vs. collectivist, psychological factors

Why Mask Compliance Differed in the United States and Taiwan During the COVID-19 Pandemic: How Individualist vs. Collectivist Cultures Respond in Uncertain Times

COVID-19, a disease caused from SARS-CoV-2 virus, first detected in Wuhan, China, in December 2019, has been a test of responding to health regulations. Common symptoms include cough, fever, chills, loss of taste and smell, just to name a few. Most cases are mild, with symptoms persisting a few days, but some cases are very severe, requiring hospitalization. The virus has ravaged through borders and taken the lives of millions worldwide. Even though the severity of the pandemic varied by country and demographics, the COVID-19 pandemic was an experience that everyone dealt with. However, the responses, attitudes, and behaviors of the citizens of different countries shed light on how people deal during times of uncertainty. Two contrasting examples include the United States and Taiwan. These two countries have significant differences in mask wearing compliance, defined as wearing a mask when in close contact (within 6 feet) of non household members (Key, 2021).

In a literature search of studies on the mask compliance rates between Eastern and Western cultures, there were multiple studies on the compliance rates and reasoning behind this behavior in Western countries, but limited studies in Eastern countries. This would suggest that because the compliance rates are so high in Eastern countries, researchers aren’t conducting studies on why people complied or how to get people to comply, instead they’re more interested in why people DON’T comply.

According to a study conducted by the University of Southern California’s Dornsife Center for Economic and Social Research, approximately 83% of Americans agree that masks are an effective way to protect themselves from contracting Americans report actually wearing masks when in public places or in close contact with members not of the same household (Key, 2021). Another study found that 64% of Americans that report not wearing a mask responded, “It is my right as an American to not wear a mask” or “It is uncomfortable.” (Vargas & Sanchez, 2020).

The Taiwanese government, on the other hand, instituted a mask mandate with a fine between $100-500 USD for noncompliance (Ministry of Health and Welfare, n.d.; Ministry of Health and Welfare, n.d.). However, there were some reports of non-compliance in some cities in Taiwan. For instance, 604 fines were given in Kaohsiung within 1.5 days (Zheng, 2021) and 848 fines given in Taichung within 2 months (Hong, T. & Lǚ, Z., 2021). Both cities have a population of around 2.7 million, so based on this statistic it can be speculated that the non-compliance rate in Kaohsiung and Taichung is about 0.02% which is still significantly lower than the approximately 50% noncompliance rate in the United States. This finding raises questions on why there is such a big disparity.

The United States has over 330 million people with diverse backgrounds, socioeconomic levels, and beliefs. When the pandemic hit, those outside of the United States saw how a high-income country like the United States dealt with unprecedented circumstances. As of October 2021, the US has over 43 million confirmed cases and 688,000 deaths (World Health Organization, 2021).

Conversely, Taiwan is a densely populated island off the coast of Mainland China with over 23 million people. Due to its proximity to China, where the virus originated, and constant air travel to and from, Taiwan was expected to have the 2nd highest number of cases. However, this was proved to be incorrect. Taiwan along with other countries like Singapore and New Zealand were able to implement policies and community-based preventative measures to slow the rate of transmission and infection rates. By April 2020, the local transmission was at zero (The Center for Systems Science and Engineering (CSSE) at Johns Hopkins University, 2021).It stayed that way for about a year. When comparing infection and mortality rates, as of October 2, 2021, the confirmed cases per million people in Taiwan and the United States is 680 and 131,020, respectively. The confirmed number of deaths per million people in Taiwan and the United States in 35 and 2,103, respectively (Ritchie et al., 2020). These statistics illustrate the significant contrast in the severity of the pandemic in these two countries with the US infection rate about 200 times that of Taiwan and the US mortality rate about 60 times that of Taiwan. Why is there such a major difference? How did this happen? What lessons can other countries learn and what do the actions by Taiwan tell us about their attitudes and cultural norms?

Specific factors that can explain why the Taiwanese and Americans responded differently to the pandemic lie mainly in cultural differences. These distinctions include Taiwan’s past experience with SARS, established social norms, different healthcare systems and access to resources, an individualist vs. collectivist mindset that serves as the foundation for psychological factors, and diversity in the population.

Past Experience with SARS: Proximal vs. Distal Threat

Taiwan had a greater proximal distance than the United States did to the SARS epidemic in 2003. General psychological principles suggest that first-hand experience has a greater impact on someone than watching from far away. From Taiwan’s experience with SARS, the government put policies in place for controlling another global health crisis, such as universal mask-wearing, quarantine requirements instituted in February 2020, closing down borders to foreigners in March 2020, and contact tracing systems after the first identified case in China (Taiwan Centers for Disease Control, 2020). However, Americans had no prior experience with a pandemic to this level. Given Taiwan’s past experience in dealing with a health care crisis, the Taiwanese were more familiar than Americans were with healthcare recommendations when these preventative measures were put in place to curb the spread of COVID-19. Additionally, in the beginning of the pandemic, Americans were not directly involved or affected by the pandemic because of its origin in China. This feeling was bolstered by Trump’s rhetoric calling COVID-19 the China virus, resulting in some Americans believing that they could not get the virus because they had limited a relationship with China. For instance, they weren’t Chinese or planning on visiting China soon.

Differences in the Governmental Leadership

Health Care Services

Another reason is the difference in access to health care services. In the United States, there is no universal health care. Universal health care ensures that all citizens have access to health care services when they need it without financial burden. About 8% of the US population is uninsured (Keisler-Starkey & Bunch, 2020). Given the dozens of insurance companies, including in the public and private sectors, Americans pay different fees, resulting in the fragmented health care system that provides them varying degrees of access to certain medical services. The average annual health insurance in the United States is $5,940. This number fluctuates given location and different insurance tiers. Some plans can reach an upward annual cost of $8000 (Price, 2021).

Taiwan, on the other hand, has the National Health Insurance (NHI) System which provides universal health care to 99% of the population. The NHI provides citizens with “SMART” cards, which store a patient’s medical history and records.

After the first confirmed COVID case was identified in China, Taiwan took strict actions to prevent the transmission to its island, given the frequent flights between Mainland China and Taiwan. Taiwan already had a public health agency, the Central Epidemic Command Center (CECC), instituted after Taiwan’s experience with SARS in 2003. The CECC responded to the COVID-19 outbreak and followed pre-established protocols to control a pandemic and had access to other data from various government agencies.

On January 20, 2020, when the CECC was activated, patients’ medical history from the “SMART” cards was integrated with their travel history and data. From there, a system categorized each citizen into high risk or low risk for contracting the virus. High-risk individuals were those who had traveled to high-risk areas, such as Wuhan, and low-risk individuals included those who had not traveled abroad and had no preexisting health condition. After this integrated information was stored on a citizen’s “SMART” card, low-risk individuals were ordered to buy a week’s worth of masks and could live normal lives. High-risk individuals, on the other hand, were sent into a two-week quarantine after which they could join everyone else (Wang et al., 2020; Vox, 2021). Quarantines as such were effective because it controlled the spread and didn’t rely on quarantining only symptomatic individuals, as asymptomatic individuals have a high chance of transmitting the virus before developing symptoms, if they develop symptoms (Summers et al, 2020).

Taiwan also banned foreigners from entering and in March 2020, the CECC categorized everyone flying into Taiwan to be considered high risk so they all had to undergo isolation quarantine. To make sure no citizens left their quarantine facility, the CECC tracked people’s location using cell phone data. There were also daily phone call check-ins to monitor any possible symptoms as well as occasional in-person check-ins (Vox, 2021).Taiwan also instituted a fine between NT $200,000 and NT $1,000,000 (approximately $7000 USD and $36,0000 USD) for breaking quarantine rules (Ministry of Health and Welfare, 2020).

However, studies have shown that only relying on case-based preventative measures such as quarantine and contact tracing wouldn’t have been sufficient for controlling the pandemic. Instead, population-based measures, such as wearing masks and social distancing, were useful in the initial containment of the virus (Ng et al., 2020). Taiwanese attitudes towards wearing masks and having a collectivist mindset, discussed later in the paper, also helped enforce these measures. Additionally, the then Vice President of Taiwan, epidemiologist Chen Chein-Jen, had broadcast announcements to assist citizens in population based measures such as mask wearing, frequent hand washing, and preventing mask hoarding. Similarly, the CECC set a fixed price for masks and used funds and the military to increase mask production. By January 20, 2020, when the CECC was activated, the government had 44 million surgical masks and 1.9 million N95 masks (Wang et al., 2020).With an integrated health insurance system, quarantine requirements, and resource allocation for mask production, Taiwan was organized and prepared to contain the virus.

U.S. Response to COVID-19

Compared to Taiwan’s approach, the United States’ response to the pandemic was completely different. To start off, the federal government put the responsibility of controlling the pandemic onto the state and local governments. This led to a divided nation, with different states instituting different policies, resulting largely from political ideology (Lewis, 2021).

Additionally, during the beginning of the pandemic, there was limited testing and even so, testing criteria was too high, mainly for symptomatic individuals admitted to hospitals, likely to have COVID-19 (Lewis, 2021). The Centers for Disease Control and Prevention (CDC) also released a flawed test, reporting that it could fail 33% of the time (Temple-Raston, 2020). Furthermore, the CDC reported that the spread of COVID-19 likely started in January/February 2020. However, the surveillance systems for detecting the virus and reports of flu-like symptoms were insufficient allowing the virus to spread undetected for more than a month (Jorden et al., 2020).

There was also mixed information from then-President Trump, government agencies including the CDC and the World Health Organization (WHO), and the behaviors from local officials. Examples include Trump’s denial of the seriousness of the virus as well as government agencies changing their message for mask guidance in part due to medical supply shortages for hospitals and health care workers (Molteni & Rogers, 2020; World Health Organization, 2020). The mask guidance during the beginning of the pandemic sent confusing messages for further encouragement of mask-wearing. Until April 2020 for the CDC and June 2020 for the WHO, these agencies only recommended masks for those experiencing symptoms, but it has now been established that the virus can also spread from asymptomatic individuals. Consequently, it creates confusing mask guidance as well as making it hard to know who and which government agency to trust.

Lastly, the US had insufficient contact tracing and quarantine policies put in place, which seen from other countries, such as Taiwan and New Zealand, had a role in attenuating the transmission (Lewis, 2021).

Individualist vs. Collectivist

One way to further understand the striking difference between these two countries is by looking at contrasting social and cultural norms. These perspectives can differ broadly and are learned distinctions in behavior imposed by cultures, through family, friends, classmates, and more. Psychologists that study cultural differences have found a distinction between Eastern and Western culture which provides insight into the difference in pandemic responses. This distinction can be represented by an individualist vs. collectivist mindset, ideas put forth by Markus and Kitayama. An individualist mindset, associated with many Western countries, puts the individual or self above the group. These individuals value and have personal independence. Collectivists, on the other hand, associated with many Eastern countries, have strong social ties and a sense of belonging to their group. Collectivists are more likely to agree that they are willing to sacrifice their own self-interests for the well-being of the group and that their happiness depends largely on the happiness of those around them. Individualists are more likely to agree that they often do their own thing and that whatever happens to them is their own doing, emphasizing the responsibility for personal well-being (Lu et al., 2021).

To illustrate the prevalence of individualist vs. collectivist cultures, in collectivist cultures, it’s more normal to see families of multiple generations living together. In the United States, a record-breaking 64 million Americans live in multi-generational households, including sizable immigrant collectivist populations. Asian and Hispanic populations, many of which are considered collectivist countries, are rapidly increasing in the US. Asians and Hispanics are more likely than whites to live in a multi-generational household, with approximately 29% of Asians and 27% of Hispanics doing so (Cohn & Passel, 2018). This sense of belonging and community from collectivist beliefs, carried over into the United States, include taking care of elderly and 1 putting others’ interests before theirs, such as potentially sacrificing personal health, commitments, or time to help out. Research suggests that collectivists are more likely to care for elderly family members as a means to strengthen family ties whereas individualists are more likely to limit caregiving and use formal social services as a means of support (Pyke & Bengtson, 1996).

This individualist and collectivist mindset can be used to understand how individual and group rights and responsibilities influenced behavior during the pandemic. For example, individual rights include the personal freedom of choosing whether or not to wear a mask and take the vaccine. To further illustrate, an individualist is more likely to say that they don’t want to wear a mask because it’s uncomfortable whereas a collectivist is more likely to agree that discomfort is not a valid excuse for going against group norms. Individual responsibility entails taking care of one’s health, through social distancing and wearing a mask. For instance, an individual wearing a mask for their personal health and not contracting COVID.

Group rights mean that being part of a collective gives access to specific privileges: a right to health care and access to masks and vaccines. Being a member of a group also implies specific behavior expectations. This can include taking the vaccine and following policies such as travel restrictions, quarantine, social distancing, mask mandates, to prevent others from possibly contracting the virus. These important distinctions highlight the different reasons individuals give in mask behavior, with individualists more likely to put themselves before the group and collectivists prioritizing group needs.

Cultural Norms

Even before policies for stopping the spread of the virus were implemented, Taiwan and many other Eastern countries had a norm for wearing surgical masks when experiencing the common cold or similar viruses to protect others and for taking care of the elderly or groups that were at higher risk (Jennings, 2021). So during a pandemic, it seemed normal if not obvious to be wearing masks in public places, on public transportation, and walking around. This mindset and behavior echoes a collectivist mindset present in many Eastern cultures.

For Americans, on the other hand, the preventative measures seemed unusual and unprecedented, since they’ve never experienced a global health crisis to this scale before. Consequently, the pandemic was an anxiety-provoking experience with changes in daily routine, with economic, financial, and health threats, as well as immense uncertainty: lots of unknowns from long-term COVID-19 effects, how to deal with variants, and confusing guidance on preventative measures from government officials and agencies. As a result, the link between behavior and curbing COVID-19 transmission might not have been as straightforward for Americans as it was for the Taiwanese based on different experiences and how the pandemic was handled. Along with the diverse backgrounds of its citizens, the United States found itself divided. As policies such as mask mandates and isolation requirements slowly rolled in, some Americans refused to follow these rules.

Collectivism Predicts Mask-Wearing

It has been well established that masks are an effective way to slow the transmission of COVID-19. Studies have also shown that there is a negative correlation between mask wearing and infection rates. As stated earlier, a USC study reported an approximate 50% mask noncompliance rate in the United States and reports of noncompliance in Taiwan predict an approximate 0.02% noncompliance rate (Key, 2021; Zheng, 2021; Hong, T. & Lǚ, Z., 2021).

Furthermore, studies have also shown that collectivism is positively correlated with mask-wearing. This holds true not only to illustrate the Taiwan vs. United States distinction, but also amongst many individualist and collectivist countries. Countries that scored higher on a reserve-coded scale of Hofstede’s individualism index (represented as a collectivism scale) such as the Philippines, Indonesia, and Thailand, had higher mask compliance rates than individualist countries that scored lower on the scale such as Sweden, The Netherlands, and Finland. These results are after controlling for other factors (e.g., political affiliation and government stringency) (Lu et al., 2021).

This is true not only when comparing the United States to other countries but stays consistent in the United States, with people in more collectivist regions (states and counties) more likely to wear a mask. For instance, states such as New Jersey, California, and Maryland scored higher on the state-level collectivism scale sourced from Vandello and Cohen (1999) and in mask compliance compared to states such as Arizona, Ohio, and Wisconsin, which scored lower on both the state-level collectivism scale and in mask compliance (Lu et al., 2021).

Masks can create physical inconvenience and be uncomfortable. As said earlier, one study found that 64% of Americans that report not wearing a mask responded, “It is my right as an American to not wear a mask” or “It is uncomfortable.” (Vargas & Sanchez, 2020). These actions follow an individualist mindset of protecting personal choice and freedom, but disregard that their actions can affect others (Stewart, 2020). Conversely, collectivists are more willing to put aside their personal inconvenience for the collective welfare and well-being (Biddlestone et al., 2020).

As mentioned previously, there is a $100-500 USD fine for not complying with mask mandates in Taiwan, along with limited reports of noncompliance (Ministry of Health and Welfare, n.d.; Ministry of Health and Welfare, n.d.). In collectivist cultures, the rules are more strict, with hefty consequences for non compliance, because the norm is an expectation to follow the policies implemented. In individualist cultures, on the other hand, the mandates are less strict and more complex and ambiguous because individualists are less likely to comply with rules that sacrifice personal freedom for the well-being and welfare of others. Cultural and personal beliefs can influence how rules are put into place and how people respond.

Additionally, in the US, there is a large divide between democrats and republicans based on their political ideology. Republicans can be seen as more individualist because they value personal freedom and limited government interference in daily personal matters whereas democrats can be seen as more collectivist because they value greater government intervention in economics affairs and a balance between orderly society and liberty. When looking at the difference between mask compliance in democrats and republicans, a striking difference is revealed. Democratically leaning Americans, aligned with collectivist values, have a higher mask-compliance rate than republican leaning counterparts, aligned with more individualist values, have a lower rate of mask compliance (Xu & Cheng, 2020).

