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Global Supply Chains Threatened by Covid Crisis in China

In: Finance, Forex

China’s stringent rules to curb Covid-19 are about to unleash another wave of summer chaos on supply chains between Asia, the U.S. and Europe.

Shipping congestion at Chinese ports, combined with Russia’s war in Ukraine, risks a punch that threatens to derail the recovery, already buffeted by inflation pressures and headwinds to growth.

Beijing’s zero-tolerance approach amid an escalating virus outbreak brings the pandemic full circle, more than two years after its emergence in Wuhan upended the global economy.

Even if the virus is reined in, the disruptions will ripple globally and extend through the year, as bunched-up cargo vessels start sailing again.

China accounts for about 12% of global trade and Covid restrictions have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. U.S. and European ports are already swamped, leaving them vulnerable to additional shocks. Once product export activities resume and a large volume of vessels make their way to the U.S. West Coast ports, we expect waiting times to increase significantly.

In the short run, the pileups will mean more costly headaches in the $22 trillion arena for global merchandise trade, which slumped in 2020 and rebounded last year. Longer term, such chaos is redrawing the contours of a global economy tied together by cross-border commerce. For some corporate executives, reeling in far-flung production networks is no longer a patriotic political slogan, it’s a business necessity given all the uncertainty.

Key policy makers are coming around to the idea that a sea change in the developed world’s supply lines is necessary. U.S. Treasury Secretary Janet Yellen calls her idea for more resilient trade linkages “friend-shoring” — a not-so subtle jab at China and Russia. Much of the shift hinges on whether the pandemic has convinced consumers to accept higher prices for products made closer to home, and at least one consultant’s analysis says they are.

Relocating supply chains “might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game,” said Brian Ehrig, at the consulting firm Kearney.  A report this month found that 78% of CEOs are either considering reshoring or have done it already. The bet it that globalization will never die, however, it will evolve to a different form.

Companies have weathered the roughest bouts of supply turmoil over the past year partly by raising prices — and consumers have largely absorbed the hit. In the near term, though, supplies from China pose a more menacing cloud than the questions about household demand.

Many sellers are suffering about a one-month delivery delay. It still takes an average of 111 days for goods to reach a warehouse in the U.S. from the moment they’re ready to leave an Asian factory, close to the record of 113 set in January and more than double the trip in 2019, according to San Francisco-based Flexport Inc., a freight forwarder. The westbound journey to Europe takes even longer, a near-record 118 days.

Imported containers are waiting on average for 12.1 days at Shanghai’s port before they are picked up by truck and delivered to destinations inland, according to supply-chain data provider project44. The rate for April 18 was almost triple the 4.6 days on March 28. Trucking shortages have crippled efforts to supply key inputs to factories and transport goods such as autos and electronics to the ships.

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