The impact of China’s lockdown on the US economy

After weeks of citywide shutdown, pandemic restrictions are slowly easing in Shanghai as subway and bus lines begin to reopen. While the shutdowns are having a serious impact on the Chinese economy, Richard Sicotte, associate professor of economics at the University of Vermont, explained how what happened in China is also impacting Vermonters and states. -United.

“Vermont’s economy is subject to the same influences as other US states,” Professor Sicotte said. “China has a huge economy with extensive trade and financial ties to the US economy. Major disruptions to the Chinese economy are sending shockwaves through the global economic system that are being felt in the United States”

During the lockdown, most businesses in Shanghai had to close. In addition, the port of Shanghai, one of the busiest ports in the world, had to reduce its operations. According to the Associated Press, Chinese export growth fell from 15.7% to 3.7% between March and April. Sicotte says lockdowns contributed to US inflation

“Industrial production in China fell in April 2022 by about 3% compared to April 2021 and the lockdowns are the main factor behind this decline. A large number of industries are affected. Chemicals used in health care, materials used in shoemaking, building materials and electronic components are in short supply. Therefore, the lockdowns contribute to inflation in the United States, but it is difficult at this stage to provide an estimate of the inflation they cause.

Sicotte adds, “I think at this point most observers blame the excessively expansionary monetary and fiscal policy in the United States as well as the fallout from the Russian invasion of Ukraine for most of the inflation that we know. Unfortunately, it is easier to determine the precise causes of economic phenomena like inflation with hindsight. This period will be studied by economists for decades to come.

The shutdowns in China have also had a negative impact on many American businesses. Adidas announced that its net profit for the first quarter fell to $310 million, from $502 million in the first quarter of 2021. Meanwhile, Under Armor announced a net loss of $60 million against net profit of $78 million recorded in the same period last year.

“Many American companies have factories or outlets in China, often in joint ventures with Chinese companies,” Sicotte said. “Many more contract with Chinese companies for parts, finished goods, or produce under license agreements. Companies that have suffered the most disruption will see their profits reduced or perhaps their losses due to the closures. Apple said they would cost the company between $4 billion and $8 billion in lost revenue. Japanese automaker Toyota is forecasting a 20% drop in operating profit.

The auto industry in the United States and around the world is struggling due to a global shortage of chips, which could continue to face challenges as China dominates the market for used rare earth minerals or chips and batteries. “China plays a pivotal role in the global battery industry, and the automotive industry is vulnerable to anything that disrupts it,” Sicotte said. “This leads to higher costs for automakers, reduced profits and higher vehicle prices for consumers.

“There are significant lithium deposits in Australia and Latin America that have the potential to play a major role in the transition to green energy, but bringing more of these deposits into production is taking time. Lithium prices are up this year, but that seems to be largely due to growing demand rather than supply restrictions, and supply isn’t growing at the same rate as demand. at $4.50/gallon or more, the shift to e-vehicles is gaining momentum.”

One idea that has surfaced is the “offshoring” of production, which would establish manufacturing plants in the United States, rather than producing goods overseas. The cost of skilled labor overseas, particularly in China and Asia, has been a major reason the United States has manufactured goods overseas. Sicotte explained that “offshoring” would increase production costs, which would lead to higher prices for American consumers.

“Nevertheless, even before the most recent shutdowns, many American companies were reassessing their supply chains and sourcing strategies. They were doing so in response to rising production costs in China relative to other countries, trade tensions between the United States and China that have heated up under President Donald Trump and continue under President Biden. , and disruptions that occurred earlier in the pandemic. Some companies are looking to diversify their sources of supply and “offshoring” could be part of that mix. Other companies will be reluctant to pull out of China because one of the main reasons for establishing a presence there is to serve the Chinese market.

As the lockdown in Shanghai appears to be slowly coming to an end, some fear Beijing may be next as multiple outbreaks have been reported there.