To conclude, it is crucial to note that lower mask compliance rates in the United States is not because of Americans being defiant against preventative behaviors, but because of contrasting belief systems and pandemic unpredictability. These findings do not suggest that Americans are associated with various personality traits but instead shed light on the distinct cultural norms affecting behavior.

Psychological Factors

Personal Freedom and Surveillance

Psychological factors, supported by an individualist and collectivist mindset, can also influence mask wearing behavior. The first factor is the idea of personal surveillance. Collectivists are more likely to agree that groups can intrude on an individual’s privacy, especially if it’s for the greater good, since collectivists are more likely to sacrifice their personal freedom for the collective (Bellman et al., 2004). Individualist cultures are more likely to put themselves before the collective to protect their personal freedom, a value that the nation was founded on. This can be seen through the reactions that Americans had towards tracking devices. Before the pandemic, tech companies shared consumer location data with the government to make it easier to track the location of Americans. According to results from a survey in December 2020 conducted on American adults, 42% of the men who responded and 52% of women who responded were very uncomfortable with this (Johnson, 2020). During the pandemic, other companies, such as Google and Apple, used consumer data to track potential exposure to COVID-19. Over 60% of US adults found this COVID-19 exposure tracking tool to be very or somewhat concerning for their privacy (Johnson, 2020).

In South Korea, a collectivist country, government surveillance and tracking has been implemented even before the pandemic. For example, the government has access to credit and bank transaction records to prevent fraud. This system was then repurposed during the pandemic to track where people went, from restaurants to subways. Additionally, because 95% of adults own a smartphone, data location, which was originally used in criminal investigations, is now used for contact tracing. Surveillance footage utilized for investigative purposes and can now provide real time, to the minute, tracking of someone’s location. Koreans can also get sent text messages for outbreak updates. The use of South Korea’s established government surveillance network made it easier to ensure public health safety. Even though there was some talk about privacy concerns, there are limited reports on noncompliance, emphasizing the collectivist tendency to allow personal surveillance for public health purposes (Fendos, 2020).

Risk Attitude

Risk attitude is another psychological factor that affects mask wearing and can be explained through the individualist vs. collectivist mindset. Recent studies show that risk aversion, defined as less likely to engage in risky behaviors, was correlated with compliance to engage in protective behaviors during the pandemic. This was not only true in a pandemic setting but in general, with individuals that have higher levels of risk aversion less likely to smoke or engage in heavy drinking. (Xu & Cheng, 2021).

During a study conducted on Italians, results revealed that emerging adults were more concerned with their relatives and other individuals/community members contracting COVID-19, potentially through them being an asymptomatic carrier, than testing positive for COVID-19 themselves. This collectivist mindset was correlated with a higher perceived risk of infection (Germani et al., 2020). This perceived risk was positively associated with engaging in protective behaviors such as mask wearing and social distancing, a US study found (Duong et al., 2021).

Mask-wearing behavior has similarly been observed and studied in many Asian countries, including Taiwan’s long-standing cultural norm of wearing surgical masks when experiencing symptoms, such as a sore throat and runny nose, as a means to protect others, mentioned earlier (Jennings, 2021).The collectivist mindset and risk perception associated with mask-wearing in different regions can help to support the reasoning behind the Taiwanese mask compliance.

Additionally, as said earlier, amongst the Americans that report not wearing masks, 64% of those Americans said that they didn’t wear a mask because it was uncomfortable or that it’s their right as an American to choose not to wear a mask (Vargas & Sanchez, 2020). An individualist mindset provides reason for these attitudes and behaviors present in some individuals.

Sensitivity Towards Social Norms

The Taiwanese have strong responsiveness to social norms. There is a sense of pressure for wearing masks in subways and public areas. The community will also shame those for non-compliance. For instance, this mentality towards social norms is epitomized in what one Taiwanese said in a CNBC article, “We have this phrase in Taiwan that roughly translates to, ‘This is your country, and it’s up to you to save it’” (Farr, 2020).The government policies also add to this, with hefty fines, up to $500, for non-compliance (Ministry of Health and Welfare, n.d.; Ministry of Health and Welfare, n.d.).

These distinctions can again be supported by an individualist vs. collectivist mindset, in terms of emotional reactions. For example, one study conducted by Matsumoto, Kudoh, Scherer, and Wallbott (1988) found that Americans and Japanese experienced similar emotional reactions but Americans experienced emotions longer, with greater intensity and more bodily symptoms such as verbal reactions, lumps in the throat, breath changes. To conclude the study, more Japanese agreed that acting on these events when coping with these emotional situations was unnecessary, showing a weaker association between emotion and behavior (Scherer, Matsumoto, Wallbot, & Kudoh, 1988). The findings can be expanded out and offer an explanation to how individualists vs. collectivists in the US and Taiwan behaved in mask compliance. The Taiwanese held each other accountable and were less likely to act on their emotions if they didn’t fully agree/want to wear a mask. Americans were more likely to act and go against these mandates, as can be seen through countless protests across many states, even if they had felt similar levels of emotion towards masks as some Taiwanese did.

One of the possible explanations for this is that many of the emotions experienced are ego-focused emotions, meaning they mainly concern the individual’s internal attributes or characteristics. Some examples include anger, frustration, and pride. Therefore, it is logical that individualists are more likely to attend to and act on these emotions than collectivists are, say if they feel their personal freedom is being violated, because these ego-focused emotions are at the heart of an independent self (Markus & Kitayama, 1991). Through the exploration of how psychological factors influenced mask compliance, the prevalence of an individualist vs. collectivist mindset underscores the application to attitudes and behaviors.

Differences in Diversity among Populations

The United States has great diversity with Americans having their own distinct identity, from various demographics, gender, race, ethnicity, and social groups. The United States is rapidly becoming more complex, with data estimates from the US Census Bureau showing that nearly 4 of 10 Americans identify with a race or ethnic group other than white (Frey, 2020; US Census Bureau, 2021). Some Americans then form subgroups with those of similar demographic identities, and base social behavior off of their beliefs and backgrounds.

One way of measuring ethnic diversity is based on an analysis of ethnic fractionalization, the probability that two random individuals from the same country are not from the same group (race, ethnicity, or other criteria). This can be done through Fearon’s analysis in which ethnic fractionalization is on a scale from 0 to 1, with 1 being the most ethnically diverse. When comparing the numbers on Fearon’s analysis, the United States is 0.49 and Taiwan is 0.274 (Alesina et al., 2002; Fisher, 2019).

Diversity is a descriptive factor in the individualist vs. collectivist mindset, with individualism associated with more heterogeneous cultures and collectivism associated with more homogeneous cultures. This diversity in mindset can explain why some states have higher mask compliance rates, as mentioned in the “Collectivism Predicts Mask Wearing” section (Lu et al., 2021).

]From a racial perspective, in a study conducted by USC, the group that was least likely to consistently wear a mask when in close contact with non-household members were whites, with a compliance rate of 46%. Compared to whites, other races including latinos, blacks, and others had higher compliance rates with 63%, 67%, and 65%, respectively (Key, 2021). Diversity in all demographics, from race, locale, and ethnicity, had significant contributions the way individualists and collectivists engaged in mask wearing. This emphasizes the dynamic intricacies of various societies in which no single factor can predict mask wearing.

Conclusion

Culture is an important factor in behavior that has intrigued me as someone who is mixed and spends time with those of various ethnicities, races, and social groups. When the pandemic hit, I spoke to many family and friends that had completely different views on how the virus affected them and what appropriate measures they believed should be taken. At times it was overwhelming and I sought to understand if there was an underlying cultural factor at the root of different attitudes and behaviors. I found that my relatives in Taiwan had one of the most striking contrasts compared to my relatives in the United States in the way they viewed how the government and our societies should be responding.

Since the onset of the pandemic, the infection and mortality rates have been significantly higher in the United States: the US infection rate is about 200 times that of Taiwan and the US mortality rate is about 60 times that of Taiwan (Ritchie et al., 2020). I chose mask wearing as my control factor because it is a universal way to lower the rate of transmission. From talking with my family and friends, I observed that mask-wearing was one of the most heavily debated topics.

The mask compliance rates are significantly higher in Taiwan than in the United States. Through my literature search, I found multiple demographic, cultural, and psychological factors, influenced by an individualist vs. collectivist mindset, that predicted mask wearing. Taiwan’s proximal distance to SARS in 2003 resulted in public health regulations that gave public health agencies access to patient medical and travel records for contact tracing and testing. Along with this, Eastern countries have norms for wearing masks to protect others. Race, locale, and political ideology was associated with mask wearing. Psychological factors involving higher risk attitude, sensitivity to social norms, and personal surveillance compliance were affected by a collectivist mindset. As a caveat, individualism tends to be correlated with Western countries but there is still a large percentage of Americans that do not associate with an individualist mindset. This results in greater diversity within the United States and Americans having differing views of cultural beliefs. Further, Taiwan’s cultural norms and policy preparedness proved to be significant in Taiwanese compliance with preventative measures.

At the heart of a collectivist is having compassion and taking in another perspective by wearing a mask to protect others. On the other hand, a reason individualists are not complying with mask mandates is not because of pure defiance but because they have a different belief system. For instance, for some individualists, it may be harder to conceptualize that they’re part of a collective and that their individual behavior is affecting the group.

These findings are important because it provides insights into how people react to governmental health regulations during times of uncertainty. Neither individualists nor collectivists are “better” than the other. There are specific attributes of each that may better serve during specific circumstances, such as a global health crisis, but I am not stereotyping individualists or collectivists with specific personality traits. I am not here to convince anyone to change their belief system but in global health crises it may be useful to adopt more collectivist actions while also taking steps to protect themselves. This can be achieved without taking away key components of identity and protecting personal values. One big question is how can we get people to comply without making them change their belief systems?

This paper explores the reasons behind noncompliance, so we can get insight into how to frame compliance requests for individualists and collectivists in different manners with the goal of showing that mask-wearing benefits the health of the public. For collectivists, explaining how mask-wearing benefits the group. Ironically, individualists that are not complying with mask mandates are presenting potential health risks to themselves and the group; these individuals are more likely valuing personal freedom over health. When framing compliance requests for individualists, it may help to emphasize that wearing masks acts in their own interests as well as establish the link between individual behavior and group health. These changes in reframing requests appeal to the individualist and collectivist belief systems while respecting personal values.

It is also important to note that extreme collectivism and extreme individualism can also harm self-interest. To further illustrate, extreme collectivism is primarily not taking into account individual needs and extreme individualism is solely focused on personal desires. Neither of these extremes act in one’s best interest because it fails to take into account other perspectives and people.

To conclude, in everyday experiences, it’s good to find some common ground. That way different perspectives can be acknowledged to create a more informed and dynamic view of the world. Sometimes it’s better to be an individual, sometimes it’s better to be a collectivist. In general, it’s hard to change belief systems to adopt other views but being able to empathize and understand why people are the way they are is beneficial not only in a pandemic, but in daily life.

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About the author

Alena Powell

Alena is a senior at Avenues: The World School in NYC. She is passionate about the social sciences, public policy, and global/cultural studies. Her academic interests are interdisciplinary and experiential as she hopes to continue immersion in different cultures, learning about various economic and government systems, and explore pathways to apply her knowledge through social impact.

The post Why Mask Compliance Differed in the United States and Taiwan During the COVID-19 Pandemic: How Individualist vs. Collectivist Cultures Respond in Uncertain Times appeared first on Exploratio Journal.

1. Introduction

For over a year now, COVID-19 has wrought unexpected and far-reaching adverse effects on the health, safety, economic and social well-being of societies across the world. Of particular concern is the impact of this pandemic on the quantity as well as the quality of learning of school-age children. Considering the adage, that children are the future of the nation, this negative impact of COVID-19 on school learning is a matter of grave concern both in the short term and the long-term.

This paper will explore these short as well as long-term effects on school learning in China.

Firstly, because during the epidemic, students could not go to school, they had to take online classes at home. This robbed them of face-to-face learning as well as the experience of in- person socializing with their peers. We would like to explore the short-term as well as the long-terms effects of this adverse change. The major short-term impact of the pandemic on schooling was the modality of instruction – classroom teaching and learning suddenly had to go ‘online’. What are the problems in online-teaching and learning?

Online classes face many problems, not all regions and families have the conditions to access the Internet. Some families do not even have mobile phones. If you have a mobile phone, you do not necessarily have a network or Wi-Fi. Therefore, online classes, virtually also to many poor families caused a burden. Of course, this is a hardware problem when these problems are solved. And new problems arise, because the teaching level of different regions is different, and there are differences in children’s performance. The national unified online course, teaching materials cannot seamlessly connect most of the students’ learning. Perhaps in the special period, the education department has done some special work, and it is the best way to solve the problem of children’s learning in front of the epidemic.

Besides the issues of inequitable or spotty availability of the internet and the related equipment, there is the critical question of professional training of the teachers. This pandemic took everybody by surprise. The teachers as well as the school administrators were expected to ‘learn overnight’ how to use the new technology as well method of teaching. That is not so straight forward since it needs professional development, training, and time to learn.

Secondly, at the family level, the parents are naturally very concerned about the students’ performance in the college entrance examination. In China, like in many other countries, high school entrance examination and college entrance examination are very important for students with very significant impact on the rest of their career and life opportunities. Therefore, these are the most concerned issues of parents and all walks of life. The impact of the epidemic will certainly affect candidates to delay the examination.

Thirdly, in many children’s minds, their idols are no longer stars. And more are great people like Zhong Nanshan, Li Lanjuan, Yuan Longping and so on. There is no doubt that the seeds have been planted in the hearts of children. I hope that when I grow up, I will become a person like them and make my own contribution to the society and the country. This outbreak. No doubt for the children, let them grow up more clearly aware of their coming to this society. What to do. What kind of people they should be has a huge impact on their values and world outlook?

2. COVID-19: A brief History of the Pandemic

In this section, I will briefly describe the history of the outbreak of the COVID-19 pandemic.

Caught off guard in the late Fall of 2019, the novel coronavirus pneumonia from Wuhan has been a shocking surprise for China. There are different opinions about the source. Some say it came from the seafood market in South China, while others say it came from the expatriates of last year’s Wuhan military games.

On the morning of December 31, 2019, the expert group of the National Health Commission arrived in Wuhan to carry out relevant testing and verification work. The investigation found that most of the pneumonia cases were the operators of South China Seafood City.

On January 1, 2020, the South China seafood wholesale market was closed, and the public places in Wuhan, especially the farmers’ markets, were locked down in the interest of public health and efforts to control the spread of this deadly virus. In addition, the disease prevention knowledge was widely publicized to enhance public self-protection awareness. People were urged to cooperate with the national and provincial pathogenic research especially with the National Health Commission to timely report the epidemic information to the World Health Organization.

It was clear that this lockdown had a significant effect on people’s daily life. People cannot go to the public since gathering together will make it easier to be infected. School cannot set very large events like concert, sports meeting. Everyone had to wear masks anywhere and anytime which make communication very difficult.

What happened to the transportation, the economy, the unemployment and how families were affected and in return how that affected the children.

1. Transportation: Do not take public transportation when you have respiratory symptoms such as fever. Take less public transportation to avoid infection.
2. The economy: Many shops closed: they could not have many profits because of the reduction on customers.
3. Families: people had more time to stay with their family members because they seldom go outside due to the pandemic. we have a deeper understanding of family affection. In the past, we always felt that the holidays, especially the Spring Festival holidays, were too short, and the family members gathered less and left more. We felt that it was not easy to get together. This epidemic situation made us spend a super long “holiday”. We all stayed at home, and the whole family ate, lived, slept, and slept together for such a long time as never before. Our understanding is more comprehensive and further. Family is deeper.

The change of thought is a deeper understanding of life. The outbreak of the epidemic caught many people by surprise. Due to improper prevention and control or inadequate understanding, many people were infected with the virus and lost their lives. The healthiest of us, while feeling lucky, are deeply saddened by the fragility of life and the inconstancy of life. It used to be said that the moon has its ups and downs, and people have their ups and downs. It is the true facts that touch the deepest part of the mind.

3. Impact on Education at the School Level: Short Term Effects

3.1 The nature of the short-term effects in China itself

The major short-term effect was the very suddenness of the crisis. It was extremely disruptive of the life as people knew it. The range of effects included closing of businesses, lay- offs, closing of schools, shortages of food and essential supplies and generalized increase in uncertainty. The situation was particularly serious for parents with young children since after school closure, their schooling was interrupted and at the same time the parents were obligated to take care of them.

