China’s supply chain crisis threatens recovery
As MPs digest MI5’s warning that a Chinese spy may have infiltrated Parliament, a supply crisis developing on China’s shores is sounding economic alarm bells around the world.
An uptick of Omicron cases in the world’s biggest trading nation is threatening global supply chains, with manufacturers and shippers bracing for disruption.
Ironically, it’s not the infections themselves doing the real damage. Beijing’s ruthless zero-Covid policy is forcing major manufacturers of textiles, cars and computer chips to shut down and ports to stop operating.
China is at the centre of an intricate web of global trade that until 2020 was a finely-tuned, just-in-time system that zipped goods to wherever they needed to be in the world.
The pandemic changed all that. “The supply chains were discombobulated,” says Roy Cummins, a former chief executive of the Port of Brisbane in Australia, who has worked in logistics for 30 years. “Shipping capacity was quickly exhausted at the start of the pandemic because everyone planned for a big decline in demand. But in fact there was a surge because people wanted to buy things. Then the supply side was hit hard with ports, warehouses and truck companies all short of workers.”
Around 90 per cent of the goods moved around the world are transported by ship, and the cost of shipping freight from China has risen 10-fold since Covid hit.
Despite the economic damage, Beijing seems wedded to its whack-a-mole approach, determined to avoid the situation in the US where five million workers stayed off work because of Covid last week. But recent clusters of Omicron cases are stretching the policy to its limit. Over 20 million Chinese citizens are confined to their homes after the cities of Anyang and Yuzhou joined the central city of Xi’an in strict lockdowns. And with the Winter Olympics due to begin next month, Communist party chiefs will be taking even fewer chances on Covid than before.
China is not the only country to be hit by supply chain problems. Across the world, Covid-driven shortages of truck drivers, supermarket staff and frontline workers are contributing to a spike in the price of raw materials and manufactured goods, fuelling inflation and hampering the still-fragile global recovery.
Maersk, one of the world’s largest shipping companies, said one of the worst supply bottlenecks is on the US west coast, where a lack of workers means shipping containers are taking four weeks to be unloaded.
Even so, Frederic Neumann, co-head of Asian economics research at HSBC, warned this week that the global economy could be heading for the “mother of all supply chain stumbles” if Omicron keeps on causing problems in China.
“The reality is that China remains the centre of global manufacturing,” says Thomas O’Connor, a supply chain expert at Gartner Inc. in Sydney. “If there were significant manufacturing or logistic shutdowns in China associated with Covid-related challenges, that would have a massive impact on the global economic environment.”
The ripples from this crisis will keep flowing for months and years to come. Supply chain problems mean shortages of supplies, obviously. That pushes up prices that were already surging. In the US, this is the week that inflation topped 7 per cent. It looks like it will go higher. Plus there is a full-blown energy crisis developing, as Neil Collins explains below. Hold on tight.
Twitter: @mattiebrignal