Those container ships out of China might not be so laden down with cargo soon. (Photo by Iain ... [+] Masterton/Construction Photography/Avalon/Getty Images)Getty Images
If you think deliveries of consumer products out of China are bad now, you ain’t seen nothing yet.
Five big developments – some short-term and others more of a longer nature – are making the process of importing goods out of China worse and will continue for the foreseeable future. And while the increased national attention trying to remedy this situation, including the Biden administration steps to have ports operate for longer hours, will help somewhat, they do not address these China-specific issues that threaten to create even more problems. And the timing could not be worse as the American economy heads into the critical holiday shopping season when demand is at its highest.
Of the five key factors, three are short-term, at least relatively, but two have the potential to be much longer lasting, impacting imports from China for perhaps years to come.
1. Energy Shortages: As China starts to head into the winter when demand for home heating is at its highest the country is beginning to experience rolling energy shortages throughout its economy. Factories are reportedly facing both brown-outs and total black-outs which have the potential to reduce manufacturing capacity across a broad range of industries. The Chinese government is trying to remedy the situation by allowing for more coal production but the time lag in that process means it could be awhile before energy capacity gets back up to normal. And that movement is directly impacted by factor number two.
2. The Winter Olympics. When China last hosted the Olympics, in the summer of 2008, the government instituted a near-nationwide program to shut down many manufacturing facilities, hoping to cut pollution from these factories and provide for a more hospitable atmosphere for athletes and global perception alike. Anecdotal reports from companies doing business with China suggest it is doing the same thing in advance of it hosting the winter Olympics, starting on Feb. 4 next year, again in Beijing. That effort could be made much more difficult given the winter timing when so much of the country’s power comes from the burning of coal. The Olympics run through Feb. 20 and no doubt manufacturing facilities will kick back in almost immediately but in the meantime there could be as much as three months of reduced production capacity at Chinese factories.
3. Chinese New Year. The third of the short-term issues impacting exports, the annual lunar calendar celebration is a well-known entity on the global sourcing calendar as factories shut down for anywhere from a week to as long as three weeks to accommodate workers who return to their home towns often thousands of miles away. During the last two pandemic-era holidays the situations were more complicated with some factories staying open as travel was highly restricted. It’s unknown how much intra-country travel the Chinese authorities will allow this time around but pent-up demand could drive extended shutdowns. The Olympics timing was no doubt chosen to coincide with the holiday but the usual pre-New Year build up in manufacturing output has probably been negated by the first two factors mentioned above.
4. Tariffs. Trade restrictions that have impacted Chinese exports to the U.S. have been a fact of life for several years now since the Trump administration moved to aggressively try to exports and exert political influence within China. Both efforts largely failed but there has been some cutback in goods from China more recently with nations like Vietnam, Indonesia and Bangladesh being the main beneficiaries. But many companies who bring product in from China had expected the Biden administration to reverse some or all of the tariffs and had been in a holding pattern for the past year or so. However that has not happened and President Biden has shown no sense of urgency to address this issue. As long as the tariffs remain in place – and more importantly appear to be in no danger of going away anytime soon – companies are going to continue to try to move production out of the country. In the meantime, the situation continues to inhibit imports from China.
5. President Xi Policies. The recent crackdown from the Chinese leader on business is getting more widespread and brazen, moving from its initial tech and real estate beginnings to encompass many more industries within the country. All of this has the potential to inhibit or even restrict Western investment in the nation and that could be devastating for a country that still needs American and European companies as partners. Certainly, China is more capable than ever of going it alone but without Western investors, it will be harder, slower and ultimately less successful. This is a very long-term issue, one we are not likely to see the full impact of for years or even decades to come. But should the Xi policies continue – and get more aggressive – it will make China less attractive for American and other Western companies to do business with.
The ports may be running non-stop, Covid may continue to lessen allowing for more people to return to the labor force and new ships and the containers they use may come on line in the next 24 to 36 months but these China-specific issues transcend all of that.
And they have the potential to impact this critical piece of the global economy long after we’ve all put away our masks.