Thus, the major short-term or immediate effects could be job-related for the adults which meant financial uncertainty and budgetary crisis. Secondly, disruption of family life especially jeopardized the education of the school-aged children. Thirdly, the women in the society had to share a disproportionate burden of this crisis. Besides facing the heath crisis that everybody else faced, they disproportionately lost jobs, and, at home, they were expected to take care of the household duties such as cooking, cleaning and, on top of that, make sure of home-schooling of their children.

The picture shows that during the epidemic, which city helped which particular area.

The modernization of national governance system and governance capacity will be further accelerated, and the level will be further improved, especially the ability of defense against major biological risks will get new breakthroughs. The outbreak of the epidemic has conducted a practical test on China’s governance system and governance capability, which not only shows the effectiveness and achievements of the governance system and governance capability, but also exposes its shortcomings and defects. It provides living data and information for accelerating the improvement and improvement of the governance system and governance capability in the future, and provides a reference for the development of digital, artificial intelligence, robot, blockchain and other modern industries The application and role of science and technology in crisis management and risk prevention and control provide a realistic basis, and provide a rare opportunity for China to turn crisis into opportunity and save danger. This is another wake-up call for China’s biological risk crisis after SARS, prompting China to speed up the modernization of its governance system and governance capacity.

There will be new changes in people’s values. The most glorious and critical moment of human nature. The novel coronavirus pneumonia animal disease animal novel coronavirus pneumonia has been confirmed. For a long time, people have pursued the idea of “everything is human food”. The virus infecting wild animals has caused SARS, Ebola, new crown pneumonia and other viruses to spread to humans. After this outbreak, there will be great improvements in legislation and people’s habits, animal ethics and values. We should deal with the relationship between man and nature with a more rational attitude, respect, and revere nature, and treat wildlife well. The actual combat of the epidemic prevention and control not only highlights the glory of human honesty, kindness, integrity, justice, love, and courage, but also has a new sublimation in dealing with the relationship between people. People sincerely respect the ordinary medical staff, soldiers, farmers, workers, and those who are not afraid of sacrifice and sacrifice for everyone What ordinary fighters, volunteers and donors have done shows the importance of harmonious relationship between people, which makes people turn their attention from power, wealth and fame to respect and revere life.

Thus, it is very clear that the COVID -19 crisis had severe and unanticipated immediate effects which left the society in a virtual shock.

The novel Coronavirus (COVID-19) had spread across 215 countries and territories in all 5 continents by May 12, 2020. On January 30, 2020, the unrelenting spread of COVID-19 prompted the World Health Organization to declare it a public health emergency, and on March 12, 2020 COVID-19 was declared a pandemic. This pandemic has caused great social and economic disruptions, leading to a decline in consumption, investment, services, and industrial production activities around the world. In particular, the insurance market in mainland China has been severely affected. The year-on-year (YOY) growth rate of gross premium in the first quarter of 2019 was 15.8%, while the rate was 6.27% in the first quarter of 2020, indicating a decrease of 9.53 percentage points in growth rate. In addition, the monthly YOY growth rates of premium in the first three months of 2020 were −12.53%, −21.35%, and 1.93%, respectively, showing a sharp decline compared to the rates of 23.97%, 10.19%, and 6.76%, respectively, in the same periods of the previous year.

While research on COVID-19 and equity markets globally is evolving (Ali, Alam, and Rizvi 2020; Haroon and Rizvi 2020), a literature has developed that examines the impact of pandemics on various energy issues (Apergis and Apergis 2020; Fu and Shen 2020; Gil-Alana and Monge 2020; Liu, Wang, and Lee 2020; Narayan 2020; Qin, Zhang, and Su 2020). In addition, there are also studies on socioeconomic factors (Fang, Long, and Yang 2020; Qiu, Xi, and Wei 2020), pandemic mitigation (Chudik, Pesaran, and Alessandro 2020), and households’ spending and consumption (Baker et al. 2020; Eichenbaum, Sergio, and Mathias 2020). However, there is no empirical study on the impact of the pandemic on the insurance market. The fundamental function of insurance is to protect people from risks. Encountering the catastrophic hazard of COVID-19 has highlighted the importance of a well-functioning insurance market. Thus, it is of great practical and policy value to study how the pandemic affects the insurance market.

In this empirical study, we employ monthly provincial-level panel data and fixed-effects models to study the impact of COVID-19 on China’s insurance market. We find that COVID-19 had a significant adverse impact on the insurance market in the short term due to the limitation of insurance marketing channels and the suppression of household insurance demand. The development of social security and digital insurance could help alleviate the negative impact of COVID-19 on the insurance market. This study provides insights into the impacts of COVID-19 on the Chinese insurance market.

3.2 Impact on Health

Risk of Severe Illness from COVID-19. People with moderate to severe asthma may be at higher risk of getting very sick from COVID- 19. COVID-19 can affect your nose, throat, lungs (respiratory tract); cause an asthma attack; and possibly lead to pneumonia and acute respiratory disease.

During the epidemic period, travel was restricted to varying degrees, and we spent several times more time at home than before. In the serious lack of exercise, subtle changes in our body function, which is the most affected metabolic function.

Our body will take in a large amount of toxins through diet, breathing, percutaneous absorption and other reasons every day. In addition, the waste generated by our own metabolism will deposit in the body, which will increase the burden of various organs of the body, and increase the risk of thrombosis, arteriosclerosis, hypertension and other cardiovascular and cerebrovascular diseases.

When the metabolism function of human body is normal, these substances will be gradually discharged from the body. But the pressure of modern life, including lifestyle and other factors, most people’s metabolic function is disorder, resulting in toxins cannot be discharged from the body. Especially during the epidemic period, many people appeared dizziness, insomnia, forgetfulness, abdominal distension, diarrhea, constipation, palpitation, shortness of breath, arrhythmia, and other “poisoning” phenomenon. This is a serious sub-health symptom, if left alone, will gradually develop into cardiovascular, cerebrovascular, tumor and other serious diseases.

Of course, these symptoms can be gradually improved by changing daily habits. However, due to the pressure of work and life, coupled with environmental pollution and food hygiene, it is almost impossible for modern people to really restore their body to a real healthy state. Currently, we need to take some measures for health intervention.

3.3 Financial Impacts

Here, quotes the extent of the unemployment due to the epidemic and extent of the closing of the businesses and loss to the economy and the impact on employment both men and women. See if you can clearly show that women suffered higher unemployment. The financial impact comes primarily from (a) being out of work and/or getting infected of ill because of the virus.

In Keynesian economics, “uncertainty” refers to the risk that cannot be insured. The recognition of uncertain risk cannot be judged by the actual loss caused by the event. Compared with many other epidemics, the mortality rate of the new coronavirus epidemic is not necessarily very high, but the main reason why people panic is the uncertainty of the mode of transmission and the method of prevention and control of this epidemic. It is this uncertainty of the new coronavirus epidemic that leads to people’s sense of insecurity, so that people take more cautious preventive actions than other epidemics, and reduce a large number of tourism, entertainment and other activities, and correspondingly reduce a large number of consumer activities，so at this stage, in order to avoid the occurrence of small probability events, people tend to “make a mountain out of a molehill” or even “make something out of nothing”, and take a wide range of preventive measures. This will inevitably increase the cost of economic activities.

The impact of the new coronavirus epidemic on the economy is a typical external impact, which is not from the internal economy, but from external factors. This external factor has two characteristics, one is sudden, the other is caught off guard. External shocks will certainly and are interfering with China’s economic growth, and even blocking some industries (such as tourism and entertainment), but in the long run, they will not block China’s economic growth and seriously unbalance China’s economy. Therefore, the nature of the new coronavirus epidemic crisis is not an economic crisis, but a social crisis and psychological crisis caused by the social public health crisis; the industry decline reflected by the crisis will not be normal, but a temporary phenomenon of rapid economic growth. We should have a clear understanding of this. The internal cause is the basis, and the external cause is the condition. Objectively speaking, China is a big country with a huge market, and domestic demand is becoming the leading force of the economy. External changes will have a considerable impact on China’s economy, but not enough to form a dominant impact. No matter how strong the external shock is, the key lies in the anti- shock ability of various industries, the anti-shock strategies of various departments and the willpower of Chinese people to cope with the external test.

3.4 Impact on Learning

Different families have different access to the Internet, so students may meet problems when having online classes.

For students who want to go abroad for further study, they probably meet lots of trouble. Those who are in China cannot go home to reunite with their families, while those who are abroad cannot go back to China to reunite with their families.

Since the epidemic erupted during the Chinese Spring Festival, most Chinese students were not able to get together with their family members and relatives.

In terms of study, there will certainly be some delay. I do not know about it in foreign countries. In China, most universities only start classes in September. In the first half of the year, online courses are the main course. How much can I learn? How much can you learn?

As I know, lots of graduators who wanted to enter American universities can only stay at home, having online courses, because when China over comes the epidemic, other countries like Japan, USA, UK also erupted the COVID-19 disaster.

Students who only had online courses could not experience the campus life abroad or at home. And because of the different time zones, students taking foreign courses had to sleep in the morning and study in mid-night. Their time had been inversed.

Schools across the nation are closing to stop the spread of COVID-19 and in the scramble to provide at-home learning, a major problem has risen to the forefront: millions of American students don’t have reliable access to the internet.

According to recent federal data, approximately 14 percent of U.S. families with school-age children lack high-speed internet. Most of those families are low-income or live-in rural areas. While there are plenty of best practice guides available for online learning, strategies for bridging the digital divide are scarce.

The COVID-19 crisis has forced education systems worldwide to find alternatives to face-to-face instruction. As a result, online teaching and learning have been used by teachers and students on an unprecedented scale. Since lockdowns – either massive or localized – may be needed again in the future to respond to new waves of the infection until a vaccine becomes available, it is of utmost importance for governments to identify which policies can maximize the effectiveness of online learning. This policy brief examines the role of students’ attitudes towards learning in maximizing the potential of online schooling when regular face-to-face instruction cannot take place. Since parents and teachers play a fundamental role in supporting students to develop these crucial attitudes, particularly in the current situation, targeted policy interventions should be designed with the aim of reducing the burden on parents and help teachers and schools make the most of digital learning.

Impacts of COVID-19 pandemic on international higher education and student mobility Research findings of this study on Mainland China and Hong Kong university students’ attitudes toward studying abroad have approved the negative impact brought by the COVID-19 pandemic on international higher education and student mobility. The barriers for students to pursue their further degrees overseas include travel bans, visa restrictions, and campus lockdowns in destination countries, as well as students’ and their families’ worries on health and safety.

Some practical reasons like the delays of English tests also prevent students from completing the application in time (Mercado, 2020). The impacts of the pandemic on international higher education are manifested in various aspects. As to student mobility, the decrease of international students due to the pandemic will bring a significant impact to overseas higher education institutions, especially for those that financially depend on the tuitions of international students (Marginson, 2020a; Tesar, 2020). For example, the UK universities would face an approximately £2.5 billion loss in tuition income in the new academic year (University and College Union, 2020). Meanwhile, with the international students becoming scarce resources, the competitions for them will increase in international higher education. Moreover, the rate of recovery from the pandemic and post-pandemic governance will become a significant factor for destination countries to attract international students (Goris, 2020; Marginson, 2020a). This study argues that the domestic job market will become competitive because college graduates will stay for jobs instead of studying abroad. The predicted global economic recession will exacerbate this effect after the pandemic (Mercado, 2020).

3.5 Psychological Impacts

The novel coronavirus pneumonia epidemic is a crisis for the public. Crisis events have three characteristics: sudden and unpredictable, bring tension and pressure to people, the usual initial method cannot solve people’s psychological crisis, is the normal response to crisis events, and people will have corresponding stress reaction, which will last about 6-8 weeks. Stress psychological reaction can be divided into emotional reaction, self-psychological defense reaction and behavioral reaction. The most common emotional reactions are anxiety, anger, guilt, fear, depression, helplessness and so on. When dealing with stress, individuals have an adaptive tendency in their internal psychological activities, that is, self-psychological defense reaction, to extricate themselves consciously or unconsciously from troubles and relieve their inner uneasiness, to restore emotional balance and stability.

Oxford Department of Psychiatry, also found that people with a pre-existing psychiatric disorder were 65% more likely to be diagnosed with COVID-19 than those without. The researchers say this finding was unexpected and needs further investigation. In the meantime, they say, having a psychiatric disorder should be added to the list of risk factors for COVID-19.

Sufferers of “long COVID” – who are still experiencing symptoms months after testing positive – also appear to experience mental health issues, which can be triggered by a range of factors including post-traumatic stress disorder (PTSD), lethargy, fatigue and olfactory disorders such as a loss of their sense of smell.

Even for those who have not tested positive, lockdown measures have increased feelings of loneliness, isolation, restlessness and anxiety, as millions of people have been quickly forced to adapt to new realities and make drastic lifestyle changes. According to the Royal College of Psychiatrists, which represents 18,000 psychiatrists in the UK, more people are seeking crisis mental health services as a result of COVID-19.

Pandemics have had a detrimental impact on the mental health of affected populations throughout history. For example, The Lancet reported that outbreaks of the Ebola virus caused “widespread panic and anxiety, depression resulting from the sudden deaths of friends, relatives, and colleagues, and stigmatization and social exclusion of survivors.” And the Spanish Flu pandemic of 1918-1919 had a long-standing impact on the mental health of survivors as a result of the massive and sudden loss of life which plunged many into a chronic state of helplessness and anxiety.

Even though the link between pandemics and mental health is well-documented and researched, there is still more research needed to fully understand the causes and solutions. Scientists are still examining how COVID-19 affects the brain and the central nervous system to determine how much that plays a role in receiving a diagnosis vs the trauma of suffering with symptoms, and in some cases narrowly avoiding death.

3.6 Are there any positive impact as well?

Only 15% more – not much Appreciation and desire for a simpler uncomplicated life

Rapid medical advance and technology advancement. Young children may learn new skills by having to use online learning tools.

1. Protection of wild animals and punishment of crimes of eating wild animals. This will undoubtedly be beneficial to the harmony between man and nature in the future.
2. Exposed some social problems, need to establish, and improve a set of disaster prevention and control system.
3. The epidemic situation in China has been basically controlled and the national confidence has been improved.
4. China takes the lead in controlling the epidemic in the world, aiding foreign countries, deepening international cooperation and enhancing international status.

4. Impact on education at the school level: long-term effects.

4.1 What is the nature of the possible long-term effects

Besides the short-term effects noted above, it is easy to imagine the lingering or the long-term effects of COVID_19 pandemic. This section is going to note several of these long-term effects.

4.2 Long Term Impact on Employment Prospects Employment issues

Employment issues

In China, campus recruitment is major means for students to find employment. Campus recruitment is divided into autumn recruitment and spring recruitment. The autumn recruitment is generally aimed at students who have no plans to go for higher degrees, and want to work directly after graduation. Spring recruitment is aimed at those students who are otherwise accomplished, but performed poorly in postgraduate entrance examinations and hence need to find employment. For prospective graduates in 2020, the adverse impact of the epidemic on employment prospects is a matter of great concern. For students who participated in the autumn recruitment, whether they can graduate as scheduled becomes an important factor in deciding whether they can successfully enter the job market. Meanwhile, domestic and large enterprises have been adversely affected by the epidemic and whether demand for students as employees will accordingly shrink is causing great uncertainty.

For students waiting for the spring recruitment, this period is also very difficult. The spring recruitment was canceled due to Covid-19. Whether it will be reorganized after the full reopening of schools depends on too many unknown factors. Most of the students waiting for the spring recruitment either participate in the postgraduate entrance examination or take the public examination. Nevertheless, due to the epidemic, the timing for these tests has also become uncertain. It is feared that China may experience the largest spurt in rates of graduate unemployment in the last twenty years.

Employment

In China, campus recruitment is the main means of College Students’ employment. Campus recruitment is divided into autumn recruitment and spring recruitment. The target of autumn recruitment is generally the students who want to work directly after graduation without further education plan. Spring recruitment is targeted at students who have other achievements but do not perform well in the postgraduate entrance examination, so they need employment. For the fresh graduates in 2020, the adverse impact of the epidemic on employment prospects is a very noteworthy issue. For the students who participate in the autumn recruitment, whether they can graduate on time becomes an important factor to decide whether they can enter the job market smoothly. At the same time, large domestic enterprises have also been adversely affected by the epidemic. Whether the demand of students as employees will shrink correspondingly also brings great uncertainty.

It’s also a tough time for students waiting to be recruited in the spring. Spring recruitment was cancelled because of covid-19. Whether the school will be reorganized after the full reopening depends on too many unknown factors. Most of the students waiting for spring enrollment either take the postgraduate entrance examination or take the public examination. However, due to the epidemic, the timing of these tests has also become uncertain. There are concerns that China may experience the biggest surge in graduate unemployment in nearly 20 years.

