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The impact of China’s lockdown on the US economy

After weeks of a citywide lockdown, pandemic restrictions are slowly easing in Shanghai as subway and bus lines reopen. While the lockdowns are having a serious impact on the Chinese economy, Richard Sicotte, associate professor of economics at the University of Vermont, explained how events in China are also affecting Vermont residents and the US.

“Vermont’s economy is subject to the same influences as other US states,” said Professor Sicotte. “China has an enormous economy with extensive commercial 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 US.”

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

“Industrial production in China fell by about 3% in April 2022 compared to April 2021 and the lockdowns are the main reason for this decline. There are a large number of industries that are affected. Chemicals for health care, materials for manufacturing shoes, building materials and electronic components are in short supply. As a result, the lockdowns are contributing to US inflation, but it’s difficult to estimate at this point how much inflation they’re causing.

My life during lockdown in Shanghai

Adds Sicotte: “I think most observers at this point blame excessively expansionary monetary and fiscal policies in the US and the aftermath of the Russian invasion of Ukraine for most of the inflation we are witnessing. Unfortunately, it is easier to determine the exact causes of economic phenomena such as inflation in hindsight. This period will be studied by economists for decades to come.”

The lockdowns in China have also had a negative impact on numerous American companies. Adidas reported a decline in Q1 net income to $310 million from $502 million in Q1 2021. Meanwhile, Under Armor reported a net loss of $60 million compared to a net income of $78 million -dollars at the same time last year.

“Many American companies own factories or retail stores in China, often in joint ventures with Chinese companies,” Sicotte said. “Many others contract Chinese companies for parts, manufacture goods or produce under license agreements. Businesses that have faced the most disruptions will see reduced profits or possible losses as a result of the lockdowns. Apple said they will cost the company between $4 billion and $8 billion in lost revenue. Japanese automaker Toyota is forecasting a 20% decline in operating profit.”

The auto industry in the US and globally is struggling due to a global chip shortage that may 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 auto industry is vulnerable to anything that disrupts it,” Sicotte said. “This translates into higher costs for automakers, lower profits and higher vehicle prices for consumers.

“There are significant lithium deposits in Australia and Latin America that are likely to play an important role in the green energy transition, but bringing more of these deposits into production will take time. Lithium prices have risen sharply this year, but most of that seems to be due to rising demand rather than supply constraints. Supply is not growing at the same rate as demand. With gasoline prices at $4.50/gallon or more, the shift to electric vehicles is gaining momentum.”

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One idea that has surfaced is production “onshoring,” where manufacturing facilities would be set up in the US rather than producing goods abroad. The cost of skilled labor abroad, particularly in China and Asia, has been one of the main reasons the US has manufactured goods abroad. Sicotte explained that onshoring would increase production costs, resulting in higher prices for American consumers.

“Nevertheless, many American companies were already reassessing their supply chains and sourcing strategies prior to the recent lockdowns. They did so in response to rising manufacturing costs in China relative to other countries, US-China trade tensions that worsened during Donald Trump’s presidency and persisted under President Biden, and disruptions that emerged earlier in the year Pandemic. Some companies are trying to diversify their sources of supply, and onshoring could be part of that mix. Other companies will be reluctant to pull out of China as one of the main reasons for establishing a presence there is to serve the Chinese market.”

While the lockdown in Shanghai appears to be slowly ending, some fear Beijing could be next, as multiple outbreaks have been reported in that city.

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