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What does the COVID-19 lockdown in Hubei tell us about China’s role in global supply chains?

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What does the COVID-19 lockdown in Hubei tell us about China’s role in global supply chains?

New research from the Department of Economics demonstrates how the coronavirus lockdown in China’s Hubei province impacted economies across the world, highlighting the importance of China’s role in global supply chains.

A key feature of the lockdown was the huge shock on labour supply, as millions of migrant workers had returned home to celebrate Chinese New Year in late January 2020 and were unable to travel back to work when lockdown began soon afterwards. Qianxue Zhang studied the impacts of the labour supply shock on productivity and welfare in China and six other economies: the UK, the US, Japan, the Republic of Korea, the EU and the rest of the world (ROW).

She considered two types of productivity loss in Hubei province: a minor loss of output linked to a proportional reduction in labour (case one), and a full stoppage of production (case two), with the real situation likely lying in between. The analysis was conducted using a theoretical model with data from the World Input and Output Database, the OECD Structural Analysis Database and the UN Comtrade database.

The research showed that welfare (measured as real income) in China reduced by 7.61% in case one and 18.28% in case two. Korea, the UK, the US and the ROW experienced lower welfare levels in both cases. This was driven by lower output and higher prices in the computer, textiles and other manufacturing sectors, which were hardest hit and export-orientated in China. However, the EU’s income increased, due to the substitution of Chinese exports with domestic or other products.

Productivity in China overall dropped by 7.55% in case one and 18.10% in case two. Productivity in all other economies also declined, although generally by less than 0.1% and 0.4% in cases one and two, respectively. Again, the textiles, computer and other manufacturing sectors played the most critical roles in productivity decline.

In terms of output, China lost 4.97% of output in case one and 14.26% in case two. All other economies produced more in almost all sectors, indicating they were producing domestic goods in place of Chinese imports. However, world output still decreased due to the importance of China’s role in production. Terms of trade - the ratio of export prices to import prices - also improved in four out of seven economies and for China dropped only by 0.06% in case one and 0.17% in case two.

Qianxue said: “The timing of the Hubei lockdown – which started in January and ended in late March 2020 - provides a unique window to understand the impact of labour disruptions in China on global supply chains. When Hubei entered lockdown in January 2020, other countries were not yet in quarantine, and their economies were relatively untouched. This enables us to see the impact of the Hubei lockdown in isolation, as the effect of other countries’ lockdowns on international trade had not yet taken hold.”

“The main export-orientated sectors in China are still relatively labour-intensive and the research shows how disruption to labour supply has knock-on effects for regional and global supply chains, in which Hubei plays a key role due to its central location in China.”

Qianxue also modelled the consequences of labour supply shocks happening in other economies, to compare their impacts with China’s. She found that if the same shocks happened in Japan, Korea, or the UK, the welfare changes in other economies were limited to 0.02%. Interestingly, China and Korea would benefit from productivity shocks in the US because firms switch their suppliers to them from the US, especially in the textiles and computer sectors. Overall, as the US has a higher reliance on imports, it has a lower impact on world welfare. The comparison emphasises the importance of China in global supply chains as a world-leading exporter.

Read the full article

Zhang, Q. (2022) ‘The Hubei lockdown and its global impacts via supply chains’, Review of International Economics.

Qianxue Zhang is a PhD student in the Department of Economics, University of Warwick.