The novel coronavirus (Covid-19) outbreak is slowing economic activity in China and raising concerns about potential US supply chain vulnerabilities in a range of sectors, including strategic raw materials, a new report warns – and also casts a question mark over the Phase One trade deal between the two countries.

Business reopening has been uneven across sectors and locations in China, with many firms awaiting government approvals to resume, according to a report from the US Congressional Research Service (CRS). Chinese media say employees are struggling to return to work amid transportation shutdowns and contagion concerns.

The American Chamber of Commerce in Shanghai reported on 17 February that most companies surveyed do not have sufficient staff to run a production line and face numerous logistics constraints. Almost half of the companies said their global operations were already affected by the outbreak, and expect demand to be lower over the next several months.

The Chinese government has locked down cities in China’s provinces of Hubei (Wuhan, Ezhou) and Zhejiang (Wenzhou, Hangzhou, Ningbo and Taizhou). In total, an estimated 90 cities across China face some form of restrictions.

“Domestic and global transportation links have been significantly curtailed with ramifications for trade,” the CRS says. “Air services face reduced capacity with the cancelling of passenger travel and restrictions on pilots and flight staff on cargo flights to third countries. Cargo operations in China depend on port staffing and are reportedly operating at significantly reduced capacity.

“While most businesses typically plan for a shut down during the Lunar New Year, including some stockpiling, companies are now likely to experience more serious shortages. Cargo shipments from China to the United States typically take approximately three weeks; any slowdown in maritime shipping could affect a wide range of industrial and consumer goods.”

China’s economy is globally connected through trade, investment, and tourism, and so any slowdown and persistent travel and transportation restrictions beyond March are likely to pressure global supply chains and potentially create worldwide economic fallout, the CSR warns.

“Measures to contain the outbreak have significantly curtailed domestic and global transportation links, preventing the transport of many products and manufacturing inputs.”

The CSR says China-sourced raw materials, manufacturing inputs, microelectronics, and finished goods are most likely to be in shortage as a result of the outbreak.

“Disruptions in Chinese supply chains are expected to have a limited macroeconomic effect on developed markets in the short term but developing markets and Asia’s developed economies, are more vulnerable. Vietnam, Taiwan, Malaysia, South Korea, Japan, Thailand, and Singapore all have strong supply chain links with China and are reporting supply shortages.

Last week, China-based analysts raised concerns Covid-19 will disrupt supplies of apparel to major international fashion brands. Manufacturers have also told just-style they are struggling to get back on track, with quarantined workers, travel restrictions and material delays disrupting production and causing ongoing uncertainty.

China is the world’s largest clothing exporter, supplying 29.8% of apparel imported into the US by value in 2019 (an even higher 39.9% by volume) and around 16% of apparel imported into the European Union (EU) by value in 2018, according to the USA’s Office of Textiles and Apparel (OTEXA) and EU statistical agency Eurostat, respectively.

The CSR also raises concerns the Phase One trade deal could be affected.

“The crisis is calling into question China’s ability to implement the US-China Phase One trade deal signed in January 2020. Transportation constraints and a slowdown in demand could affect China’s import levels.”

However, it says the agreement has a force majeure provision that could give China flexibility in implementing its commitments.