Pacific Money | Economy

Rising Shipping Costs in China Add Weight to Decoupling Calls

The latest knock-on effect of the pandemic — ballooning shipping costs for Chinese exports — have laid bare the risks of current supply chain patterns.

Rising Shipping Costs in China Add Weight to Decoupling Calls
Credit: Wikimedia Commons/ kees torn

The global COVID-19 pandemic is giving nations cause to rethink myriad aspects of the world previously known as “normal.” Survival bunkers built in preparation for the apocalypse no longer seem to be a far-fetched idea. Living in relative isolation is not as daunting as it sounds. And making what we need and want in close proximity to where we live, or at least in one’s own country, may be a better idea than relying on the ability of far-flung nations to produce it for us.

Why? Because even if another country can make a needed product, they might not necessarily be able to deliver it to us in a timely and cost-efficient way.

Such is the situation highlighted by the ever-worsening shipping crisis out of China. Ships laden with containers are stuck in Chinese ports. Goods waiting for containers are stuck on factory loading docks. And shipping costs for those goods that are getting out have risen exponentially, destroying the value chain proposition that is supposed to underscore China’s advantage as a low-cost manufacturer.

The South China Morning Post reports that in 2020, “Rates on the busiest routes from China to the west and east coasts of the U.S. ended 208 percent and 110 percent higher than in 2019.”

The wisdom of the old adage “Don’t put all of your eggs in one basket” is being proven once again to be true.

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More than 25 years ago, China assigned itself an audacious goal: become the world’s factory. In spectacular fashion, despite sanction-drawing human rights abuses, initially backward infrastructure, and a poorly-trained workforce accustomed to meeting volume targets of a communist-driven command economy rather than quality targets of choosy international buyers, China has become the world’s largest manufacturer. It now manufactures millions of products often no longer made anywhere else on the planet – and although many are loathe to admit it, often makes them very well indeed.

Global addiction to China’s low-cost exports is now being tested. In three distinct ways, the trend to manufacture cheaply rather than more expensively closer to home is being called into question by the shipping crisis.

The first impact is on small businesses. Bloomberg suggests that “Global demand for Chinese goods has been so strong recently it’s creating a shortage of containers and driving up shipping costs, potentially impeding the nation’s exports in coming months.” Those higher costs hurt small businesses disproportionately more than large ones, who may be able to absorb what should be temporary increases.

Small businesses are vulnerable not just to the shipping costs themselves. The boon for larger competitors is that they, in a trend already well-defined by Walmart, Amazon, and other super-sized retailers, may be able to pick up the products that small importers can no longer afford to ship from China. With large corporations able to bear initially high shipping rates for goods that they do not now offer, they are in a position to capture market share held by small companies, leading to a double whammy of not only rising shipping costs but also loss of business to those able to withstand the initial sticker shock.

The second impact of the shipping crisis is broader in its policy ramifications. The barriers between borders that the COVID-19 pandemic has created throw into relief the problem of putting supply chains far away from ultimate end-users of the products those chains produce. With some products, the question becomes one of national security. Even prior to the pandemic, many nations were already questioning their over-reliance on one manufacturing nation as the source of critical supplies of pharmaceuticals and key technology products.

But the question is larger than just “key” products. What happens when a nation can no longer provide its own clothing, its own home appliances, indeed its own children’s toys? In the United States, for example, those manufacturing capabilities have dwindled to next to nothing. Try buying clothes that are made in America. According to the U.S. clothing brand Goodwear, the percentage of American clothing made in America has dropped from 95 percent in 1960 to 2 percent today. Between 1990 and 2011, “750,000 clothing manufacturing jobs disappeared from the U.S.”

In other words, not only an entire industry, but also an entire skill set has become extinct in the United States. That phenomenon is repeated in countries throughout the world. Pandemic-delayed and exorbitantly-priced shipping of Chinese-made goods serves to highlight not only global dependence on offshore manufacturing but also the danger of leaving countries, and ultimately individuals, vulnerable to the vagaries of disease and its resulting disasters.

The third impact of the rise in shipping costs out of China is of course on the Chinese people themselves. Millions of people are engaged in cottage-industry manufacturing for foreign buyers, often at low profit margins. These are that which have retrained, retooled, and re-imagined themselves from subsistence farmers to small entrepreneurs making everything from buttons to bows and beyond. They, too, are vulnerable, and in many cases, they, too, have lost an original skill set: the ability to feed themselves from sparse parcels of land. As their goods pile up unsold and unshipped, they, too, have their dependencies laid bare. In their case, their weak link is in the ability of a foreign buyer (whom they will usually never meet) to bear the brunt of buying goods at an overall price – due to shipping – that results in at minimum a temporary loss to that buyer.

The impact on the Chinese people is not limited to the manufacturers, though. It extends to those in leadership. Given the current risks to those manufacturers, it is surprising that the Chinese government has apparently not yet intervened in the shipping cost crisis.

China is no stranger to intervening in its economy when the need arises to shore it up, as it did during the 2008 financial crisis. It cannot afford to let its manufacturers go bust if shipping costs begin to cut into exports in a meaningful way. Thus, while international buyers of Chinese goods contemplate the consequences of policies that led them to offshore in the first place, Chinese policymakers are certainly accelerating their own plans to further decouple the Chinese economy from an over-reliance on foreign exports. Both sides have reasons to pull back, and it has taken an invisible virus to show us why.