4.3 Long term Impact on Learning Opportunities/education

Impact on studying abroad

According to news from the Ministry of Education, there are about 1.6 million overseas Chinese students, and currently there are still about 1.4 million abroad 5. It had seemed earlier that the interest in studying abroad among Chinese students was on the rise with 413,900 Chinese studying abroad in 2013 and 662,100 in 2018 6. The countries to which students go for higher education has diversified over the last few years. 7. The impact of the epidemic on the overseas study programs remains uncertain because much will depend on the decisions of universities in other countries to invest in higher education as well as their policies on migration. The global outbreak of the epidemic may lead to the postponement of enrollment of foreign students in many universities posing a dilemma for those students who have already been admitted. Government-sponsored overseas education is also greatly affected, including joint training of students and visiting scholars. Since the trajectory of the coronavirus remains uncertain many programs of training that were premised on global partnerships might need to be suspended.

In summary, the delay of graduation and rise of unemployment is inevitable. Overseas students who have already found a job, similar to domestic students, also face the risk of delayed entry into the work force or the cancellation of their positions. The long-term effects of such delays and uncertainties on the students who were accustomed to thinking that higher education will give them a secure future will need to be carefully studied in the coming years and plans for mitigation of these hardships will be an important project for the government and the universities alike.

The impact on postgraduate education inland

Despite the increasing interest in studying abroad, the poor management of the Covid-19 pandemic in many countries has made some families look at the prospect of overseas studies for their children more critically now. Accompanied by the pressures for adequate jobs mentioned above, the prospective graduates might prefer to take postgraduate admission examination, increasing pressure on domestic graduate admissions. The number of participants in the postgraduate entrance has exceeded 3.41 million in 2020 8. The epidemic will undoubtedly make the situation worse next year.

Apart from the students, the Ministry of Education and the colleges are under great pressure as they plan for the organization of examinations for the postgraduates, the written tests that have to be administered to such large numbers of students, and little experience with online testing methods. The biggest challenge is going to be how to alleviate the unemployment problem for the educated youth and restore faith in the Chinese economy.

As we all know, students have diversified to receive higher education. They will go to various countries for further study. The impact of COVID-19 on overseas study projects is still uncertain because each country’s policies are different. The global explosion of the new crown may cause many universities to delay their applications, and the students who have already been admitted are in a dilemma because they can only take online courses after paying the same tuition fees. As the trajectory of coronavirus transmission is still uncertain, some global activities may be forced to suspend.

Graduation will be delayed and unemployment will rise because of the epidemic. It can be said that graduates at home and abroad are facing the same problem. The long-term impact of these delays and uncertainties on students who are used to thinking that higher education will bring them a safe future needs to be carefully studied in the next few years. The plan to alleviate these difficulties will be an important project of the government and universities.

Despite people’s enthusiasm for studying abroad, the poor management of covid-19 in many countries makes some families prefer boring exam-oriented education to international education. If it goes on like this, it may be worse.

In addition to students, the Ministry of education and universities are also facing great pressure when planning to organize postgraduate examinations. However, there is little experience in online examination methods for large-scale examinations in China. The TOEFL or AP test for international students can be implemented online. It is clear that the university entrance exams in China will never be online, because many would cheat if in that case. The biggest challenge will be how to alleviate the unemployment problem of educated youth and restore confidence in China’s economy.

5. Concluding Remarks and Future Research

In this paper, I have examined and analyzed the nature of the impact of COVID-19 on school learning in China, a topic not only of great interest to me personally, but also of great significance for the world at large especially China.

The sudden outbreak of COVID-19 has brought many disadvantages to countries around the world including China. Focusing on China, its health, well-being, economy, transportation, and schooling along with many other sectors have been adversely affected in the first year and a half since this outbreak. The focus of this paper is the impact on school learning both in the short as well as the long run.

After an introduction in the first section, I present the history of the pandemic to provide the proper perspective to the issue at hand. The following two sections constitute the heart of this research study where I explore the short and the long-term impacts of COVID-19 on school learning China.

In terms of the short term, this paper finds that major impacts have been on the health, psychology, economics, and education part. People’s health conditions are weakened by this pandemic period, and they became afraid of this. The rate of unemployment rose for may shops closed because of the epidemic. Education was quite terrible because students could not go to school as usual. They stayed at home for months until the situation got better. While having online classes, they met a lot of problems.

On the other hand, in terms of the long-term, this paper finds that major impacts have been in terms of good effects on China, like, cities in China tried to work together to overcome this difficulty. Chinese medical power became stronger because many people were waiting to be cured, etc.

Future research.

Of course, it also promotes the rapid development of science and technology in human society. In the short term, the situation of students in class has changed greatly, from face-to-face teaching to online teaching. Although this is the best way during the epidemic period, it still has disadvantages. Moreover, COVID-19 has also aroused many students’ thinking. They organize related speeches, research, and other activities. In the long run, the employment of students is facing great difficulties. The life trajectory of many graduates may be changed because of this epidemic. The postponement of recruitment and examination, the postponement of graduation, and the change of teaching methods are unprecedented. Many families are also hesitant about whether they should study abroad or stay at home.

To study these topics, I investigated a lot of materials, read a lot of literature, and found many useful articles to help my research. Some lovely pictures and scientific charts have also become a great help. However, there are still some deficiencies in the study, such as the limited information, I did not conduct a questionnaire survey of the surrounding population, nor did I conduct further data analysis on the charts.

In future studies, I may not be confined to domestic surveys. I will look at the whole world and study the different effects of COVID-19 on different countries and different policies.

References

1. https://www.cdc.gov/coronavirus/2019-ncov/need-extra-precautions/asthma.html
2. https://www.kqed.org/mindshift/55608/14-tips-for-helping-students-with-limited-internet- have-distance-learning
3. http://www.oecd.org/coronavirus/policy-responses/strengthening-online-learning-when- schools-are-closed-the-role-of-families-and-teachers-in-supporting-students-during-the- covid-19-crisis-c4ecba6c/
4. https://www.researchcghe.org/perch/resources/publications/wp54to-publish.pdf
5. https://americanethnologist.org/features/collections/covid-19-and-student-focused- concerns-threats-and-possibilities/analysis-on-the-influence-of-epidemic-on-education-in- china
6. https://www.tandfonline.com/doi/full/10.1080/1540496X.2020.1791074?scroll=top&need Access=true&
7. https://www.gavi.org/vaccineswork/anxiety-depression-and-insomnia-impact-covid-19- mental-health?gclid=EAIaIQobChMI-Jitqu2H8AIV4DytBh3FNwJ2EAAYASAAEgIUoPD_BwE

About the author

Helen Zhang

The post The Impacts of COVID-19 on School Learning in China appeared first on Exploratio Journal.

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Sage Hill School

September 27, 2020

The post The Impact of COVID-19 on the Fashion Industry in the United States appeared first on Exploratio Journal.

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Author: Rebecca Chen
Sage Hill School
September 27, 2020

1. Introduction

The unprecedented pandemic of COVID-19 has obviously broad-sided the world with very significant impacts of the various aspects of the societies around the world. Besides the obvious toll it has taken on health and safety, the economies have been severely hampered as well. Though the relative impact of the pandemic may have affected the different economies somewhat differently, all have been influenced adversely. Everything is in shut-down. This includes retail stores, major transportations, factories, etc. One of the major industries that is damaged in this pandemic is the fashion industry. This paper will focus on the impact of COVID-19 on the Fashion Industry with a special reference to the United States. 

Fashion has always been an integral part of human existence. Believe it or not, fashion started about 500,000 years ago, when clothing was made to mark the social status and individuality of a person. Until this day, the sole purpose of clothing has evolved from its roots. From an outfit, people can tell one’s career, education level, or even personality. Whether you are into fashion or not, you must admit that your style of dressing has become part of your identity and a medium to express yourself. 

The Fashion Industry is a 1.2 trillion global industry. It has 4% of the market share and undoubtedly has its unremovable position in the U.S. economy. Approximately 1.9 million people are employed in this industry (Ref. 1). By 2019, the industry already has a worldwide revenue of $545 billion U.S. dollars, and is estimated to rise to $713 billion U.S. dollars by 2022 (Ref. 2). However, with the unexpected pandemic, we are now unsure of this estimation, but the statistics still highlight the wide range of influence the Fashion Industry has on our nation. 

With COVID-19, people are forced to stay at home, and thus they are deprived of a platform to present themselves. When this happens, people worry less about catching up to the trends and decrease their spending on clothing. This brings down sales in the fashion industry tremendously. Brands’ profits plunged, and some even filed for bankruptcy and might cease to be in existence. Physical stores are closed, and some are permanent. Runway shows are postponed or cancelled, and designers must move to the internet to present their fashion pieces. Online fashion shows became a compromised norm. The shutting down of transportation and stricter regulations placed on imports and exports also lead to the deceleration of the supply chain and the lack of fluidity of customers. Factory workers in Southeast Asia are paid less compared to their already meager wages, and some even went out of work. The fact is that the downfall of the fashion industry is creating a domino effect from its demand chain all the way up to its supply chain. You might not care about the current trending style or an upcoming collection from a designer brand but understand that the collapse of the fashion industry has its effect on you or someone close to you. 

In this paper, I will mainly discuss the impacts of the pandemic on the fashion industry. In the first part (Section 1), I will be describing the nature and structure of the fashion industry, and how it has transformed itself in 2020. In the second part of the paper, I will be discussing all the effects the pandemic has on the fashion industry. In the third part, I will be listing some possible future prospects for the fashion industry. In the last part, I will introduce a proposal that might mitigate the damage that has been done to the industry.

2. Nature of the Fashion Industry 

2.1 Structure and History of the Fashion Industry

What is the fashion industry? To be succinct, it is simply the business of making and selling clothes. To be exact, the fashion industry comprises multiple segments: designing, manufacturing, distributing, marketing, retailing, and advertising (Ref. 3).

The very fundamental sector for all clothes is the design and production of textiles. Textiles, including natural and synthetic fabrics, are mass-produced by automatic machinery. Their distinct texture and color are created through dyeing, weaving, printing, etc. (Ref.3).

The first step in establishing a fashion department is the design of clothes. There are two different types of designers. The most common ones are usually anonymous employees of design teams hired by large fashion retail companies. They draw their design inspirations from models on Instagram, the latest trending TV shows or movies, and other sources. They design and provide to satisfy consumer demands, and the prices of their creations are usually reasonably priced. The other type of designers are the big names you see on the internet, such as Karl Lagerfield, Virgil Abloh, etc. These designers usually work independently and create high-street fashion pieces or haute couture. Unlike the designers mentioned above, they do not feed into consumer demands as much, because they are the trendsetters in fashion. Their fashion pieces usually embody deeper meanings than the surface, so their designs are highly priced (Ref.3).

Beginning in the Industrial Revolution around the early 1800s, the fundamentals of our current factory system were developed. Then, in 1830, Barthelemy Thimonier invented the first model of the sewing machine that will eventually be mass-produced in our era. That is how our current factory system comes into picture. Manufacturing facilities, most famously placed in southeast Asia, produce garments for apparel companies. China became the largest producer due to its cheap cost and labor (Ref.3). Nowadays, our fashion industry has a short product life cycle and a complex supply chain. The supply chain in the U.S. contains about 22,000 companies and 675,000 employees. To reach efficiency, many manufacturing facilities have moved overseas and increased usages in online or electronic commerce (Ref.4).

The next step is to present the finished products to the customers. First, the companies will have to buy the manufactured goods from the manufacturing facilities, a process called retailing. Then, the companies need to market their apparels to their targeted customers. The most recent strategy is to conduct data analysis and promote their advertisements to specific audiences that may be interested in the apparel physically (for example, on the streets of Beverly Hills) or online (through social media platforms such as Instagram). However, the most old-fashioned way of promotion is sourced from magazines. In the 19th century, people looked towards magazines such as Godey’s Lady Book or Lady’s Realm for the latest trend, and they boosted the apparel businesses’ profits. Now, although we buy fewer physical materials, we still regard magazines such as Vogue as our fashion icon. Our fashion sense is also influenced by the media and the celebrities we see on television. The most classical and iconic example would be Audrey Hepburn. Her style of dressing set the trend in the 80s and the 90s, even until this day. Fashion shows, movies, red-carpet events, even internet fashion blogs allow us to follow the steps of the fashion icons and created this “hype” for apparels. Clothing brands also utilize these types of media exposures to increase brand recognition and characteristics.  

The last step is merchandising. Some companies decide to sell on retail, and thus they primarily focus on producing apparels according to customers’ taste. Other companies sell on wholesale to places such as department stores or online companies. At both levels, the companies still need to use marketing strategies described above to increase brand exposure and reputation. 

2.2 Role of the Fashion Industry

As mentioned in the introduction, the fashion industry is a crucial industry that takes up 4% of the entire U.S. economy. It is one of the largest employers in the U.S. economy and employs about 1.9 million people. Breaking down the statistics, most of the employees (about 79%) are fashion apparel retailers, and they have an average annual wage of 26,650 dollars. In this 79%, marketing and sales managers have an average annual wage of 84,600 dollars, the highest in the industry. Accountants and auditors have an average annual wage of 69,960 dollars. Purchasing agents have an average annual wage of 56,550 dollars. About 8% of the employees in the fashion industry (approximately 145,000 people) specialize in fashion wholesale and merchandising, and they have an average annual wage of 52,350 dollars. Another 8% of the employees (approximately 143,000 people) specialize in the sub industry of apparel manufacturing, and they have an average annual wage of 34,110 dollars. Finally, there are about 18,000 fashion designers in the industry with an average annual wage of 73,690 dollars (Ref. 5).

Internationally, the U.S. fashion industry has a big influence. For instance, the largest fashion brand, Nike, is an American company, making about 30.6 billion dollars every year and has a market share of 105 billion dollars. Its largest market is in the U.S. (about 46%), and secondly in the western Europe (about 19%). Other large companies that are influential in the international market include TJX (owns T.K. Maxx, Winners and Marshall), VF corporation (owns The North Face, Vans and Timberland), L Brands (owns Victoria’s Secret) and Under Armour (Ref.5)

The United States also has a huge share of exports for fashion purposes overseas. The largest export products are textiles with a value of 22.9 billion dollars. Out of the textiles, raw cotton takes the largest proportion (19%), following nonwoven textiles (8%), cotton yarn (5%), artificial filament tow (4.5%), and synthetic filament yarn (4.5%). The second largest export products are headwear and footwear with a value of 1.14 billion dollars. Footwear with leather body takes the largest proportion (27%), following parts of footwear (23%), other headgear (12%), footwear with textile body (7.5%), other footwear of rubber or plastics (7%), and other footwear (6.5%). 

The United States, however, is the largest importer of fashion pieces. The U.S. spends about 105 billion dollars on import of clothing. Sweaters, pullovers, sweatshirts, etc. (13%) take up the largest proportion, following women’s suits, not knit (9%), men’s suits, not knit (8%), women’s suits (5%), and T-shirts (5%). The second largest imports are footwear and headwear, with a value of 28.8 billion dollars. Footwear with leather body (42%) takes up the largest proportion, following other footwear of rubber or plastics (23%), footwear with textile body (16%), hats, knitted or crocheted (5%). 

3. Impact of the COVID-19 Pandemic on the Fashion Industry

3.1 Fashion Shows Cancelled

Fashion shows are an integral part of the fashion industry. As fashion brands organize spring, summer, fall and winter collections and present them on fashion shows, they forecast the oncoming trends and styles. Fashion shows also provide a platform for designers to be viewed under professionals’ eyes and to prove their worth. Even if you are not interested in fashion shows, your clothes are still in some way impacted by them, because fashion brands of all kinds follow the fashion shows and strive to imitate the latest styles they showcase. 

Now with the pandemic, many fashion shows are cancelled. Starting off with the Milan Fashion week, six Chinese brands cancelled first, including Masha Ma, Shiatzy Chen, Uma Wang, Jarel Zhang, Calvin Luo and Maison Mai. Then, two large high-end brands, Chanel and Armani, also cancelled their presentation during the week. Chanel cancelled their Métiers d’Art on February 14, and Armani cancelled their presentation less than 24 hours before the show. The Paris fashion week went on, but all were advised to wear a protective mask. International fashion weeks after that were also postponed, cancelled, or continued digitally (Tokyo, Beijing, Shanghai, LA, São Paulo, Sydney, etc.) (Ref. 6).

The first fashion show to go online was Shanghai Fashion week beginning on March 24. 31 designers presented their collections on their own accounts or channels on various social media platforms. Progress was made. For instance, the fashion brand Shushu/Tong was stocked in Dover Street Market (Ref. 6). 

