Following weeks of a city-wide lockdown, pandemic restrictions are slowly easing in Shanghai as subway and bus lines are beginning to reopen. While the lockdowns are having severe impacts on the Chinese economy, Richard Sicotte, an Associate Professor of Economics at the University of Vermont, explained how what transpired in China is impacting Vermonters and the U.S. as well.
“Vermont’s economy is subject to the same influences as other states in the U.S.,” said Professor Sicotte. “China has an enormous economy with extensive commercial and financial links to the U.S. economy. Major disruptions to the Chinese economy send shockwaves through the global economic system that are felt in the U.S.”
During the lockdown, most businesses in Shanghai had to close down. In addition, the Port of Shanghai, one of the world’s busiest ports, had to curtail operations. According to the Associated Press, Chinese export growth sank from 15.7% to 3.7% between March and April. Sicotte says the lockdowns have been contributing to the inflation in the U.S.
“Industrial production in China fell in April 2022 by about 3% compared to April 2021 and the lockdowns are the major factor causing that decline. There are a large number of industries impacted. Chemicals used in healthcare, materials used in making shoes, construction materials, and electronic components are in short supply. Consequently, the lockdowns are contributing to inflation in the U.S., but it is hard at this point to provide an estimate of how much inflation they are causing.
Sicotte adds, “I think that at this point, most observers blame excessive expansionary monetary and fiscal policy in the U.S. plus the fallout from the Russian invasion of Ukraine for most of the inflation that we are experiencing. Unfortunately, it is easier to determine the precise causes of economic phenomena like inflation with the benefit of hindsight. This period will be studied by economists for decades to come.”
The lockdowns in China have also negatively impacted numerous American corporations. Adidas reported their net income for Quarter 1 decreased to $310 million, down from $502 million in Quarter 1 of 2021. Meanwhile Under Armour reported a net loss of $60 million compared to a net income of $78 million reported at the same time last year.
“Many American corporations own factories or retail outlets in China, often in joint ventures with Chinese firms,” said Sicotte. “Many others contract with Chinese firms for parts, finished goods, or produce under licensing agreements. Firms that have faced the most disruptions will see reduced profits or perhaps losses as a result of the lockdowns. Apple said that they will cost the company between four and eight billion dollars in lost revenue. The Japanese automaker Toyota is forecasting a 20% decline in operating profit.”
The automotive industry in the U.S. and worldwide has been struggling due to a global chip shortage, which could continue to face challenges as China dominates the market for rare earth minerals that are used or chips and batteries. “China has a central part in the global battery industry, and the auto industry is vulnerable to anything that disrupts it,” said Sicotte. “This leads to higher costs for auto manufacturers, reduced profits and higher vehicle prices for consumers.
“There are significant lithium deposits in Australia and Latin America that are likely to play major roles in the transition to green energy, but bringing more of those deposits into production takes time. Lithium prices are way up this year, but most of that seems to be due to surging demand rather than supply restrictions. Supply is not growing at the same rate as demand. With gasoline at $4.50/gallon or more, the move to electronic vehicles is gaining momentum.”
One idea that has been surfacing is “onshoring” productions, which would establish manufacturing plants in the U.S., rather than producing goods overseas. The cost of skilled labor overseas, particularly in China and Asia has been one of the main reasons why the U.S. has manufactured goods offshore. Sicotte explained that “onshoring” would raise costs of production, which would lead to higher prices for American consumers.
“Nonetheless, even before the most recent lockdowns, many American firms were reevaluating their supply chains and sourcing strategies. They were doing this in response to rising costs of production in China relative to other countries, the trade tensions between the U.S. and China that heated up during the presidency of Donald Trump and are continuing under President Biden, and the disruptions that occurred earlier in the pandemic. Some firms are seeking to diversify their sources of supply and “onshoring” could be part of that mix. Other firms will be reluctant to pull out of China because one of the major reasons to establish a presence there is to serve the Chinese market.”
While the lockdown in Shanghai appears to be slowly coming to an end, some fear that Beijing may be next as multiple outbreaks have been reported in that city.