China’s Supply Chain Slows Down as Global Trade Shows Resilience
One of the biggest economic hits of the COVID-19 pandemic was the complete disruption of the global supply chain. With entire economies shut down as lockdowns spread worldwide, global trade activity screeched to a halt, and the supply chain has yet to recover fully.
Lockdowns in China, which affected many major industrial and manufacturing regions, caused trade activity to fall by 50% in the first months of the pandemic. With factories closed, massive shortages of crucial components like computer chips rippled throughout industries across the globe. Problems with staffing at major ports, along with a spate of severe weather issues, further compounded the supply chain crisis.
Because China enforced a very stringent zero-Covid lockdown policy early on in the pandemic, it was one of the first to recover. However, a new report suggests that the Omicron variant is once again straining the supply chain in China. New lockdowns are in place, and no matter how brief they may be, they will certainly cause further disruptions for companies still struggling to refill their depleted warehouses. Unfortunately, this is happening just as the rest of the world sees restricted supply chains recover.
Zero-COVID policies create negative trade activity
Much focus on China in recent months has been on trade bans arising from China’s treatment of the Uyghur ethnic minority population and the country’s shifting approaches to dealing with public blockchains and cryptocurrency. But another very significant issue has been building in the background. Namely, a new round of infections is making China’s zero-COVID policy kick in, confining millions to their homes and shutting down large manufacturing facilities.
It is worth briefly reviewing China’s policy and how it affected the global supply chain in 2020. Early on in the pandemic, China initiated its zero-COVID policy. Within two weeks of the first death in China, the government began shutting down large cities across Hubei province, including Wuhan, the epicenter of the pandemic. The scale of the action was so large that the World Health Organization called it “unprecedented in public health history.”
The first services affected were public transportation – bus and train stations, airports, and major highways leading into and out of Hubei province all closed. Soon residents were confined into their homes, with only a single household member allowed to leave the house every two days to get essentials, such as groceries or medicine.
According to numbers the Chinese government reported, the zero-COVID policy was remarkably effective. Despite having a population of over 1.4 billion, China recorded fewer than 100,000 cases and 5,000 deaths in the first year of the pandemic (compared to 27 million cases and 370,000 deaths in the United States over the same period). Indeed, China’s policies were so effective that it ranks 120th in total cases out of 225 countries and regions reporting data and 84th in total deaths.
However, the zero-COVID policy also had a significant negative effect, both for China and the rest of the world. Indeed, what came next started a chain reaction that battered industries worldwide.
Three weeks after the lockdown began, China shut down all non-essential industries in Hubei, including non-essential manufacturing. Chinese trade activity soon plummeted, losing almost 50% in a single month.
Unfortunately, Hubei was and is a major manufacturing center in China, supplying steel, display screens, and automobiles. But perhaps Hubei’s most significant product is computer chips which are a critical component in many other products. So as Chinese supply dried up, other companies soon found themselves unable to fill orders creating a spiral of declining supply despite growing demand from consumers who were filling their time at home by shopping online.
The supply chain stabilizes throughout 2021
After falling drastically in 2020, trade activity rebounded quickly. China, in particular, regained its footing swiftly, seeing significant activity gains by the end of 2020, although it still had issues with transport. Everyone else fared less well, with growth just beginning to reassert itself around the fall of 2020, right before a new wave of COVID hit, causing further lockdowns.
The past year saw the supply chain stabilize for many countries as businesses had proper strategies in place and trade activity began to recover. According to Tradeshift’s recent Index of Global Trade Health, many regions were edging towards pre-pandemic activity levels, with the United States experiencing a surge that put it well in front of its earlier numbers. The Euro Zone remained below pre-pandemic levels but was clawing its way back.
Figure 1: Global trade activity 2020-2021
(courtesy of Tradeshift Index of Global Trade Health Q4 2021)
However, at the end of 2021, more bad news arrived in the form of the Omicron variant. Its effects would be felt quickly. But would the lessons learned throughout the early stages of the pandemic help prevent another meltdown?
New lockdowns in China create new disruptions
In 2021, China nearly met its zero-COVID goals, with only around 10,000 infections and two deaths through to the end of November. However, in December, things began to change. The far more transmissible Omicron variant began to take hold, and within two months, China had more new cases than it had seen in the previous year. Not surprisingly, they responded by once again initiating strict lockdowns in the Zhejiang, Henan, and Shaanxi (Xi’an) provinces, again major Chinese industrial centers.
The effects are already visible and pronounced. According to Tradeshift’s report, Chinese trade activity declined 10% in Q4 2021, marking the lowest activity level since the onset of the pandemic. Given how badly Chinese supply chain issues affected the rest of the world in 2021, there is naturally concern that the current Chinese downturn will spread rapidly. Fortunately, there are some signs that the rest of the world may be better able to handle the downstream issues this time.
What does the rest of 2022 hold?
There seems to be good reason to believe that the supply chain issues that arose following China’s initial lockdowns are finally easing in a meaningful way. But the rise of the Omicron variant, the uncertainty surrounding potential new variants, and the new spate of lockdowns in China are leaving many uneasy.
Tradeshift’s founder and CEO, Christian Lanng, is one of those who is holding his breath about the next few quarters. Indeed, he believes everyone should be working now to build more robustness into the supply chain, reinforcing its ability to withstand large-scale disturbances. He predicts:
“At some point in the next 12 months, an event will unleash disruption that will once again test the resilience of global supply chains. Experts now expect a major shock to hit supply chains once every 3.7 years. Heading into the third year of a global pandemic, our index suggests businesses have learned a number of lessons which are enabling them to become better problem solvers in the face of fresh challenges.”
So the bad news is that we are not out of the woods quite yet. But the good news is that we have become much better at finding our way out quickly and with as few scratches as possible.