Shipping congestion at Chinese ports, combined with Russia’s war in Ukraine, risks a one-two punch that threatens to derail the recovery, already buffeted by inflation pressures and headwinds to growth. Are we about to witness the fracturing of the global trading order? Is globalisation on its way back to square one?
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. 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. “We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”
Beijing’s zero-tolerance approach
The change in Covid prevention policies in different cities has imposed an extraordinarily severe impact on logistics.
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.
Vessels queuing up
Longer queues of vessels seen off China’s coast aren’t helping. The line of cargo carriers has jumped after Shanghai, home to the world’s largest container port, initiated a city-wide lockdown late last month to combat Covid-19 cases. The total number of container ships in port and off the hub’s shared anchorage with nearby Ningbo stood at 230 as of last Wednesday, a 35% increase from this time last year, according to Bloomberg shipping data.
To ease congestion around Shanghai, sailings are being diverted to Ningbo and Taicang, according to Donny Yang, Dimerco’s director of ocean freight. At the same time, the central government has instructed that highways be kept open and unobstructed.
Air freight is also being affected, with deliveries into Shanghai Pudong International Airport backed up, Taipei-based air and ocean freight forwarder and logistics specialist Dimerco Express Corp. said. That congestion has spread to Shenzhen, as the city that borders Hong Kong has seen a sharp increase in shipments rerouted from Shanghai.
Carmakers to electronics manufacturers in China’s financial hub have been gradually resuming operations, as authorities have encouraged the use of closed-loop systems, in which workers live on site at their factories. Still, ramping up production from a shutdown isn’t an instant process. Tesla restarted its Shanghai factory after a three-week closure, though it’s uncertain how long the plant can operate with a limited supply of components.
Wang Xin, head of the Shenzhen Cross-Border E-Commerce Association, an organization representing some 3,000 exporters, said that even though a lockdown in that Chinese tech hub lasted only a week, “many sellers are suffering about a one-month delivery delay.”
Will consumers accept higher prices?
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. European Central Bank President Christine Lagarde, in a speech Friday, said Europe’s integration in global value chains was even deeper than the U.S.’s. Trade as a share of the euro area’s gross domestic product rose to 54% in 2019 from 31% two decades earlier, she said, compared with America’s 3 percentage-point rise to 26%.
She also cited a recent survey that found 46% of German companies get significant inputs from China. Of those, almost half are planning to reduce that dependency. Russia’s invasion now means the search for the lowest-cost suppliers must be refocused around geopolitical alliances. “We must work towards making trade safer in these unpredictable times, while also leveraging our regional strength,” said Lagarde, the former managing director of the International Monetary Fund. “Even industries that are not considered strategic are likely to anticipate the fracturing of the global trading order and adjust production themselves.”
Much of this shift hinges on whether the pandemic has convinced consumers to accept higher prices for products made closer to home. 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, a partner at the consulting firm Kearney and co-author of a report this month that found 78% of CEOs are either considering reshoring or have done it already. Added Shay Luo, a Kearney principal who helped write the report: “My bet is that globalisation will never die, however, it will evolve to a different form.”
