Supply Chain Disruption: Is China The Key?

The global economy is connected through the supply chain system from one country to another country, but recently, the world has been experiencing a huge disruption in its supply chain system. This disruption caused problems, including the soaring price of commodities and the shortage of some goods.

What Causes the Supply Disruption?

The Covid-19 pandemic was the first event that sparked the beginning of the supply chain disruption, resulting in limited physical activities, work done from home, and the commencement of a lockdown in several countries. Due to this reason, the majority of companies, especially necessities, decided to slow down and decrease their production level significantly to survive the dramatic demand drop. Unexpectedly, the demand for many goods bounced back faster than it was predicted, as many countries are starting to loosen up their Covid policy. The majority of the industry wasn't ready yet and it takes time to increase their production capacity back to normal again, this made the prices of goods increase since the availability of the goods is becoming scarcer and insufficient to meet all the market demand.

Moreover, the war between Russia and Ukraine made the supply chain disruption even worse. The war made the export and import process, especially for energy and food-related goods, to be hampered. Why? Because Russia is one of the biggest exporters of oil and natural gas, especially to Europe. Meanwhile, Ukraine is one of the biggest wheat and seeds exporters in the world. This then resulted in an even higher commodity price.

Lastly, China’s “Zero Covid Policy” when the majority of other countries have loosened up their Covid Policy. This created a significant supply chain blockage since China is the largest exporter and second-largest importer in 2021, in terms of value. One of the most recent cases is the ShangHai lockdown which went on for 2 months. This policy caused many economic activities in the area, including the production and distribution process to be halted. Most factories are forced to shut down, resulting in a lot of market demand failing to be fulfilled. Besides that, the number of monthly containers at ShangHai port during the lockdown decreased by a total of 25% (Saxon, 2022). This means that the distribution process of the goods will be slower to reach the buyer’s hand, making the condition even worse.

Is it worth it?

This strategy worked well during the earlier stage of the Covid-19 pandemic, as shown by China’s low number of Covid-19 cases and deaths. Unfortunately, this strategy does not work efficiently in the present time, most countries that choose to lift their Covid restrictions have shown better economic recovery. Based on the National Bureau of Statistics of China In April 2022, retail sales had declined by 11%, property sales had dropped by 40%, car sales had dropped by 32%, and exports had dropped from 14.7% to 3.9%. Due to that, many investment banks decided to lower their prediction of China’s economic growth from 5.5% to only 3.3% growth (Yao & Carpenter, 2022).

Then, why does China persist in implementing its strict Covid prevention policy? The answer lies in the vaccination rate for elderly people, especially for those above 80 years old which is still relatively low. Only around 50.7% of Chinese people aged 80 received two doses of injection and only 19.7% received booster injections (Liu et al., 2022). Some research also said that Chinese-made vaccines are less effective against the Omicron variant. Moreover, because of strict Covid prevention, China’s population hasn't developed a strong natural immunity, which poses an even bigger threat to China if it lifts its Covid policy. However, if we try to see China’s policy from a different perspective, there’s an advantage for China to do so. By implementing the “Zero Covid Policy” China gets the power to be the price setter for the global market price of many different goods, which can be utilized for China's benefit and interest.

The Benefits

China has been the main manufacturing place for many goods, especially high-tech goods. Many big companies such as Apple, Google, and Microsoft are manufacturing their goods in China. Now, China’s condition is unstable because of the implementation of its policy, therefore a lot of companies are starting to shift their production to other cheap manufacturing countries, mainly India and Vietnam. Apple has been reported to start producing a small proportion of its newest iPhone 14 in India, meanwhile, Google was reported to make its newest Pixel phone in Vietnam. Even though right now China is still the biggest and most capable manufacturer in the world, this is a good thing since a lot of companies are starting to consider other alternatives, which eventually will reduce the global reliance on China’s manufacturing industry. Moreover, by reducing the level of reliance on a single country, we can reduce the risk of supply chain problems happening again if something would have happened to one of the manufacturing countries.

On the other hand, since many international companies are starting to look for alternative places to manufacture their product, this will be a huge opportunity for manufacturing companies with cheap labor to grab the market. Countries such as India, Vietnam, Indonesia, and the Philippines have a huge chance to dive into the market and they should utilize it accordingly.

When will supply chain blockage and commodity prices drop?

The supply chain disruption happens due to the ripple effect of several huge events happening in a close period. The big question is, when will it go back to normal again? It is rather hard to predict the ending since a lot of things are extremely uncertain. However, the supply chain blockage and commodities prices will certainly come down when China starts to relax and open its “Zero Covid Policy''. Besides that, the signs of a recession happening all around the world also put a huge strain on commodity prices, such as oil and metals. This happens because if a recession happens, the demand for a lot of goods will come down, therefore affecting the demand for raw materials. On the other hand, OPEC+ (world organizations of oil country producers) decided to cut down their production to keep the price of oil high, this resulted in the recent increase in oil prices.

In conclusion, even though it’s hard to predict the future price of commodities, it is almost sure that the price of some commodities, especially the ones related to manufacturing processes will start to come down, even when the supply chain system is still disrupted. This happens because of the potential recession due to monetary policy to deal with high inflation which then will lower economic activity. However, some commodities prices such as energy in Europe will remain high as there is a scarcity of energy supplied there, mainly due to the Russia and Ukraine war.

Summary

• The commodity boom is the result of several major events happening during the same period, which are the Covid-19 pandemic, the Russia and Ukraine war, and China's “Zero Covid Policy”.

• Behind every disadvantage that China gets from implementing its “Zero Covid Policy”, it also gains a huge advantage by holding the power to set the global market price.

• Other countries are starting to look for alternative places to continue their production process, and cheap-labored manufacturing countries such as India and Vietnam will gain a huge opportunity to grab the market.

• Some commodity prices will start to go down as monetary policy tightening (an action taken by the central bank to increase the interest rate) continues to battle high inflation, which then makes the possibility of a recession happening bigger.

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