China seems to have thought it was pulling it off. Since the draconian lockdowns in Shanghai began over three weeks ago, the effects on global markets had been, perhaps surprisingly, relatively mild.
Wait times for containers at the Port of Shanghai, the world’s busiest, had increased, but not by an extraordinary amount. The number of ships waiting to unload had increased, but the number of canceled sailings had hardly budged.
Chinese authorities had prioritized keeping the seaports and airports open to minimize the disruption to global trade. In previous lockdowns, such as the one in Ningbo last August, the ports were included and shuttered. This time, though, the government decided to leave the seaport and airport open for international trade.
But the ports don’t exist separately from the rest of the city. Port workers live elsewhere in Shanghai and commute to work; ports depend on ground transportation connecting them to other inland facilities; and exports must be produced in factories before they are put into containers. China was able to maintain the façade for a few weeks, but it’s coming apart now.
“Trucking has been the worst hit, as strict local pandemic policies and arbitrary implementation of rules choke off the transport of goods,” reported the Wall Street Journal on April 21. Containers were sitting empty because trucks could not move goods from factories to the port. Truckers needed to provide a negative Covid test and a bunch of other documents to enter, and in many cases they weren’t allowed to leave their trucks for days at a time. Journal reporter Liza Lin shared a video of a medical worker in a hazmat suit using a pole to give a trucker a bucket in his cab so he could use the bathroom.
Without trucking, it didn’t even matter what the factories were doing. The Chinese government is now scrambling to try and reopen factories, but as the rest of the world learned two years ago, it’s much easier to curtail economic activity than it is to restart it. And lockdowns overall are not winding down; on the contrary, they are expanding, affecting areas that are home to 373 million people and 40 percent of China’s GDP. It looks as though Beijing is next.
For the U.S., more port congestion on the West Coast is likely as the backlog of goods coming out of China grows. The expected influx will be in June and July, coinciding with the expiration of the current labor agreement between West Coast dockworkers and employers.
And it’s not as though there’s excess capacity in the U.S. to accommodate that surge. Freight railroads near the ports are already backed up right now during a relative lull. (It sure would be nice to have another huge intermodal yard right next to the Port of Long Beach right now.) Warehouses further inland in California are already full, so containers will probably pile up at the ports and temporary storage yards.
U.S. companies are responding by placing their peak-season orders earlier than normal. According to the Journal of Commerce:
Imports for the new school year beginning in September already started arriving in April, said Scott Weiss, vice president of business development at third-party logistics provider Whiplash. Back-to-school merchandise traditionally began to arrive at the ports in May, he said.
“A lot of people got burned last peak season, so retailers are bringing in as much product as they can now,” said Weiss.
Ordering extremely early was one of the tactics firms used during the Christmas season last year, and it was largely successful in avoiding major shortages.
While Americans will feel some effects from these lockdowns, it is the Chinese who will pay the most for their government’s demonstrated failure. In the short term, the effects are obviously horrific, with people locked into their homes without food or basic supplies. The Communist Party is undeterred, with the People’s Daily urging Chinese to “[unite] more closely around the party’s leadership with Xi Jinping as the core.” Chinese outside of Shanghai likely do not even know the severity of the lockdowns, with strict government controls on information and state media generally painting a sanguine picture.
In the longer term, China is looking less and less attractive to outsiders. As Craig Fuller wrote for FreightWaves, “Supply chain professionals are already looking for alternatives to China, and this process will accelerate.” China is an outlier here. If you want to do business with a country that won’t lock its truck drivers in their cabs and force them to pee in buckets, you have plenty of options.
Indonesia, for example, is striving to position itself as an alternative to China in Asia. It has been a bright spot in Asia recently, and its prospects among investors have risen as China’s have dropped. U.S. tech companies are looking to India, with Apple already starting to make iPhones there.
As Li Yuan wrote in the New York Times, China’s current lockdowns remind many of the strict communist command economy of the country’s pre-Deng past. China’s economic growth and importance in the global marketplace is predicated on it not reverting back to that history of authoritarian control. For the CCP to do what it has done to Shanghai, the center of the country’s wealth creation, sends a clear message to international investors and firms: We value our political power and our communist ideology more than your business.