What China’s “Static Management” COVID Response Will Mean to the U.S.

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    The Chinese regime has begun to refer to the restrictions imposed by the state on movement and activities, in its response to rising COVID cases, as placing the communities “under static management.” The phrase “lockdowns” caused people to be in a state of panic. Therefore, China has decided to address public issues in the traditional communist method: altering the way it speaks. It's not like you are being held in a prison; you're just being controlled in a state of stagnation.

    Shortly, we will begin to see the results of static management appear in supply chains across the globe and the supply of goods within the United States. It is estimated that the U.S. imported a jaw-dropping $90 billion worth of products from China so far this quarter–an increase of 20 percent in the initial two months of the year. This means that the U.S. economy has become more dependent on imports from China. This makes us more vulnerable to the effects of factories and ports closing.

    When the pandemic first hit the world in 2020, imports from China dropped by almost one-third, going from between $33 billion to $22 billion by February. While it is unlikely that trade will drop at that rate this time, there could be shortages. Production disruptions can be prolonged for weeks and could echo through global supply chains for many months to follow. Both the components of U.S.-built products as well as components of items made in other countries around the world could be scarce. Some consumer products could face extreme shortages. The result is likely to be a higher rate of inflation over the long term.

    The U.S. is in a better position than most of its allies. Exports to China are just 2 percent of the U.S. GDP. Thus, a decrease in the demand for goods from China isn't going to hurt the country in the least. Germany and Korea, which export manufactured products to China of significant economic size, may be facing the most difficult times should the lockdowns continue a few more weeks. Australia and Russia, important exporters of commodities to China, are also likely to be affected.

    There's a silver lining. Static management could reduce the demand from China for commodities, specifically within the energy sector. This should lower the cost of crude oil. A recent report by Bank of America analysts found that the COVID-related lockdown news from China reduced WTI (West Texas Intermediate) crude prices 10 percent. This could help offset some of the pressure on prices caused by what appears to be an escalating conflict in Ukraine.

    The Dallas Fed on Tuesday released an analysis of the OPEC (Organization of the Petroleum Exporting Countries) supply gap. The cartel has increased its production quota worldwide by 400,000 barrels per day every month, but the actual production hasn't been able to keep pace with the amount. A portion of this is because of Saudi Arabia intentionally keeping supply at a low level to ensure that prices remain high and to reduce stocks. However, a large portion of the shortage is due to the fact that many OPEC nations are reaching the end of their production capacities. More quotas don't mean much if you don't have the infrastructure required to fulfill the requirements. There is no way for the different OPEC members to meet the gap when other members fail to fulfill their amounts of the quota. This suggests that, even if the price of oil continues to increase, it is unlikely that there will be much more supply coming from OPEC countries.

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