The first fashion show with a complete runway, models and designers that went online began on May 2 in London Fashion week. The show was run by famous icons in the fashion world, Carine Roitfield (former French vogue editor) and her son Vladmir Restoin Roitfield, to raise donations for the amfAR fund to fight against Covid-19. It was streamed on YouTube channel Fashion Unites with thousands watching live. Famous designers that were there include Olivier Rousteing (from Balmain), Pierpaolo Piccioli (from Valentino) and Virgil Abloh (from Off-white and Louis Vuitton). Famous models that were there include Karlie Kloss, Winnie Harlow, Stella Maxwell and Joan Maxwell. The models did their runway in their kitchens, closets, bedrooms, etc. The runway show was a sight never seen before, as we get to watch models do catwalks in their own cozy houses (Ref. 7). 

3.2 Sales Go Down

Due to the fear of the pandemic, the government has issued nationwide shut down of non-essential departments, which include apparel stores. Clothing retailers must move their stores online to operate. However, online stores do not provide services that can only be done in physical stores such as clothing fitting, bringing down demand for clothing. Additionally, people stay at home more often, so the need for stylish clothes has diminished. Not only did the sales in the fashion industry go down significantly, the manufacturing of new collections of many brands have been paused. Retailers are left with a huge amount of unsellable stock, and even if everything were to go back to normal, the winter and spring collections would also be left unwanted as they are unsuited for the season (Ref. 8). 

The fashion industry has been hit hard by the pandemic, and some of the well-known fashion brands have filed for bankruptcy. The first major brand to fall was J. Crew, which is known for its jeans, khakis and basic clothing. CEO Jan Singer filed for bankruptcy protection on May 4 and hopes to achieve a financial restructuring. Neiman Marcus, another well-known department store brand, filed for Chapter 11 bankruptcy protection on May 7. Other brands that filed for bankruptcy include John Varvatos, J. Hillburn, True Religion, Bldwn, The Modist, Elizabeth Suzann, Anthom and J.C. Penney (Ref. 9).

LVMH, the largest luxury conglomerate, is also significantly impacted by COVID-19. Brands under this company include Louis Vuitton, Christian Dior, Givenchy, Fendi, Loewe, etc. Due to the massive decrease in sales and inability to manufacture more collections, its profit dropped by 27% compared to last year. In the first two quarters, LVMH’s net profit decreased by 84%, or $612.29 million. CFO of LVMH Guiony thinks that the reason for such staggering statistics is because of the closures of physical stores. Also, LVMH is vertically integrated. Guiony says, “We do manufacture inside, and so we suffer some lack of absorption of fixed costs.” This seemingly beneficial factor of the company has now turned against it (Ref. 10).

Kering, the second largest luxury conglomerate, has a similar experience to its competitor LVMH. Brands under this company include Gucci, Saint Laurent, Bottega Venetta, Balenciaga, Alexander McQueen, etc. Kering, compared to LVMH, is just a bit more affected, with its profit dropped by 29% compared to last year. Store closures and halted tourism played a major part in the decrease in sales just like it does with LVMH. 

3.3 Crisis in Bangladesh

Bangladesh is the second largest country in exporting garment. Most of the fast fashion brands we know import from Bangladesh. There are approximately 4,825 garment factories and 3.5 million workers who work in those factories. However, factory workers mainly comprise women and children. Their wage is about 3,000 taka a month, which is about $35. It is barely above the legal minimum wage, and they spend almost all of it to sustain their families. The working condition is horrible and some inhumane. On average, the workers work for 14-16 hours every day. Factory fires have killed off more than 400 workers, showing the extremely hazardous working environment they live in. Sexual harassment and assault are also very common in the factories (Ref. 11).

Despite the appalling situation described above, factory jobs are essential to many in Bangladesh. It can be said that the country is currently experiencing a humanitarian crisis, because the coronavirus is ravishing Bangladesh’s economy. 84% of the country’s revenue comes from the export of garment. Because of overstock issues and closures of physical stores, Western brands try to cut losses by cancelling orders in Bangladesh. The cancellation of orders amounts to about $2.8 billion dollars. About 1.2 million workers in Bangladesh are impacted by the cancellation, and more than 80% of factory owners admit that they must dismiss their workers because they are unable to pay for their incomes (Ref. 6). The shut-down of the factories to the workers are deadly because most lost their only source of income to support their families. Even those who stayed in operating factories face pay cuts that cannot substantially support them. There are no unemployment benefits. Hunger and poverty become an issue that is more urgent and deadly to the Bangladesh citizens than the coronavirus (Ref. 11). China is the largest country in exporting garments, so why is China not hit as hard as Bangladesh? The answer is simple. Compared to Bangladesh, China has a larger and more sophisticated economy. Although China was also hit by the decrease in global demand, the garment industry is only a small percentage of their whole economy. Thus, they are so much less affected than Bangladesh. 

4. Future of the Fashion Industry

In this section, we will discuss the future of the fashion industry including data protection, digital clothing, utilizing AI technologies in retailing and designing of clothes.   

4.1 Data Protection in the Fashion Industry

Due to California’s new Consumer Privacy Act, people are now relatively better protected against the misuse of their personal and transactional data. Even a behemoth such as Apple has developed several methods that make it more difficult for the Third Parties to gather data from consumers. Although this might damage fashion brands in the way that they have to rely less on third party data to promote to their targeted audience, there is a better alternative. They could turn to “influencer marketing”, which is the act of promoting products through influencers with a specific pool of followers. This strategy is helpful especially now with Instagram’s advertisement tools that aid in creating influencer campaigns that target specific audiences. This allows a stronger and more authentic connection to be made between a brand and a customer (Ref. 14). FashionNova, for instance, reached its success mainly through influencer marketing. The brand works with almost every fashion blogger on Instagram, most famous ones include Kylie Jenner, Cardi B., and Amber Rose. This allowed them to reach six million followers in just three years (Ref. 16)

The introduction of Blockchain has also led to additional protections for privacy of the consumer data. What exactly does it do? First, blockchains store information about the time, dollar value and date of a user’s transactions. Blockchains also record a “digital signature” unique to each user. Lastly, blockchains distinguish one item from another using special cryptographic codes called “hashes” (Ref.17).

The usage of blockchains have also become more prominent in the fashion industry. This would make transfer of authentic clothes or sneakers safer. Both Farfetch and LVMH have joined in offering blockchain-enabled purchases (Ref. 14). Arianee is a company based in Paris that specializes in blockchains protocols. One of the first projects is in the vintage fashion industry. Vintage fashion is the reselling of luxury items that are 20 years or older. Users are first provided with digital identities that record transfers of ownership. Then the digital identities are linked to the brand’s chip, QR or serial code. This would prevent the fakes from entering the market, as markets do not accept products without a digital certificate (Ref.18)

4.2 Digital Clothes

Digital clothes can take many forms. It can be digital skins of popular games, it could also be digital collections that can be worn on Instagram pictures, and on a digital closet of a website. 

We have already seen apparels in digital form in 2019. The most shocking and eye-catching one is Louis Vuitton moving into the gaming industry and designing skins for League of Legends champions (Ref. 14). Louis Vuitton has engaged in a multi-year partnership with Riot Games that include both physical and digital content. LV has already designed two skins for League of Legends (champions Qiyanna and Senna). These two characters with the Louis Vuitton outfit performed in a virtual hip-hop group called True Damage in Worlds 2019. LV also designed a travel case for the “Summoner’s Cup” (League of Legends logo). With Covid-19, the gaming industry proliferates in the sense that everyone has more time to play games now that they are staying at home. We might anticipate more collaborations between LV and Riot Games in the year of 2020 (Ref. 15). 

An iconic example of digital clothes on Instagram would be Carlings. The company launched its first digital-only collection called “Neo-Ex” featuring bright neon yellow jackets, blue latex chaps and a black visor. Each piece in the collection is worth about $12. After an item is purchased, designers would fit the piece onto a photo of a user that can be posted on social media. The collection was a success, and a second collection is possible to come (Ref.19).

4.3 AI Technology in the Fashion Industry

AI technology is so intertwined with the fashion industry nowadays, that 44% of fashion companies that have not adopted AI are facing bankruptcy. $7.3 billion dollars are spent on AI technologies in the fashion industry each year (Ref. 20). 

What is AI? It is artificial intelligence, which is the simulation of human intelligence processes by machines. AI in the fashion industry can be used in apparel designing, manufacturing and virtual merchandising.

Alibaba, a Chinese based giant company, also launched its fashion AI store. These AI features include smart garment tags and intelligent mirrors. There are also Bluetooth chips in every product sold. The AI technologies are incorporated into the smartphone app to provide users with better experiences (Ref. 20)

Macy’s feature of “On Call” is also incorporated with AI technologies. It can answer questions such as “where to find men’s perfumes”, and the machine will answer with directions. Questions such as navigation to the nearest retail stores can also be answered. This enabled the company to close more than 100 stores to save up to $550 million (Ref.20).

Tommy Hilfiger’s digital showroom was presented to us in 2019 and it is estimated that by 2021, all Tommy Hilfiger design processes will be done on 3-D design. The showroom was made with the purpose of decreasing waste, saving time, and increasing the speed of product flow. The technology was already used for 20 categories and the 2020 collection will be designed and sold digitally. The brand is still optimistic about further development of digital clothing and says that eventually people will be seeing themselves wearing products in store. This might be an evolutionary step in the buying of fashion pieces, and a great solution to the closures of physical stores in times of the pandemic (Ref. 21).

5. Proposed Solutions to Help the Fashion Industry

5.1 Current Issues with the Fashion Industry

The critical issues of the fashion industry have arisen due to the coronavirus, but in truth the industry has been struggling with these problems for a long time now. One of the major issues is the timing of delivery of collections. Right now, the collections of fashion pieces are presented on fashion shows six months prior to their arrivals in stores. This was an old method to control visibility and promotion of the fashion pieces. However, now in the age of digital media, this gap of six months leaves fast fashion brands more than enough time to copy their works, manufacture them and sell them to customers before the high fashion designers do (Ref. 13).

This delay in schedule also means that products are received way earlier to retailers than their expected purchasing period. Now seen as aged products, retailers would sell these products on discount, thus less people are willing to purchase the products at full price at their actual brand stores. Heavy discounting such as Black Friday sales really consume a huge part of the full-price sales. It makes sense, because no one wants to buy the same product at a higher price (Ref. 13).

Lastly, fashion brands spend a huge amount of money on the production of fashion shows. A 10-15 minutes fashion show might cost from $200,000 to more than $1 million. Fashion brands also must pay for travel fees of each designer, editor, journalist and buyer for about 8 times per year. All these factors are eating away the fashion brands’ profits. Then, with the onslaught of the coronavirus, these problems worsen. 

5.2 Changing the Fashion Show Schedule

The Rewiring Fashion Proposal is proposed by many novel apparel companies in hope to change the calendar of fashion shows and revise the rules in the industry.

One change proposed is to completely change the fashion show calendar. First, combine men’s and women’s fashion weeks to take place in January or February and in June. This would enable longer periods of full-price retail period, minimize costs on fashion shows and travel fees, and eliminate gender differences in fashion (asexual clothing). Also, rearrange the fashion shows so that they run exactly before the season-appropriate months. At last, combine the next season buying periods with current season fashion shows (Ref.22).

Another change proposed is to remodel the current fashion shows. The format of fashion shows has not been changed for fifty years; thus the system is outdated in this fast-growing digital world. First, the rule that every brand should show up for every season should be eliminated, the fashion shows should now be more flexible and welcoming to outsiders. Also, designers should have the chance to design their own stages and format of presenting their fashion pieces, instead of following the traditional way of “walking the stage” (Ref.22).

5.3 Focus on Online Presence

Now that it seems like the coronavirus will not go away for a while, retail stores should consider building on their online store structures. Stores that lack online stores or well-structured online stores are eliminated during the pandemic. Even now that physical stores can open, there is still government regulation in place that restricts the number of consumers allowed in the store. Most customers are still online (Ref. 23).

To recover the loss of sales incurred from the closedown of physical stores, apparel companies should learn now to make their website more appealing to a wider range of customers —– international customers. First, the website itself must look appealing, or at least professional. The appearance of the website is the first step to attracting new customers. Then, in order to attract international customers, first make sure that the website can be reached in different areas around the world. There should also be a variety of different languages that customers can select to use on the website, as not all customers are fluent in English. Next, photos of clothes on sale should stay consistent (same angle, etc.) and high-quality. Since customers are unable to visit physical stores, clear photography of clothes provides them with a better buying experience. Also, a size chart that can convert units of different systems is also important and convenient for international customers. Lastly, use paying methods that are common worldwide, such as PayPal or Mollie (Ref. 23).

Another way to boost sales is to collaborate with big e-retailers, not just ones from the U.S., but retailers from all over the world, such as Alibaba and Zalando. Investing in digital marketing is also key to thriving in these times of the pandemic (Ref. 23).

5.4 Changing from Mass Production to Made-to-Measure

Mass production is very common in the fashion industry. Before an apparel collection comes out, an apparel company first places an order in a factory, then the huge amount of manufactured clothes is shipped to stores to sell to the customers. This might have worked well in the past years, when there wasn’t pandemic. However, now due to the coronavirus, sales in the entire fashion industry has dropped significantly. Many orders have been cancelled, which leaves factories facing bankruptcy. On the other hand, companies are also left with huge amounts of unwanted stocks. A tactic in fixing this problem is to switch from mass production to made-to-measure (Ref. 23).

Some retailers in the industry, such as the haute-couture brands, have already made this kind of decision. Made-to-measure is the pre-buying of apparels before they are manufactured. This reduces the risk of having excess stocks as all manufactured goods are prepaid for. However, retailers might still have to work on educating the customers the significance of switching tactics, as they might be unwilling to prepay for apparels. The effort is worth it, as the tactic would help both the supply and demand chains of the fashion industry (Ref. 23).

5.5 Adapt to the New Reality

The pandemic has become our new reality, and the fashion industry must learn to adapt to the unique conditions of the coronavirus.

First, the demand for apparels have certainly changed. In the past, the business environment required a formal wardrobe. However, now that people are working from home, a need for a formal wardrobe has decreased. Although people still have to appear with formal attires on zoom or skype calls, people demand for more casual clothes now that most of them are staying at home. Retargeting casual products such as trousers or t-shirts might be beneficial for some companies (Ref. 23).

Secondly, in 2020, people are aware of the issues with sustainability in the fashion industry more than ever before (probably because the coronavirus leads to more exposures of such issues). It would be a good idea for companies to start incorporating sustainability into their core to gain trust and approval from customers (Ref. 23).

6. Concluding Remarks

This paper analyzes the impact of COVID-19 on the fashion apparel industry. The resulting supply chain disruptions and closure of physical brick and mortar stores has worsened the challenges for this industry which was already struggling and in need of reforms even before the pandemic.

The paper first explains the structure of the fashion industry. The industry has multiple complex segments: designing, manufacturing, distributing, marketing, retailing, and advertising. Every segment is essential to the survival of the industry, and the pandemic has disrupted many segments of the industry. In terms of its relative significance for the overall economy, the fashion industry is one of the largest employers in the U.S. economy and it makes up approximately 4% of the average Gross Domestic Product. The U.S is also the largest importer in the world of different fashion pieces that range from shoes, apparel and clothing accessories. Thus, a relative decline of the U.S. fashion sector not only adversely affects our country, but also the global economy.

The impacts of Covid-19 pandemic on the fashion industry are also presented in this paper. The resultant cancellation of fashion shows affected the entire system of the fashion industry, and it has been forced to turn to a new route for promotions and marketing i.e. online. The drop in sales has forced not only small, but relatively larger businesses in the industry to face bankruptcies. Even the largest conglomerates in the industry are severely affected by the pandemic. An entire country, Bangladesh, is faced with an economic as well as a humanitarian crisis due to the cancellation of fashion garment exports caused by the pandemic.

The possible future scenarios of the fashion industry are also presented and discussed in the paper. Due to legal restrictions such as California’s new Consumer Privacy Act, data protection is enhanced in the industry with the advanced usage of Blockchain technology. The pandemic has also resulted in challenging ways to meet the crisis. For one, this has brought the internet a new possibility to show off your fashion styles, through the “digital clothes”, that can be worn in games, social media posts and digital closets. The AI technology will eventually be incorporated into online and physical apparel stores to better the experience of customers. 

The paper recommends many solutions regarding the fashion show schedule, online stores and marketing, mass production and adaptation to the new reality considering the pandemic. A reform movement called #rewiringfashion has been proposed to shorten the fashion show schedule and combine men’s and women’s fashion shows. Investment in and dedication to online presence are also crucial for survival of small businesses in the current situation. To relieve the damages done to the supply side of the fashion industry, mass production of apparels must be adjusted into made-to-measure. 

