Shanghai’s rigorous pandemic restrictions have caused industries to close and ships to be unable to unload and pick up goods.
Ram Narain, the owner of a pharmacist in Bengaluru’s affluent Koramangala neighborhood, ordered one of his employees to check the stock of a long list of drugs scribbled on a sheet of paper.
Narain shook his head as the guy yelled back numbers. He sighed when asked what was bothering him.
“It’s the same issue that’s bothering everyone else – China’s new lockdown.”
“India is a major drug producer, while China supplies 70 percent of the Active Pharmaceutical Ingredient that is API, which are the bioactive ingredients of all drugs. The extended COVID-19 lockdown in Shanghai, home to the world’s largest container port, has put those supplies in jeopardy since late March.
Narain’s fears mirror widespread concerns that the restrictions imposed by authorities in the city of 25 million people could disrupt international supply lines of everything from medications to electric vehicles, delaying global economic recovery even as countries open up fully after two years.
China’s economy has so far borne the brunt of the country’s economic nerve center’s record increase in coronavirus cases. Analysts warn, however, that Shanghai’s unique role in global trade means the shutdown could have far-reaching consequences for the rest of the world, particularly if it lasts for a long time. Shanghai and its surrounding areas are one of China’s most important manufacturing centers. They rely on imported components that arrive in the country via the city’s port, which is also where finished goods are exported.
The consequences of that three-pronged reliance on the metropolis are beginning to emerge. Tesla‘s Giga factory in Shanghai was shut down on March 28 and has yet to resume the plant, which manufactures roughly 2,000 electric cars each day. On Saturday, its Chinese rival Nio halted manufacturing, citing an upsurge in cases in Shanghai and the provinces of Jiangsu and Jilin, where it operates.
According to Bruce Pang, head of macro and strategy research at Hong Kong-based China Renaissance Securities, the Shanghai Containerized Freight Index, which was already in decline due to the war in Ukraine, is continuing to fall, signaling a drop in Shanghai’s exports.
Pang told the reporters that the worst COVID outbreak in China could lead to delays and higher prices. “This might stymie recovery and add to global inflation.”
According to Julian Evans-Pritchard, a leading China economist at London-based consultancy Capital Economics, the impact of the Shanghai lockdown on global supply chains has been minimal so far. Many factories are continuing to operate under a closed-loop system, in which personnel remains in their workplace during the lockdown to reduce the danger of infection.
“The majority of factory floor employees are migrants with little safety nets who will put up with it in order to preserve their employment,” Evans-Pritchard told the reporters. Even in normal times, a large number of people live in the dorms provided by the employer.
He also mentioned that Chinese manufacturers have substantial stocks that they can rely on to get through short lockdowns. However, according to Pang and many other observers, Shanghai’s present limits will persist until June.
“If the restrictions continue for too long, product shortages will occur both inside and outside of China,” Pritchard-Evans added.
Already, ominous indications are appearing. According to research released on April 7 by Hong Kong-based experts of Spanish financial services business BBVA, car freight traffic at the Shanghai port has decreased during the lockdown, but vessel congestion outside the port has increased. The BBVA experts also believe there is a good chance — a 25 percent chance — that Shanghai won’t be able to stop the current wave by June.
According to Wang Huiyao, founder and president of the Center for China and Globalization, a Beijing-based think tank, China can alleviate the effects of the Shanghai trade embargo by turning to its other ports.
“You have to remember,” Wang said to the media that China still has other huge ports that can serve the world. Shanghai, Ningbo-Zhoushan, Shenzhen, Guangzhou, Qingdao, Hong Kong, and Tianjin, for example, are home to seven of the world’s ten largest container ports.
In the last few months, the majority of these cities have been subjected to various levels of lockdown. Despite a global semiconductor shortage, China’s exports increased dramatically in 2021.
“China’s alternatives to the gateway to the rest of the world have enabled this,” said Wang.
Emerging economies are in danger
Shanghai, however, bears a disproportionate burden as a container port: in 2021, it alone handled 20% of China’s freight volume.
In their analysis, BBVA analysts Betty Huang and Xia Le remarked, “Given Shanghai port’s vast capacity, other surrounding ports will find it difficult to fill the void. “By then, the pain of Shanghai’s lockdown will have spread across the global supply chain.”
Capital Economics has recently cautioned that emerging Asian economies such as Vietnam and Cambodia could suffer the most as a result of their reliance on Chinese manufacturing supplies. Chinese components account for 24% of Vietnam’s manufacturing sector’s gross value added.
Others, however, will not be spared: goods purchased directly or indirectly from China account for more than 20% of Japan’s total imports and more than 15% of US purchases from abroad.
Shanghai’s shutdown is raising questions about the economic rationality of the country’s “zero-COVID” goal at a time when the pandemic has already made many governments and firms wary of relying too heavily on Chinese supply chains. Despite the great majority of the globe moving away from stringent regulations and learning to live with the virus, China uses a zero tolerance policy to lock down entire cities when new cases appear.
“The epidemic has brought increased supply chain variety and resilience to light,” Pritchard-Evans added. “Recent events in China serve as a sobering reminder of this.
“While Beijing has declared that it will continue to work to solve the situation, there is still a lot of work to be done, are hints that authorities are becoming increasingly concerned about the economic and social costs of harsh lockdowns. Authorities in Shanghai announced a small loosening of restrictions on Monday, allowing residents in regions where the virus is under control more freedom of movement.
Residents in areas where no cases have been documented for 14 days are allowed to leave their houses as long as they follow health regulations and stay in their sub-district under the 3-tier disease control system. Residents in locations where there has been no case for more than seven days are allowed to pick up food delivery or go for a walk at a set time and location.
Wang believes the situation in Shanghai will provide China‘s policymakers with an opportunity to compare the mainland’s strategy with that of Hong Kong, which avoided a city wide lockdown despite having the world’s highest COVID-19 fatality rate earlier this year.
The Beijing-based observer described the situation as “a tale of two cities.” “And China’s future policy will be shaped by the approach that works best.”