Shanghai’s Lockdown Could Hit The U.S. And EU At The Worst Time

China's renewed obsession with Covid-19 lockdowns could hit the United States and European Union economies hard by adding to stagflation pressures gathering momentum in the last twelve months.

Covid-19 lockdowns are over in most countries worldwide, as the spread of the pandemic and its severity have been easing. But not in China, which continues to lock down cities, including the recent lockdown of Shanghai and Zhengzhou. They have an enormous impact on its economy and the economies of its major trade partners, the U.S. and EU. For instance, when containers do not leave China's ports, the merchandise doesn't arrive in U.S. and EU ports, fueling shortages of manufacturing products, which add to stagflation pressures.

That's the last thing both economies need, as they already strive to cope with supply chain bottlenecks fueled by the Russian-Ukraine war. They have pushed inflation into a 40-year high, in the case of the US.

Still, Chinese authorities do not think that the lockdowns significantly impacted the flow of Chinese goods to overseas markets. "The first quarter of this year saw the country's total trade expand more than 10 percent year-on-year," said a Globaltimes editorial posted over the weekend in response to criticism from western media. "China's foreign trade posted positive year-on-year growth for seven consecutive quarters. From Apple mobile phones to Tesla electric cars, "Made in China" continues to supply blood to the major arteries of the global industrial chain, bringing certainty to the world disturbed by "Black Swan" and "Grey Rhino" events."

But a close examination of China's exports shows that China's February exports dropped from $327 million in January to $217 million in February before recovering slightly in March. And the full impact of Shanghai's recent lockdown will take 4-5 weeks before it is felt by the U.S. and EU, according to Robert Khachatryan, CEO at Freight Right Global Logistics. "This is when the containers shipped right after the lockdown will start reaching the US shores," he says. "The important difference between this lockdown and any previous ones is that Shanghai factories, which are largely outside of Shanghai proper, still continue to manufacture. There is a massive build-up of goods ready to ship. These will hit the Shanghai port all at once, overflowing all the available vessel space and creating a deficit of empty containers in the area."

A container deficit, in turn, could slow down trade in other areas of the world, worsening shortages of commodities and adding fuel to inflation. Kostas Mastoras, President and owner of Long-Island-based Optima Foods, an importer of Mediterranean food products, is already seeing container shortages delaying shipments. "The situation could worsen in May," he says. "That's when we will see another round of price hikes."

And perhaps another record inflation number at a time when the U.S. economy will already be weakening by the Fed's tightening. The timing of Shanghai’s lockdown couldn’t be worse.