Since we are still amid the COVID-19 pandemic, its full spectrum of consequences has not revealed themselves and there is a heightened element of uncertainty. This paper has highlighted the nature of the problem and tried to provide a few of the emerging solutions to meet the challenge. There will be a need for an ongoing analysis and research effort to track the impact of the pandemic on this very important industry to contend with the consequences in a successful manner. 

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About the author

Rebecca Chen

Rebecca is a senior at the Sage Hill School.

The post The Impact of COVID-19 on the Fashion Industry in the United States appeared first on Exploratio Journal.

Introduction

The Coronavirus pandemic (COVID-19) is a worldwide medical and economic emergency caused by a newly discovered coronavirus. The first human cases of COVID-19, were reported by officials in Wuhan City, China, in December 2019 which then spread to many countries including India. India reported the first confirmed case of the coronavirus infection on 30 January 2020 in the state of Kerala. And now India has a total of 8.27 million cases as of October 2020 making it the second worst hit country after the US.

The economic impact of the pandemic has been largely disruptive. During lockdown, employment has come down by a large number, GDP rates are declining and many businesses are shut down. According to the World Bank, India is likely to record its worst growth performance since the 1991 Liberalisation this fiscal year. 

In May, The Indian Government announced a 20 lakh crore (307.6 US billion dollars) economic package consisting of both fiscal and monetary measures which includes reforms which were previously announced. This package includes policies which affect micro, small and medium businesses (MSMEs), migrant workers, agriculture etc. Mr. Modi said that this package accounts for about 10 per cent of the Indian GDP. However, according to the estimation by Barclays and HSBC India the package is only worth about 1-2 lakh crore (15.38-30.7 US billion dollars) which accounts for about 1 per cent of the Indian GDP.

Since the Indian economy was already slowing down before the pandemic due to the 2016 Indian Banknote demonetisation and Infrastructure Leasing & Financial Services crisis, I feel that more action needs to be taken by the Indian Government in order to improve the Indian economy for the long run. I will be sharing my thoughts and opinions on the current economic situation in India and will also be discussing some potential policies regarding employment, interest rates and corruption. 

Discussion 

Employment and Unemployment Rates

If we compare the unemployment rates before and after Covid-19, we see a huge spike. This is mainly due to the nation-wide lockdown imposed during the months of March, April and May. However, after the 20-lakh crore (307.6 US billion dollars) economic package was announced in mid may there seems to be a decrease in unemployment rates particularly in rural areas. As of 15^th October, the unemployment rate in India is 6.8 per cent while in the urban sector its 7.9 per cent and in the rural sector 6.4 per cent. These rates are significantly low when compared to the rates in April (before the package was announced) where the unemployment rate in India was 23.52 per cent, in the urban sector it was 24.95 per cent and in the rural sector 22.89 per cent.

The unemployment rate in October is almost 3 times less than what it was in April. Also, the unemployment rate as of 15^th October is much lower than pre-covid rates as well. In December 2019 the unemployment rate, as seen in Table 1, is 7.60 per cent in India, 9.02 per cent in the urban sector and 6.93 per cent in the rural sector. Comparing these rates to the current rates, unemployment has come down by approximately 1 per cent in India.

If we look at table 2, we would see that the most hard-hit age group is 18 to 25 years. Even before Covid-19 struck the unemployment rate for younger people was much higher than the older people.

This may be due to the fact young workers are not appropriately qualified and lack the needed skills.

From the table 3, we can see that the majority of workers have less than ten years of formal education which is not nearly enough to work. Only 3.6 per cent of workers have a diploma.

If we compare the unemployment rate by work types, we would see that unemployment during Covid-19 in the informal sector is almost 3 times higher than the formal sector. But, before the pandemic, unemployment in both the formal and informal sector was almost the same. This shows the informal sector has been severely affected by Covid-19 due to the lack of labour laws, job security, insurance schemes, pension etc.

The average labour participation rate in the first three weeks of September was 40.7 per cent. These compare poorly with the 40.96 per cent recorded in August. The average LPR from June through mid-August was almost 40.9 per cent. This average has dropped to 40.45 per cent for the period mid-August through mid-September.

A falling labour participation rate indicates a smaller proportion of the working age population is employed or, is unemployed and is looking for employment. It can also mean people who are still studying or people who are retired are more in number in India. 

The employment rates in India stood at 37.6 per cent, 37.5 per cent and 37.9 per cent in the first three weeks of October, lower than 38 per cent recorded in September. The employment rate stood at 39.4 per cent in 2019-20. The average rural employment rate stood at 39.1 per cent in the first three weeks of October is lower than 39.8 per cent in September, which was its highest level since the lockdown, and was closer to 40.7 per cent in 2019-20. The average employment rate in urban India in the first three weeks of October was 34.8 per cent in September but still over 200 basis points lower than the 2019-20 level.

From my point of view, even though unemployment rates are coming down, there has been a decline in employment rates as well. The Indian Government needs to take action to improve employment as high employment would reduce inequality and prevents relative poverty from those who are unemployed. It would improve business and consumer confidence which will encourage higher growth in the long term. 

Indian GDP Rates

After the announcement of the economic package, India’s GDP estimates were downgraded even more to negative figures signalling a deep recession. Estimates from the World Bank says GDP in India will contract by 9.6 per cent in FY21. On 22^nd May 2020 the RBI governor Shaktikanta Das also said India’s GDP growth will remain negative in FY21.

State Bank of India research predicts a contraction of over 40 per cent in the GDP in Q1 FY21. On a quarterly basis, India’s growth rate fell from around 8 per cent in Q4 FY18 to a new low of 4.5 per cent in Q2 FY20.

India’s real GDP declined y-o-y by 23.9 per cent in the quarter ended June 2020, reversing the economy back to its quarterly level of less than rupees 27 trillion.

The reason why the Indian GDP is declining rapidly may be due to the decline in consumption demand from private individuals, demand by private sector businesses, demand for goods and services generated by the government etc.

Looking at the percentage changes (year on year) in Table 4 we can see private consumption has fallen by 27 per cent. Business investments is half of what it was last year in the same quarter. Net export demand has turned positive in this Q1 because imports have crashed more than its exports.

Although government expenditure went up by 16 per cent, in my opinion, it is nowhere enough to compensate for the loss of demand in others sectors of the economy which has in turn led to decline in the Indian GDP.

Business Creation and Business Death

According to the data provided by the Minister of State Finance and corporate affairs Anurag Singh, the number of companies registered from April to August 2020 by all Registrar of Companies (ROCs) is 51,807. However, the applications for setting up of new companies were received prior to the global pandemic. So, we still are unsure about the rate of creation of businesses during the period of Covid-19 as legitimate sources of data on this subject have not yet been provided.

Before COVID-19, a total of over 6,80,000 companies were closed across India. The number of closed companies account for 36.07 per cent of the total 18,94,146 companies that are registered under Registrar of Companies. Out of the total 6,80,000 companies that have been shut, over 1,42,000 were in Maharashtra, more than 1,25,000 were in Delhi, over 67,000 were in West Bengal while no company was closed in Sikkim.

The obvious reasons why businesses are shutting down so quickly is due to the rapid decline in demand for goods. Businesses related to online grocery, healthcare and essential goods are booming as they are in popular demand.

To improve business creation and lower business deaths the government should try and lessen the burden on businesses in order to function during the pandemic.  The Indian government should allow businesses to continue to exist by giving business employees a paid holiday instead of just laying them off.  The government could also reduce paperwork, lower taxes or provide tax refunds as well.

Agricultural Sector

The agricultural sector is an important part of India’s economy. It is among the top two farm producers in the world with China being the first. This sector provides approximately 52 percent of the total number of jobs available in India and contributes about 18.1 percent to the Indian GDP. This is perhaps the reason why the government has devoted a whole tranche of the economic package to this sector.

GDP from Agriculture in India decreased to 4546.58 INR Billion in the second quarter of 2020 from 5306.26 INR Billion in the first quarter of 2020.

However, according to the quarterly estimates of GDP released by the National Statistical Office the gross value added (GVA) from agriculture, forestry and fishing grew by 3.4 per cent at constant prices in April-June 2020 over April-June 2019. This is against a 22.8 per cent YoY decline in overall real GVA for the quarter.

The Indian Government has introduced a lot of policies in the agricultural sector to assist farmers and also to strengthen the overall farm sector. This has led to a declining rate in unemployment especially in the rural areas as mentioned above. Seeing this, we would expect food prices to come down as well.

But the cost of food in India increased 10.68 percent in September of 2020 over the same month in the previous year. It is the highest food inflation since February and ahead of the festival season. Prices of vegetables jumped 20.73 percent, meat and fish 17.6 percent and pulses 14.67 percent.

Although, the Indian government has done well in introducing policies to improve the farm sector, I feel they need to focus on lowering food prices because if this trend continues a lot of people would not be able to afford food at such high prices.

Transactions

Unified Payment Interface (UPI) saw an increase of 8.3% in the total transaction volumes between May and June 2020, according to data published by the National Payments Corporation of India (NPCI). For the same period, the amount transacted went up by 20%.

The total number of transactions in June 2020 was around 1.8 times higher than in the same month last year.  The total amount transacted during the month stood at Rs 2,61,835 crore (approximately 35 billion US dollars), up 1.79 times year-on-year as seen in Chart 5. There is a steep descent following the increase in the month of April, which was likely due to a nationwide lockdown that was imposed to prevent the spread of Covid-19.

The average amount per transaction increased to Rs 1,958 for June 2020 as seen in Chart 6. The average had been trending up since November 2019, but saw a dip in April, and a minor dip in March.

If we look at Chart 7, the number of transactions increased by 102.4 million in June, whereas the total amount transacted went up by Rs 43,443.4 crores (nearly 6 billion US dollars). In the previous month (May 2020), volume had increased by 234.9 million and the amount transacted grew by Rs 67,250.9 crores (approximately 9 billion US dollars).

With an increase in transactions and amount per transaction, cash is moving faster, which means there is an increase in economic activity, this may in turn lead to an increase in economic growth which is much needed for the Indian economy.

Policy Recommendations

Even though unemployment rates in India have come down significantly during the past few months, these rates are still not ideal for a developing economy. The Indian Government should be trying to furlough workers for a certain period of time. This is exactly what the German Government is doing. The furlough programme in Germany also known as kurzarbeit is a social insurance programme whereby employers reduce their employees’ working hours instead of taking away their jobs. Under kurzarbeit, the government normally provides an income replacement rate of 60 percent (more for workers with children).

Which means that a worker receives 60 per cent of his or her pay for the hours not worked, while receiving full pay for the hours worked. So, a worker would only experience a 10 per cent salary loss for a 30 percent reduction in hours. This scheme was very helpful in keeping the employment stable during the global financial crisis.

This policy without a doubt reduces unemployment, since workers do not lose their jobs and also protects workers’ income as well. As COVID-19 will have a much larger impact on the German economy than the global financial crisis did, workers will now have greater income protection as the replacement rate will increase. The replacement rate, starting at 60 per cent for the first three months, will increase to 70 per cent during the 4^th to 6^th months, and further to 80 per cent from the 7^th month. The maximum duration of the program has been extended to 21 months. Moreover, the coverage will be expanded to temporary workers as well. In my opinion, this is an excellent policy to be used during times of economic crisis. The Indian Government should be looking at policies similar to Kurzarbeit to reduce unemployment and increase income protection.

The real interest rate in India was reported at 6.93 per cent in 2019, according to the World Bank collection of development indicators, compiled from officially recognized sources.

The Reserve Bank of India should be looking at lowering real interest rates to zero or negative figures. This would encourage low-cost borrowing and greater access to cheap credit by firms and individuals. The benefit of low interest rates is their ability to stimulate economic activity. 

Lowering interest rates would also increase business investment which would in turn benefit the Indian GDP. The RBI can help spur business spending on capital goods, which also helps the economy’s long-term performance. Businesses’ increased capital spending can then create jobs and consumption opportunities as well.

Another benefit of low interest rate is that asset prices can be raised. When money supply increases, people find themselves with more money balances than it wants to hold. In response, people use these excess balances to increase their purchase of goods and services, as well of assets like houses. Increase demand for these assets, raises their price.

The zero interest policy has been implemented in the wake of several economic recessions over the last two decades. First used by Japan in the 1990s, the U.S., the U.K. and EU nations have turned to lowering real interest rates to zero to stimulate economic activity during economic recessions.

Another policy known as Quantitative Easing should be implemented by the Indian Government. QuantitativeEasing involves a central bank (The Reserve Bank of India) printing money and using that money to buy government bonds (long term debt) in order to inject money into the economy to expand economic activity.

Large-scale purchases of government bonds lower the interest rates on those bonds. This pushes down on the interest rates offered on loans (e.g. mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.

So, it works by making it cheaper for households and businesses to borrow money which would encouraging spending. 

Lower long-term interest rates will keep business confidence high as well as giving commercial banks extra deposits to use for lending.

Quantitative Easing can also make India competitive overseas. Particularly it leads to a depreciation of the exchange rate which then makes export industries more price competitive.

It would also ensure that inflation does not fall below the central bank’s inflation target. By implementing this policy, the government would be able to stimulate demand and long-term growth. It would also help keep the economy out of recession. 

Corruption in India is an issue which affects the economy in many ways. Not only has it held the economy back from reaching new heights, but rampant corruption has stunted the country’s development. Especially during COVID-19, people are being exploited and funds are being misused. 

If we look at Map 1, bribery persists in almost all the states at high levels. The government should be looking at introducing a National E-Government programme wherein, Indian citizens instead of going to centres to pay taxes, or to pay their electricity bill, do this online on an electronic device. Especially for those in rural areas, the government should provide electronic devices in centres for those people who don’t have access to computers or the internet. This would eliminate bribery. When people come to government counters or centres, they are bribed by government officials but, by introducing online websites this would avoid people coming in contact with government officials or members of a political party. By introducing this programme, the government should also educate people on how to use their online platform to pay their taxes or collect rations through the internet.

The government should also strengthen laws against corruption and there should be good enforcement of the Act or the law. Despite the Prevention of Corruption Act 1988, corruption is still flourishing. This is because of weak actions and proceedings towards corrupt people. People don’t have any fear of this act and the court. The act must be revised for better implementation.

Indian citizens should be educated on this issue as those who are uneducated do not know about the process, provisions and procedures through which they can get justice. Corrupt public servants often demand bribes. It is due to unawareness in the field of law, public rights and procedures thereof that a common and an uneducated suffer out of the corrupt society. This suggests that if we are educated, we can understand our rights well. The government should create awareness on how corruption is polluting the Indian Economy and how people are contributing to it without even realising. 

We could also reduce corruption levels by bringing in reforms to improve productivity, to increase the salaries of the civil servants matching the bribes demanded by them. This way, civil servants would stop the act of bribery and thus reduce corruption. Doing this would also generate tax revenue which is good for the state. Reducing corruption would also benefit the society as people would have more trust towards the government. It would also increase investment as corruption levels are low and businesses would have much more faith in the government.

Conclusion

Overall, the Indian economy has been badly hit. With high unemployment rates, high food prices, negative GDP figures and many businesses shut, the Indian economy may take years to recover from this crisis especially with high levels of corruption present.

By implementing a policy similar to the German furlough scheme, employment would increase in India as people would know that their income is protected. By lowering interest rates, business spending and investment would increase which would create more job opportunities benefitting the unemployment crisis. And last and most importantly, reducing levels of corruption would automatically improve the Indian economy as corruption persists at all levels and plays a major role in the declining trend of the Indian economy.

Ending on a positive note, Duvvuri Subbarao, a former RBI governor, said that India could look forward to a V-shaped recovery. A V-shaped recovery might be the best outcome during the pandemic

References

Mentor: Dr. Eric Golson, University of Surrey

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About the author

Bhumika Appaswamy

Bhumika is an 11th grader at the NPS International School. She is very interested in the field of economics and hopes to pursue it at at a higher level.

The post The Impact of COVID-19 on the Indian Economy appeared first on Exploratio Journal.

Abstract

The COVID-19 epidemic has been spreading at a speed which is 1,000 times faster than SARS, covering the world. Since the first infection of the COVID-19 was confirmed in China on December 31 of 2019, the total number of global cases has exceeded 1 million as of early April 2020 and surpassed 4 million a month later. 

To prevent the spread of COVID-19, most nations implemented lockdown measures including border closings, movement restrictions, stay at home orders, closing schools, and business restrictions and prohibitions. This has led to unprecedented social and economic impact on the global community. 

As a neighboring country of China, South Korea has experienced the spread of COVID-19 in  a particularly intense way and earlier than most other countries, reached a peak from February to April. However, Korea has contained COVID-19 effectively without a lockdown and movement restriction measures, maintaining the normal life pattern and business operation, which was backed by taking active steps including massive testing on a large scale, public disclosure of the relevant information, and social distancing campaign. These efforts consequently have made South Korea evaluated as a successful case in response to COVID-19.

