Climate change could worsen supply chain turmoil

Chinese factories were shuttered again in late August, a frequent occurrence in a country that has imposed intermittent lockdowns to fight the coronavirus. But this time, the culprit was not the pandemic. Instead, a record-setting drought crippled economic activity across southwestern China, freezing international supply chains for automobiles, electronics and other goods that have been routinely disrupted over the past three years.

Such interruptions could soon become more frequent for companies that source parts and products from around the world as climate change and the extreme weather events that accompany it continue to disrupt the global delivery system for goods in highly unpredictable ways, economists and trade experts warn.

Much remains unknown about how the world’s rapid warming will affect agriculture, economic activity and trade in the coming decades. But one clear trend is that natural disasters like droughts, hurricanes and wildfires are becoming more frequent and unfolding in more locations. In addition to the toll of human injury and death, these disasters are likely to wreak sporadic havoc on global supply chains, exacerbating the shortages, delayed deliveries and higher prices that have frustrated businesses and consumers.

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“What we just went through with Covid is a window to what climate could do,” said Kyle Meng, an associate professor at the Bren School of Environmental Science and Management and the department of economics at the University of California, Santa Barbara.

The supply chains that have stretched around the world in recent decades are studies in modern efficiency, whizzing products like electronics, chemicals, couches and
food across continents and oceans at ever-cheaper costs.

But those networks proved fragile, first during the pandemic and then as a result of Russia’s invasion of Ukraine, with companies struggling to source their goods amid factory and port shutdowns. With products in short supply, prices have spiked, fuelling rapid inflation worldwide.

The drought in southwestern China has also had ripple effects for global businesses. It drastically reduced hydropower production in the region, requiring power cuts to factories and scrambling supply chains for electronics, car parts and other goods. Volkswagen and Toyota curtailed production at nearby factories, as did Foxconn, which produces electronics, and CATL, a manufacturer of batteries for electric cars.

The Yangtze River, which bisects China, dipped so low that the oceangoing vessels that typically traverse its upper reaches from the rainy summer into early winter could no longer run.

Companies had to scramble to secure trucks to move their goods to Chinese ports, while China’s food importers hunted for more trucks and trains to carry their cargo into the country’s interior. The heat and drought have wilted many of the vegetables in southwestern China, causing prices to nearly double, and have made it hard for the surviving pigs and poultry to put on weight, driving up meat prices.

Recent rainfall allowed power to be temporarily restored to houses and businesses in western China. But drought persists across much of central and western China, and reservoirs remain at one-third of their usual level.

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That means less water not only for hydropower but also for the region’s chemical factories and coal-fired power plants, which need huge quantities of water for cooling.

China even resorted to using drones to seed clouds with silver iodide in an attempt to trigger more rain, said Zhao Zhiqiang, the deputy director of the Weather Modification Centre of the China Meteorological Administration, at a news conference Tuesday.

At the same time, the coronavirus and China’s insistence on a zero-Covid policy continue to pose supply chain risks by restricting movement in significant portions of the country. Last Thursday, Chinese authorities locked down Chengdu, a city of more than 21 million in southwestern China, to clamp down on coronavirus outbreaks.

These frequent disruptions in Chinese manufacturing and logistics have added to concerns among global executives and policymakers that many of the world’s factories are far too geographically concentrated, which leaves them vulnerable to pandemics and natural disasters.

The Biden administration, in a plan released Tuesday outlining how the United States intends to bolster its semiconductor industry, said the current concentration of chipmakers in Southeast Asia had left the industry vulnerable to disruptions from climate change as well as pandemics and war.

But setting up factories in other parts of the world to offset those risks could be costly, for both businesses and the consumers whom companies will pass their costs on to in the form of higher prices. Just as the pandemic has resulted in higher prices for consumers, Meng said, so could climate change, particularly if extreme weather affects large areas of the world at the same time.

Natural disasters and coronavirus lockdowns in China have been particularly painful, given that the country is home to much of the world’s manufacturing. But the United States has also felt the rising impacts from extreme weather.

A multiyear drought in much of the Western US has weighed on US agricultural exports. West Coast wildfires have jumbled logistics for companies like Amazon. Winter storms and power outages shut down semiconductor plants in Texas last year, adding to global chip shortages.

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White House economists warned in a report this year that climate change would make future disruptions of the global supply chains more common, citing research showing that the global frequency of natural disasters had increased almost threefold in recent decades.

Academics say the effect of these disasters and of higher temperatures in general will be particularly obvious when it comes to food trade. Some parts of the world, like Russia, Scandinavia and Canada, could produce more grains and other food crops to feed countries as global temperatures rise.

But those centres of production would be farther from hotter and more densely populated areas closer to the equator. Some of those regions may struggle even more than they do now with poverty and food insecurity.

One danger is that increasing competition for food could encourage countries to introduce protectionist policies that restrict or stop the export of food, as some have done in response to the pandemic and Russia’s invasion of Ukraine.

These export restrictions allow a country to feed its own population but tend to exacerbate international shortages and push up food prices, further aggravating the problem. The WTO, citing the damage that protectionist policies could pose, has urged countries to keep trade open to combat the negative effects of climate change.

Ngozi Okonjo-Iweala, the WTO’s director-general, has described trade as “a mechanism for adaptation and resilience” that can help countries deal with crop failure and natural disasters. In a speech in January, she cited economic models estimating that climate change was on track to contribute to severe malnutrition, with as many as 55 million people at risk by 2050 because of local effects on food production. But greater trade could cut that number by 35 million people, she said.

“Trade is part of the solution to the challenges we face, far more than it is part of the problem,” Okonjo-Iweala said.

Solomon Hsiang, the Chancellor’s Professor of Public Policy at the University of California, Berkeley, and a co-director of the Climate Impact Lab, agreed that trade might simultaneously make the world more resilient to these disasters and more vulnerable.

In some situations, trade can help soften the effects of climate change — for example, allowing communities to import food when local crops fail because of a drought, he said.

“That’s on the good side of the ledger,” Hsiang said.

“But the bad side is, as everyone really acutely understands, we are so interconnected from our supply chains that events on one side of the world can dramatically impact people’s well-being elsewhere.”

The New York Times