How latest COVID-19 lockdown in China can cause trade disruption

Highlights

• China is observing a surge in Omicron cases, which can hamper international businesses dependent on the country.
• The country is imposing strict restrictions followed by mass testing and quarantine facilities.
• The number of companies announcing production halts has been alarming during the latest lockdown.

The COVID-19 pandemic has cast its never-ending dark shadow on the world, with events coming a full circle as China implements fresh lockdowns in several commercial hubs. One of the first nations to remove lockdowns in 2020, China is observing a rise in Omicron cases once again in 2022. What has stemmed from these restrictions is a widespread frenzy surrounding the supply chain chaos that can arise due to shipment delays and rising input costs.

China is a hub of manufacturing plants owned by major international companies, and thus, disruptions within the country are likely to seep into the global supply chains. Essential parts, such as computer cables and circuit boards, are manufactured in China. Consequently, markets are bracing for the impact of delayed shipments, with effects visible on oil prices and input costs.

Stock prices in China and Hong Kong have also taken a hit from the restrictions imposed in China’s tech and finance hub, Shenzhen. Meanwhile, rising cases have caused a worrying streak and receding confidence in the economy. At a time when global warfare has already incapacitated the supply of certain essential goods, China’s restrictions are expected to worsen the situation at hand.

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What do we know about China’s latest virus outbreak?

Rising cases in China have compelled the government to take the necessary step of re-implementing COVID-related restrictions on the masses. However, global businesses are facing a major threat from these restrictions, which could hamper supply-side operations.

Despite infected numbers being much lesser than previous peaks in China, the government has taken a zero-tolerance approach. The Chinese government is imposing strict restrictions followed by mass testing and quarantine facilities. Notably, the rising cases are mainly of the Omicron variant, which is a fast spreader in nature.

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A natural outcome of these restrictions has been on factories and transportation networks that have suffered due to lack of labour and business shutdowns. Additionally, electronic factories in the south and industrial companies in the central part of the country are also witnessing hampered activity due to lockdowns. Moreover, cities close to Shanghai are observing disruptions in operations as stringent measures are being taken to curtail the spread of the virus.

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Is it the right time for China to impose lockdown?

The rather harsh efforts of the Chinese government to control the spread of the Omicron variant have left foreign investors and producers locked in a guessing game. The unpredictability arises from the fact that the Chinese government can be as hostile or strict against the virus as it pleases.

Little regard has been paid to the fact that international businesses may suffer in between these restrictions. Moreover, the timing of these restrictions has left little room for businesses to turn toward alternative sources of materials, given the escalating geopolitical conflict. The Russia-Ukraine war has already left countries scrambling for supplies of essential materials such as oil, wheat, and food grains.

Most importantly, the effect of the lockdowns is not just being felt by companies that have been domestically set up. Foreign companies dependent on Chinese imports are also facing the threat of Chinese ports being shut down without any warning. Thus, with an existing supply shortage plaguing global economies, Chinese disruptions can bring increased inflation, with delayed deliveries becoming a regular phenomenon.

Why is the latest lockdown more alarming?

At the port of Lianyungang, foreign sailors are not being given clearance to leave ships or even to use cities to change crews. Those wishing to enter Shanghai need to be mandatorily tested. Additionally, cross-border freight services are seeing disruptions, with fresh and live food shipments bearing the brunt.

While some level of disturbance is common during a period of rising infections, the number of companies announcing production halts has been alarming during the latest lockdown. The issue is exacerbated as there is less clarity on alternative routes of shipments.

The agency managing the Shanghai port has closed its offline operations, stating that all the shipment-related activity would go online. Also, the agency did not acknowledge that the latest restrictions have interfered with shipment activities in the country.

Therefore, the ambiguity on how businesses should resume their operations has raised more eyebrows than the rising number of cases in China. Surprisingly, this seems to be the first time for the country when the news of rising infections is playing only a minuscule part in fuelling global concerns.

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