South Korea is particularly sensitive to severe economic blows, since it has a high dependency on exports and is deeply engaged in the global supply chain. Due to factory closings and lockdown measures in many trading nations, the production and supply of goods has been hit severely, while the sales of corporations have been drastically diminished due to movement restrictions and reducing purchasing powers caused by sharp rise of unemployment in the global markets. South Korean economy suffering was from both supply and demand

Besides, since South Korea has a very high percentage of self-employed business among the OECD member nations, the economic impact resulting from collapsing self-employed business had an enormous negative influence on the overall economy of Korean society. The lack of resilience or self sufficiency among self-employed businesses in South Korea caused this phenomenon, whose economy in scale is relatively lower than other OECD nations.  

Based on these structural characteristics of South Korean economy, the research is to look into the impact given to the overall Korean economy-mainly manufacturing, aviation business as key industry, self-employed business, and start-ups from February to April when COVID-19 hit Korea the hardest, and contemplate the direction which the South Korean government and enterprises should move toward to tide over the difficulties of the post-COVID-19 era.

Introduction

As the coronavirus (hereinafter called as “COVID-19”) has been spreading at a speed, 1,000 times faster than SARS to cover all over the world including Europe & US within only two months after the outbreak in China, the WHO finally came to declare COVID-19 a pandemic. As of April 30, the total number of the infected patients confirmed reached to more than 3,000,000. It took only 4 months to infect 1 million people all over the world after its first outbreak in China. 

A total of 151 countries and territories have imposed bans on people coming from South Korea, which has had a significant impact to the South Korean Economy. Since the first patient of the COVID-19 was confirmed on January 20th 2020, South Korea’s total infections turned out around 10,700 as of April 30, which was the 35^th rank, following US, Spain, Italy, France, Germany, UK, Turkey, Iran, Russia, China, Brazil, Canada, Belgium, Netherlands, India, Switzerland, Peru, Portugal, Ecuador, Ireland, Sweden, Saudi Arabia, Israel, Austria, Mexico, Singapore, Pakistan, Chile, Japan, Poland, Romania, Belarus, Qatar, and UAE. To prevent the spread of the COVID-19, most nations implemented lockdown measures including border closings, movement restrictions, stay at home orders, closing the school, and business restriction and prohibitions, which has eventually given unprecedented social and economic impacts to the global community. 

All prominent political and economic leaders have characterized the current economic crisis by COVID-19 with one voice as follows:

• It’s not limited to a regional crisis but has developed to be a worldwide crisis. 

• It brings significant challenges to both the real economy and financial economy.

• It is expected that the usual monetary and fiscal measures have a limited effect on economic recovery.

 • Putting an end to this pandemic quickly is the key to getting back to normal. 

UNCTAD estimated that the shock of COVID-19 might trigger a recession in some countries and a deceleration of global annual growth to below 2.5 per cent – often taken as the recessionary threshold of the global economy, while OECD projected global growth could fall to 1.5% in 2020, almost half the 2.9% rate it had forecasted before the outbreak.

It’s somewhat undeniable the world is on the brink of the deep global recession, which has never been experienced. In this regard, Morgan Stanley lowered its first-quarter US GDP forecast to -3.4% from -2.4% and its second-quarter US GDP forecast to -38% from -30%. 

Fitch, the credit rating agency, expected world economic activity to decline by 1.9%, eurozone GDP to fall by 4.2% and the U.K.’s GDP to decline 3.9% this year. It is viewed that the South Korean economy heavily depends on trade due to the small domestic market. According to OECD data, Korea’s dependency on exports was 41.6% of GDP in 2019, which was the second highest dependency ratio followed by 46.9% of Germany among G20 countries. Such a heavy dependency on overseas markets tends to make the national economy more easily exposed to risk, whenever overseas markets have any economic turbulence. 

Especially, leading industries of the South Korean economy such as automobile and electronics have exquisite global supply chains from China as well as other countries. As the Korean economy has intricately connected with other global partners, the current epidemic issue greatly imposed impact on Korean markets. 

Another feature of the South Korean economy is the high ratio of self-employed business like restaurant, cafe and grocery, which is 25.1%. It’s much higher than other OECD member countries. Since movement restrictions and fear of infection at places like restaurant, café, and small shops make people stop visiting them to buy goods,  it is assumed that the current situation is causing fatal damage to these self-employed business owners.

Additionally, the South Korean government has adopted a fiscal policy of increasing spending on social welfare since 2018, which inevitably increased the burden on government expenditure. Furthermore, the current economic crisis struck by the outbreak of COVID-19 is bringing up additional public expenditure on a large scale to prevent the national economy from plunging, which would give a negative impact on the South Korean government’s financial soundness. The Korean government’s budget was 475 trillion won (US$387 billion) in 2019, and is projected to be dramatically increased up to around 560 trillion won(US$456 billion) in 2020 with revised supplementary budget on several occasions due to COVID-19. 

Therefore, this research will review the impact and damage on the South Korean economy by COVID-19 during the last three months, from February to April, in relative economic sectors. It will also provide a base to consider the risk by a pandemic as a critical variable, which is expected to occur more frequently in the future, especially in planning the company strategy as well as adopting the measures for national finance soundness.

1. The growth of Korean economy wrecked by COVID-19

Comparing this crisis with the previous economic crisis that South Korea has experienced, the current situation has quite different and much more serious characteristics. The Asian Financial Crisis in 1998 was limited to a few Asian nations, and in South Korea the economy recovered quite fast, helped by a jump in exports; while the financial crisis in 2008 South Korea was relatively unaffected. When Severe Acute Respiratory Syndrome (SARS) occurred in 2003 and the Middle East Respiratory Syndrome (MERS) did in 2015, those diseases spread into South Korea and resulted in local market slowdown and temporary stagnation of the domestic economy. But in both cases, the economic impacts remained relatively short. Such a ‘V-shaped’ economic recovery, which has been shown in past contagious disease cases, won’t be easily applied this time.

The economic crisis struck by COVID-19, in which the financial and real economy is collapsing simultaneously, has led to a deeper and more serious crisis. Korea will suffer both a supply and a demand crisis. As the lockdown in overseas markets including US and Europe is resulting in the sharp rise of unemployment, it naturally leads to a reduction in the purchasing power; accordingly the demand is radically decreasing all over the world, which  badly impacts South Korean exports. 

Experts such as the IMF and EIU (Economist Intelligence Unit), view the global economy as having stepped into a recession already. If the vicious circle-“breakdown of supply chains and diminishing consumption ⇒ decrease in sales ⇒ bankruptcy of company ⇒ restructuring ⇒ job loss ⇒ decline of demand and consumption”-occurs, global consumption declines could develop into longer structural problems from temporary phenomenon. Furthermore, economic activities in both US & EU occupying 50% of the world consumption has been paralyzed, which leads to a drastic shrinkage of demand in the global market. 

The real economy is usually based on traffic and transaction, which was destroyed by the fear of COVID-19 infection in a short time. The South Korea Customs Service announced total exports from April 1 to April 20 amounted to US$21.7 billion, which is a 26.9% reduction from the same period of last year. The daily average export ended up at US$1.5 billion, which is 16.8% reduction from the same period of last year.

COVID-19 first hit China, Korea, Japan and then went over to the US and Europe. Infectious disease naturally makes the regional economy in a downturn, which eventually shrinks the export of that region.  The more Korean economy depends on other countries, the worse Korean economic situation is getting because the diminished market demand of those countries results in lessening the volume of export from South Korea.Those regions are the major trading partners of South Korea. According to the South Korea International Trade Association, last year the Korean exports to US, China, Japan and Europe were US$307.13 billion, accounting for 56.6% of total exports, US$542.23billion. Especially, the exports to China, the epicenter of the COVID-19, were US$136.22billion, a quarter of total South Korean exports. 

Regarding the supply crisis, the damage from the Chinese supply chain gave the biggest shock to the world. Chinese factories which cover one-third of the world’s manufacturing, stopped for several months and the supply chain has been struck heavily. Enterprises in other countries regret they have heavily depended on China for intermediate production, the origin of COVID-19. Hubei Province, where Wuhan city is located, has played a major role as factories of automobiles, electronics and pharmaceuticals. Until the outbreak, 60% of the top 500 global companies in terms of annual revenue, operated the manufacturing facilities in Hubei Province.   

Until now most major multinational enterprises have grown up by producing their goods in China or by exporting the intermediate inputs to Chinese companies. This recently unprecedented disruption, however, has proven the more dependent a company is on Chinese markets, the more risks a company has. Apple, the largest company in the world in terms of aggregate value of listed stock, reduced its production in China by 50% as COVID-19 crisis accelerated.

The United Nations Conference on Trade and Development (UNCTAD) explained the impact made by the Chinese supply chain as: “A reduction in Chinese supply of intermediate inputs can affect the productive capacity and therefore the exports of any given country depending on how reliant its industries are on Chinese suppliers. For example, some European auto manufacturers may face the shortage of critical components for their operations, companies in Japan may find it difficult to obtain parts necessary for the assembly of digital cameras, and so on. For many companies, the limited use of inventories brought by a lean and just-in-time manufacturing process would result in shortages that will impact their production capabilities and overall exports. Overall, the most impacted economies will be the European Union (machinery, automotive, and chemicals), the United States (machinery, automotive, and precision instruments), Japan (machinery and automotive), the Republic of Korea (machinery and communication equipment), Taiwan Province of China (communication equipment and office machinery) and Viet Nam (communication equipment)”.

Besides China, the South Korean factories in other countries including the US, Europe, and India have had to stop to prevent the spread of COVID-19, and given the impact to supply of goods. In 2019, South Korea has barely managed to maintain 2% of growth rate mainly initiated by government expenditures, and its real economy has been in vulnerable status. Under such an economically poor situation, South Korea has been directly attacked by the COVID-19 outbreak. 

According to Chinese National Bureau of Statistics, this year China’s first-quarter GDP shrank by 6.8 % from a year ago, the first decline since 1992, when official quarterly GDP records started. Industrial production also fell by 1.1% in March, after a 13.5% decline over January and February. As Korean economy heavily depends on China, the simultaneous recession between two economies can’t be avoided. 

The International Monetary Fund (IMF) predicted that Chinese growth rate this year could be at around 1.2% and also revised South Korean growth rate from 2.2% to -1.2% because given South Korea’s high dependency on trading, the growth forecast is constrained by very weak external demand. Meanwhile, Korea Economic Research Institute (KERI) forecasted that the annual Korean economic growth this year would be -2.3%, the lowest level since the IMF financial crisis. It was the first time this institution forecasted negative growth. If the forecast on the growth of Korean Economy turns out to be correct, South Korea will experience the negative growth for the first time since the 2^nd oil crisis (-1.6%) in 1980 and the Asian Financial crisis (-5.1%) in 1998.

To prevent the world economy from plunging infinitely, each nation has unveiled unprecedented fiscal policies. On March 24, the South Korean government doubled the rescue package to 100 trillion won ($80 billion) from the previous package of 50 trillion won. The new package provides a safety net for conglomerates as well as support for small and medium-sized enterprises and self-employed business. In addition to this, on April 22, the Korean government revealed plans for an additional 85 trillion won (US$68.8 billion). A fund of 40 trillion won will be given as aid to key industries, including the airline, auto, shipping, shipbuilding, machinery, telecommunications, and power industries. And 35 trillion won is to be used as financial support for small businesses as well as buying more corporate bonds, and 10 trillion won is to increase job security. It is unclear if this ‘Helicopter Money’ can save the economy. However, it is quite obvious government financial assistance to the withering corporates as well individuals are the only solution to help them survive till COVID 19 comes to a halt.

2. Manufactures hurt by the broken supply chain 

As COVID-19 has shrunk the global demand and supply dramatically, South Korea is one the most vulnerable countries, given its heavy dependence on trade. Korea has grown to be a leading export-driven country with global supply chains, from one which had been dependent mainly on its domestic production lines.  According to the South Korea International Trade Association, the ratio of Korean offshore production facilities have been expanded in the fields of smartphones, automobiles and consumer electronics, while the ratio of overseas manufacturing of American and Japanese firms has decreased since 2016 due to the reshoring policies, mainly driven by tax breaks and operation subsidies.

Since the first patient of COVID-19 was confirmed last January in China, a large number of factories have been closed for three months but reopened as the spread of COVID-19 slowed down. During the shutdown periods in China, Korean Conglomerates such as LG Chem, SK Innovation, Hanwha Q CELLS that operated in China naturally closed their plants. Only a semiconductor factory of Samsung Electronics located in Xian held its production around 100% in January and February even when COVID-19 spread rapidly. As COVID-19 spread actively in Europe and the U.S. in March, Korean factories in those areas faced the shutdown of their plants, which eventually gave the significant blows to Korean leading industries such as electronics, automobiles, and chemicals.    

As soon as Eastern European countries joined the European Union in 2004, Korean companies set up the business models that goods are produced in Eastern European countries mostly to be sold in Western European countries. Since the Eastern European nations are geographically close to Western ones and access freely there, it leads naturally to lower the production and transportation cost. According to the Korea Trade Investment Promotion Agency, around 160 out of 210 South Korean production sites in Europe are concentrated in four Eastern European countries.

Samsung and LG faced “production cliffs,” which resulted from the current crisis in all manufacturing factories except South Korea and China in March and April. As the production shortfall in Indian factories followed by the production termination in the U.S. and Europe was experienced, South Korean automobile manufacturers faced severe difficulties both in production and sales. IHS Markit, a global market research institute predicted global auto production could fall by 1.4 million vehicles this year due to the “shutdown of factories“ in Europe and the U.S. In this regard, Korean leading auto companies, Hyundai Motor Company and KIA Motors, which together account for the world’s fifth biggest carmaker by sales, are experiencing severe turmoil, resulting in making the component manufacturers get into difficulties at the same time.

In addition to “the production cliffs,” the sales have a tendency of decline too. It is worried that Hyundai Motor Company, Samsung Electronics, LG Electronics, more than 50% of whose revenues come from Europe and the U.S., will have a fatal blow in their sales. In particular, Hyundai Motor Company, which sold 1.27 million autos, of which 710,000 were in the U.S. and 560,000 in Europe respectively, accounting for 51% of its total revenue. It is expected the administrative orders of governments for closing stores in Europe such as France and Italy will decrease the possibilities of auto sales due to the rapid reduction of national incomes in the European Nations. 

Moreover, the sales of Hyundai Motor Company in China, where the official dealers temporarily closed their business due to COVID-19, declined to 1,007,000 cars which was a 97.4% drop from last year’s result, 38,017,000 cars. According to the Korea Automobile Manufacturers Association (KAMA), the exported automobiles in February were at the lowest levels since August 2003 with a 26.9% drop compared to the same period in 2019. It is one third of the highest sales record (304,774 cars) in December 2014.   

Korean electronics producers such as Samsung Electronics, LG Electronics in major markets including North America and Europe were blocked to seek the viable niche. It was regrettable that the biggest electronics retailer such as Best Buy in the U.S. and MediaMarkt in Germany have closed their offline stores. Samsung Electronics and LG Electronics whose sales of consumer electronics in the U.S. and Europe contribute to almost 50% of their whole revenue of consumer electronics, faced the difficult situation that they could not sell goods even if they were eager to.  Best Buy, which runs 1,009 stores nationwide in the U.S has shortened business hours and restricted the entrance of customers, which actually moved into the stage of practical closure. More than 50% of consumer electronics sales of Samsung Electronics and LG Electronics in the U.S. and Canada were generated through Best Buy in the field of offline market. 

Samsung Electronics and LG Electronics in European markets have enhanced the offline sales networks through MediaMarkt alongside with the online sales networks such as Amazon to increase the European market shares. However, MediaMarkt has closed 850 stores in major European countries such as Germany, Spain, and Italy from the middle of March, and this did plenty of damage to these two Korean companies. Meanwhile, according to the Counterpoint Research, a global market research institute, sales of smartphones in February declined 14% compared to the same period of previous year, though the global drop of smartphone sales was less than expected. Perhaps in a sign of things to come, however, sales of smartphones in China, an origin country of outbreak, have declined almost 38%.  

The reason for the sales dropping less than expected is the demand in the offline market has been switched to the online market, which made the sales in the online market grow steadily. Samsung Electronics which took the first place in the global market shares(21.9%) last February is relatively less impacted by COVID-19 than other competitors because the production lines are diversified to Vietnam, India and Korea, and the demand of Samsung smartphones had not been as high in China even before the outbreak. On the contrary, Apple which ranked 2^nd place (14.4%) in global market shares faced the difficulty in global sales for almost two weeks in February due to the production and supply disruptions in China. 

