As Shanghai lockdown drags on, fears grow for global trade | International exchange

Bangalore, India – At a pharmacy in the upscale Koramangala district of Bengaluru, India, owner Ram Narain anxiously asked one of his employees to check stocks of a long list of drugs scribbled on a sheet of paper.

As the clerk called out numbers, Narain shook his head. Asked what was worrying him, he sighed.

“The same thing everyone is concerned about – the new lockdown in China.”

India is a major drug producer, but 70% of its active pharmaceutical ingredients – the biologically active component of any drug – come from China. The indefinite COVID-19 lockdown since late March in Shanghai, home to the world’s largest container port, threatens those supplies.

Narain’s worries reflect growing concerns that restrictions imposed by authorities in the city of 25 million people could disrupt international supply chains of everything from medicines to electric vehicles, stalling global economic recovery even as nations are finally opening up completely after two years.

China’s economy has so far borne the brunt of the record rise in coronavirus cases in the country’s economic nerve center. But analysts warn that Shanghai’s unparalleled role in global trade means the lockdown could have serious implications for the rest of the world, especially if it lasts much longer. Shanghai and surrounding areas are among the largest manufacturing centers in China. They depend on imported components entering the country through the city’s port, which is also how finished products are then exported.

The effect of this triple dependence on the city is beginning to be felt. Tesla closed its Giga factory in Shanghai on March 28 and has yet to reopen the factory which produces around 2,000 electric cars a day. Its Chinese rival Nio suspended production on Saturday, citing rising cases in Shanghai and in Jiangsu and Jilin provinces, where it has factories.

Electric car maker Tesla has been forced to suspend production at its Shanghai factory due to the coronavirus outbreak and the city’s lockdown [File: David Paul Morris/Bloomberg] (Bloomberg)

The Shanghai container freight index, already in decline due to the war in Ukraine, continues to slide, signaling a decline in Shanghai’s exports, said Bruce Pang, head of macro and strategic research at China Renaissance Securities, based in Hong Kong.

“The worst COVID outbreak in China could lead to delays and higher prices, which could stall the recovery and further worsen global inflation,” Pang told Al Jazeera.

So far, the effect of the Shanghai lockdown on global supply chains has been limited, said Julian Evans-Pritchard, senior China economist at Capital Economics, a London-based consultancy. Many factories continue to operate using what is known as a closed-loop system – where workers remain at their workplaces during lockdown to reduce the risk of contracting infection.

“Most of the factory workers are migrants with limited safety nets, who will put up with it to keep their jobs,” Evans-Pritchard told Al Jazeera. “Many already live in employer-provided dormitories, even in normal times.”

Chinese manufacturers also have healthy stocks they can rely on to weather short lockdowns, he added. But Pang and many other analysts believe the current restrictions in Shanghai will last at least until June.

“If the shutdowns lasted too long, it would lead to product shortages inside and outside of China,” Pritchard-Evans said.

Worrying signs are already emerging. An April 7 report from Hong Kong-based experts from Spanish financial services firm BBVA shows vehicle cargo traffic at the port of Shanghai plunged during the lockdown, while congestion with ships waiting outside the port increases. The BBVA researchers also believe there is a real possibility – they have assigned it a 25% probability – that Shanghai will not be able to eradicate the current wave by June.

China can mitigate the fallout from Shanghai’s lockdown on global trade by turning to its other ports, said Wang Huiyao, founder and president of the Center for China and Globalization, a Beijing-based think tank.

“You have to remember that China has other massive ports that can still serve the world,” Wang told Al Jazeera. Indeed, seven of the world’s 10 largest container ports are in China: Shanghai, Ningbo-Zhoushan, Shenzhen, Guangzhou, Qingdao, Hong Kong and Tianjin.

Most of these cities have experienced shutdowns of varying lengths in recent months. Still, China saw a surge in exports in 2021, even amid a global shortage of semiconductors.

“The options that China has, in terms of gateways to the world, have enabled that,” Wang said.

Emerging economies at risk

Yet Shanghai bears a disproportionate burden as a container port: it alone handled 20% of China’s cargo traffic in 2021.

“If the Port of Shanghai ceases to operate, it is difficult for other nearby ports to fill the void given its gigantic capacity,” BBVA researchers Betty Huang and Xia Le wrote in their report. “By then, the global supply chain will directly feel the pain of Shanghai’s lockdown.”

Emerging Asian economies such as Vietnam and Cambodia could be the hardest hit due to their reliance on Chinese inputs for manufacturing, Capital Economics warned in recent reports. Chinese components contribute 24% to the gross value added of the Vietnamese manufacturing sector.

But others will not be immune: goods imported directly or indirectly from China constitute more than 20% of Japan’s total imports and more than 15% of US purchases abroad.

At a time when the pandemic has already made many countries and businesses uncomfortable with over-reliance on Chinese supply chains, the Shanghai lockdown is also reigniting questions about the economic logic of the government’s ‘zero-COVID’ strategy. country. As part of the zero-tolerance approach, China quarantines entire cities when new cases emerge, although the vast majority of the world moves away from strict controls and learns to live with the virus.

“The pandemic has highlighted the need for greater supply chain diversification and resilience,” Pritchard-Evans said. “The latest developments in China are just another reminder of that.”

While Beijing has vowed to continue its elimination efforts, there are signs that authorities are growing increasingly concerned about the economic and social toll of the draconian shutdowns. On Monday, authorities in Shanghai announced a slight easing of restrictions to allow greater freedom of movement for residents of areas where the virus is under control.

Under the three-tier disease control system, residents of areas where no cases have been reported for 14 days are allowed to leave their homes provided they follow health protocols and stay in their sub-district. . Residents of areas that have gone seven days without cases are allowed to pick up food deliveries or walk around at a designated time and place.

Wang said the crisis in Shanghai could also offer Chinese leaders a chance to compare the mainland’s strategy with that of Hong Kong, which avoided a citywide lockdown even at the height of a devastating wave of coronavirus outbreaks. COVID-19 earlier this year when she had the world. highest death rate from the virus.

“It’s a tale of two cities,” said the Beijing-based analyst. “And the approach that works best will shape China’s policy going forward.”