China Espana

According to a survey conducted by Grant Thornton (thanks to our friends at the Madrid Chamber of Commerce for sharing), Spanish exporters are upbeat about prospects for 2020. Forty-one percent of Spanish companies are expecting to increase their exports during the year, a greater degree of optimism than in the European Union as a whole (35%).

In light of this, it is worth asking, will we see an increase in Spanish exports to the United States?

According to the International Trade Administration, in the first 11 months of 2019, Spanish imports to the U.S. went down 3.8% year-on-year. This contrasts with increases in France, Belgium and the Netherlands of 11.4%, 15.1% and 24.4% respectively.

It seems clear that Spain has not benefited from the U.S.-China trade war, which is not surprising. An advanced economy like Spain’s is not exactly an alternative to “just right” China, with its relatively lower costs. In turn, countries that more directly compete with China, such as Mexico, India, Thailand, Malaysia and Vietnam have all seen their imports to the U.S. grow. The tariffs imposed by the U.S. on agricultural goods from Europe, which hit important Spanish products, have not helped matters.

Nonetheless, China’s ongoing coronavirus crisis could give rise to new opportunities for Spanish industry. Of course, this crisis is above all a humanitarian one, and our thoughts are first and foremost with the victims in Wuhan and elsewhere. Yet, it is important to pay attention to the broader impact of this outbreak. Simply stated, China is closed for business. The Lunar New Year holiday has been extended in all important economic centers, prolonging the usual shutdown of the manufacturing sector. If the crisis is not brought under control soon, the authorities will have no choice but to continue the closures. As our managing partner Dan Harris warned recently in his post, What’s Going to Happen With My China-Dependent Supply Chain, “How long will this last? Nobody knows.”

This presents serious problems for companies reliant on Chinese suppliers. Even if they manage to get hold of their suppliers, the latter will not be able to offer even a ballpark estimate of when they will be able to ship product (and if they do, they are lying), let alone take new orders. And never mind those yearly trips to visit factories and/or check out the latest at the Canton Fair (which, by the way, may be cancelled).

The scourge of coronavirus follows the beating that Chinese factories have taken as a result of the Section 301 tariffs imposed by the United States. Even before that, China was losing ground to its competitors in Southeast Asia and elsewhere, which generally offer lower costs, as well as other advantages. As a result, many Chinese manufacturers were already “walking dead”. The coronavirus stoppage will finish off many of them.

As a result, many companies will need to find alternative sources outside China for their inputs. Vietnam and its neighbors will offer alternatives in some instances, but not in all. Even if there makers of the product in question, their production capacity may be insufficient, especially in the face of a massive, sudden shift away from China.

And let’s not forget that, in a worst-case scenario, Vietnam and its neighbors may themselves face a coronavirus pandemic.

As the Spanish proverb goes,  a río revuelto, ganancia de pescadores. Fishing in troubled waters, we’d say in English. Spanish companies should not let this opportunity pass.