The semiconductor industry, a major leading export industry of Korea, seems to be impacted relatively less compared to other industries. The total export of Korean semiconductors in 2018 was US$126.7 billion, which broke through US$100 billion for the first time and occupied 20.9% of total Korean exports. The Korean Custom Service has recently released statistics of Korean import & export. According to it, the export of semiconductors has increased 20.3% from March 1 to March 20 compared to the same period of previous year, but the export results from April 1 to April 20 turned out to decrease 14.9% from the same period of last year. In 2019 the total export of semiconductors recorded US$93.9 billion, still occupying 17.3% of total Korean exports. It is clearly proven that semiconductors are an industry with considerable magnitude in South Korean exports. It shows, however, the sales of semiconductors increased slightly in March and gradually came to decline in April compared to the same period of last year.

Timing is important. If the spread of COVID-19 in the global community slowed down in two months, the world economy could be on track for recovery, which would continuously spur the demand of semiconductors. But if the pandemic continued into the summer, a totally different scenario should be taken into account. Semiconductors would be eventually damaged by the reduction of demand for electronic devices such as smartphones and PCs by COVID-19. The International Data Corporation (IDC), a global provider of market intelligence, has recently published a report that global semiconductor sales this year would decline more than 12% at the worst, compared to previous year. In that case, the semiconductor industry, working as a prop of Korean economy, would be seriously damaged unlike the current status to eventually bring up the risk of Korean economy to be heavily shaken from the bottom.     

For the post-COVID-19 measures, South Korean cooperates are expected comprehensively to review the supply chain strategy, which heavily depends on the suppliers abroad. After experiencing that more than 151 nations banned or restricted people coming from Korea and a large number of factories abroad were shut down by the local authorities, the enterprises have inevitably started to consider this constraint- that pandemic will rise more frequently in the future-in designing the future business strategy.

3. Aviation: the most impacted industry

Global aviation companies have reduced or terminated the major long distance lines. Simply speaking, Qantas Airways of Australia, announced a reduction of 90% of international flights as well as 60% of domestic flights. Consequently, the Qantas Airways explained almost 30,000 jobs would be challenged  On March 16, CAPA, the Aviation Research Company in Australia, issued a statement that most airlines in the world would go bankrupt by the end of May without coordinated government and industry intervention. The total size of the international aviation industry is US$2.7 trillion with 65.5 million related jobs. The size of Korean aviation industry is US$47.6 billion occupying 3.4% GDP to create 838 thousand related Jobs. 

Moreover, the Airlines for America, whose members are American Airlines, United Airlines, Delta Air Lines, Southwest Airlines, anticipated that major airline companies could run out of money between June 30 and the end of the year. In this regard, this organization has asked the American government for financial support as much as US$50 billion and the tax reduction of tens of billions of USD. While the international aviation industries have been experiencing the devastating blow by the movement restrictions, the International Air Transport Association (IATA) forecasted passenger revenues would shrink 44% compared to 2019 to bring the damage of US$252 billion to the global aviation industry.

Nine South Korean airlines have their backs up against the wall due to the extremely serious demand difficulties related to COVID-19. As of April 20 a total of 151 countries and territories have imposed bans on people coming from Korea, which almost eliminates international flights for Korean aviation companies. Meanwhile, on April 2^nd the Korean National Assembly Research Service released the report of “The Current Status of Financial Supports and Further Assignments for the Aviation Industry related to COVID-19.” This report explains on the basis of third week of March that passengers of international flights decreased 93.5% compared to last year and daily passengers in the Incheon International Airport shrunk 91.6% from 190 thousand people on March 16, 2019 to 16 thousand people on March 16, 2020. Korea Civil Aviation Association (KCA) announced the number of air passengers stood at 1.74 million in March. This is the first time that the figure has fallen below 2 million since such statistics began to be recorded from 1997. Additionally, this report states that until June 2020 the sales of Korean Aviation companies are estimated to drop around US$5.25 billion, and expresses the concern that eventually the companies could go bankrupt and the International Aviation Networks could collapse eventually, if this pandemic situation continues.      

Due to the features of the aviation industry, the portion of fixed costs in the operation expense occupies 35% to 40%, which naturally makes the majority of the aviation industry manage to hold their business by wasting the cash reserves. Considering the operation expense and interest costs, South Korea’s leading air carriers-Korean Air Lines and Asiana Airlines are assumed to have monthly outflows of cash amounting to US$667 million and US$408 million respectively. At the same time, Jeju Air, a representative low cost carrier (hereinafter called as “ LCC”) has been experiencing the outflow of cash amounting to US$83 million monthly. These outflows are unsustainable without eventual revenue improvements and could lead to the collapse of the firms.            

As the risk of collapse of global aviation industries are apparent, governments of developed countries have initiated emergency financial support on a massive scale. On the contrary, in February, Korean government announced to allow the national banks to lend the loans only to the LCC up to US$250 million, which is far from enough to revive the domestic aviation industry. As huge losses in the second quarter was expected for the aviation industry, the South Korean government was asked by the Korea Civil Aviation Association to roll out an upgraded support measure for air carriers.

On April 6, the Federation of Korean Industries published the research “The current status of diminishing cargos in aviation transportation and its implication.”, and pointed out that the production plants have been shutting down and aviation of passengers and cargoes have been decreased due to COVID-19. In this regard, this research states that Korean exporting companies are entirely bearing the damages from the increasing transportation costs and the delay of the shipments. Especially, since the high valued products mainly depend on the aviation transportation, it consequently brings out the critical consequence to the exports. For resolving the chaos of Korean exports and normalizing the aviation transportation networks, it is highly required to remove the entry restriction and provide the financial support for the aviation industries which might be in the bankruptcies in a chain.           

Currently, Korean relief programs for the aviation industry have been criticized by relevant stakeholders such as the industry, the National Assembly, and experts in regard to the fact that that program could lower the financial burden of the aviation industry but the magnitude of the assistance is relatively low. On April 3, Korea Civil Aviation Association repeatedly asked for additional financial support by sending a petition to the Ministry of Transport and Construction, the Ministry of Economy and Finance, and other related government organizations, mentioning that the aviation industry could not survive solely on its own measures without wide-scale assistance from the governments. The aviation industry is the national strategic industry, which clearly has significant gravity to influence our economy and other industries. Therefore, it is strongly required that the government immediately takes more progressive and effective measures to relieve the aviation industry before it’s too late.   

4. Withering self-employed business 

Due the spread of the COVID-19, “shut-down” and “stay inside” policies in the cities and countries all over the world have eventually put a halt to the business related to so called “human contact industries” such as restaurants, bars, grocery and small shops, and resulted in enormous economic impact on self-employed business or shopkeepers.

Meanwhile, South Korea has introduced the “Social Distancing Policy,” which restrains people from going out and gathering due to COVID-19 since March. And it has caused critical damage to the self-employed business in South Korea as other countries. Especially the ratio of self-employed businesses in South Korea is 25.1%, almost 4 times as high as that in America, 6.3%. In terms of self-employed business’s ratio, Korea ranked 5^th in the OECD member countries. Therefore, the economic impact on the self-employed business is disseminating negative effects in overall Korean society. According to the Market Research Data published by the Korea Federation of Micro Enterprise on March 16, the moving population has decreased 80% in major domestic commercial districts, while the total sales declines of the self-employed business in Seoul were assumed to be US$ 250 million on a daily basis.

South Korea is the country where COVID-19 has started relatively earlier than other countries. It made the customers for businesses drastically drop since February, which consequently decreased 145 thousands of the entrepreneurs having employees such as restaurants, and on the contrary increased 149 thousands of the entrepreneurs having no employees to manage the business by themselves. It shows the entrepreneurs struggled to survive by minimizing or eliminating employment.

In February, the total cases filed up in the national courts including the Seoul Insolvency Court increased by 19.2% for individuals and 12.6% for the corporations as the restaurant business, lodging business, retail business, and small business owners were pushed to the limit due to the financial difficulties. The South Korean government announced the rescue package to cope with COVID-19, including programs for self-employed businesses. According to the aid plan, the size of support for small and medium-sized enterprises and self-employed business people was expanded to 58.3 trillion won.

The aid package included financial support for them to 12 trillion won, which would allow them to borrow money at the interest rate of around 1.5 percent from every financial institution in South Korea. A 5.5 trillion-won special loan guarantee program was also introduced and the rollover of debts could be done at all registered financial institutions. The amendment bill to the Restriction of Special Taxation Act has been passed to lower value added tax for the self-employed, whose annual revenue is from 66 million won to 88 million won. The number of beneficiaries is supposed to be around 1.16 million. Furthermore, the self-employed, whose annual revenue is below 48 million won, are exempt from VAT. To make the financial aids including loans and guarantees activate for self-employed businesses damaged by the COVID-19, it is urgently required to provide sufficient funds to those quickly. 

5. Latent power of IT/Bio start-ups showing presence in the crisis

South Korea has now been recognized worldwide as a best practice of response system against COVID-19 with its leading testing abilities and innovative use of technology. The main reason South Korea has successfully coped with COVID-19 is contributed from the development and production of the test kits of COVID-19 in shortest manners and the “The Epidemiological Survey System of COVID-19”, which finds the movement of infected individuals to share the relevant information including the traces of patients, and prevents the transmission of infectious disease. 

Once the society experiences the tremendous crisis, the new business opportunity can be created through discovering the potential capacity in exploring the solution to overcome the difficulties. South Korea has peeked into the new possibilities in emerging business sectors such as Bio and IT, while experiencing the significant damages by COVID-19 in various industries. 

[Leading Testing Capacities]

South Korea has established the daily test capacity of COVID-19 up to 20,000 cases, and conducted aggressive disease diagnosis to effectively prevent the diffusion of the COVID-19. In establishing successfully such a biggest detection capacity of COVID-19 in the world, the development of the test kits using the RT-PCR technology which shortens the test time from one day to six hours and fast introduction of the mass production system are crucial. In introducing the test kits on right time, the biotech start-ups deserve the credits for it. The biotech start-ups such as KogeneBiotech, Seegene, SolGent, PCL, LabGenomics, Cancerrop and SD Biosensor participated swiftly into the development and production of test kits. Kogene Biotech instantly kicked off to develop the test kits on January 10 as soon as the information of the infected was reflected on the GISAIS, which stores the virus information collected by the WHO, and that reaction was 10 days earlier than the first patient was diagnosed on January 20 in Korea. Solgent also started to develop the test kit on January 17.

Without the innovator’s spirit of the start-ups, the situation South Korea is facing now would be totally different. Moreover, experts in the Korea Centers for Disease Control and Prevention have played an important role: they granted the use of new test kits to the start-ups within a week. It was four days before the first patient was diagnosed in Korea. An artificial intelligence-based big data system Seegene had in-house has enabled it to quickly develop a test kit in 2 weeks to timely respond to the spread of COVID-19. Without an in-house AI system, it would have taken more than 2 months to develop the test kit. When COVID-19 just broke out in China, Seegene predicted in mid-January an enormous volume of test kits would be needed, and entered upon development. As of April 13, 7.7 million units of Korean test kits have been exported to more than 100 countries in the world. Considering the total number of tests done for South Korean people was about 500,000 since the outbreak of COVID-19, the exported kits are more than 15 times of the units which have been used in Korea. South Korea has also introduced a “drive-through” testing system initiated by a Korean doctor for the first time in the world, which many countries benchmarked and eventually adopted.

At “drive-through” testing facilities, officials in white hazmat take fluid samples from the driver and passengers. It takes only 10 minutes and results are texted to the patient, usually. Meanwhile, a “walk-through” testing booth has been firstly applied in the airport. The Korean Intellectual Property Office supported to complete the process for the Korean patent of walk-through testing booth, and carried out the consultation for international patent application.  

[Innovative Use of Technology]

South Korea has been operating a system to support epidemiological investigation of people infected with COVID-19. Additionally, individual companies created websites and cell phone applications which plot the locations where people have been infected by COVID-19, to make them avoid these areas easily. A warning notification is pushed to a user’s cell phone if they come within 100 meters of a place where a person infected by the virus has stayed. The system helps health authorities to immediately check various data such as surveillance camera footage and credit card transactions of confirmed COVID-19 patients to trace their movements. It has been developed on the basis of various “Smart City” technologies in cooperation with the Ministry of Science and ICT, the Ministry of Land, Infrastructure and Transport and the Korea Centers for Disease Control and Prevention.

As stated above, while there are startups finding new business opportunities amid the COVID-19 crisis, it is true there are also many startups or ventures facing financial difficulties like blockage of bank loans due to the weak financial guarantee and small revenue figures or failure of raising funds from investors. To resolve these problems, the Ministry of SMEs and Startups introduced the support programs for 8,400 start-ups and ventures on April 8. If successfully implemented, US$1.83 billion would be provided for the start-ups and ventures by the end of this year.

Meanwhile, IT technology companies in Silicon Valley in the US having Artificial Intelligence and remote technology are seeking out creating the business opportunities in resolving the current issues caused by the COVID-19 crisis.        

Innovation is also happening in other areas. The users of  Google Classroom has almost doubled in a month to 100 million from 50 million in the beginning of March as all the school shut down due to the COVID-19. And the number of users of the “Zoom” service, an American communications technology company, has increased 20 times from 10 million at the end of 2019 to 200 million last March. The “Untact business”, which has been operated partially in the education and some sectors, is expanding to all businesses as COVID-19 has spread out fast. The demands on online shopping have explosively increased and the real estates, recruitment, banking and exhibition business are also stepping into the new “Untact” era. For example, South Korean construction companies are considering applying more advanced technologies such as Artificial Reality and Virtual Reality to the cyber model house.           

South Korea is viewed as being in a better position than following the IMF crisis in the end of 1990s. Even though South Korea has been significantly damaged economically due the COVID-19, it also found out that the new potentials for the growth such as COVID-19 test kits, the fusion of Biotechs & Information technology, and the transformation into Untact business are increasing. If the crisis of COVID-19 settles down soon, the key elements whether Korean companies including the start-ups could seize the tremendous opportunities or not will rely on the success of transformation into the new environment. Therefore, it is absolutely required for the companies to transform shortly to survive, and achieve the growth.

Conclusion

As COVID-19 is still in progress it is not easy to forecast the exact impacts on the global economy. However, based on the statistics so far, it seems that there are some similarities with the case of the Spanish flu. The COVID-19 Pandemic is giving significant impacts to the global community as the Spanish flu did 100 years ago. According to the analysis by Robert J. Barro, a professor of Economics at Harvard University, the Spanish flu eventually caused the death of 39 million people, 2% of the 1.8 billion global population heavily striking the whole world during 1918-1920. It is assumed that the global GDP at that time being composed of 43 major countries dropped 6%, while private consumption did 8% during that period.  Asian Development Bank estimated that the global cost of COVID-19 might be as high as US$4.1 trillion or 4.8% of global GDP if COVID -19 keeps spreading longer.

According to the International Labor Organization (ILO), the COVID-19 crisis is expected to wipe out 6.7 percent of working hours globally in the second quarter of 2020 – equivalent to 195 million full-time workers. The Korean government should react to this risk with aggressive fiscal and financial policies to prevent the companies, small business owners, and self-employed business from getting into bankruptcy, in addition to supporting the wages for maintaining the employment. Being cautious of the financial soundness, it is critical to provide the maximum financial support in order to make the economy recover fast with resilience after the COVID-19 is over. The national debt ratio to the GDP in South Korea was around 10% until the mid of 1990, but now exceeds 40%. It is strongly required to focus all the assets in overcoming the crisis, while radically reducing the unnecessary spending as the financial soundness is essential to maintain the national credibility.  

In an addition to the financial support, the South Korean government, which has so far given too much importance to pro-labor policies and introduced compulsive regulations excessively, should deregulate the anti-market policies and encourage the corporate investments by reforming the labor market and tax system. Furthermore, the government should refrain itself from intervening into the private sectors. Without these measures, enterprises could not revive even if the financial support from the government is provided. If COVID-19 calms down and it naturally leads to resolving the anxiety of people, the consumption and investment will be somewhat encouraged, which is expected to make the domestic markets stable. But, it is difficult to assure that South Korean economy, which has a high dependency on overseas markets and exports, could recover soon.        

COVID-19 will not be able to stop globalization. Even though it will give meaningful change to the mainstream. Therefore, enterprises have only one choice to adopt themselves to the post COVID-19 environments if they want to survive. Korea should also lessen its over-dependence on Chinese economy, and look to make sweeping strategy changes including the reshoring policy of the high-tech industries which can utilize automated facilities. As evidence of such a move, we are already seeing that the new terminology “Untact” is talked about as an alternative business way in the COVID-19 era. From now on, breakthrough innovations beyond “Untact” would be needed continuously to respond to the pandemic era which is expected to ever last.

Mentor: Dr. Eric Golson, University Of Surrey

About the author

Hyunyeob (Ian) Yun

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