China’s zero-COVID policy equals trouble for supply chain, inflation

Just when the U.S. was starting to see improvements in the supply chain, small COVID outbreaks in China resulting in big shutdowns threaten to wreak havoc on the world economy.

“Particularly if China sticks to a no-COVID policy, Omicron can really disturb supply chains again,” Federal Reserve Chair Jerome Powell said on January 11.

With about two weeks to go before the Beijing Winter Olympics, the Chinese government isn’t taking any chances. It’s enforcing its hardcore “zero-COVID” policy: The goal of having no COVID cases at all in a country of 1.4 billion people.

Last week, officials identified the first locally transmitted Omicron case in Beijing. In China, one case is enough to lock down a facility, spurring mass testing and quarantining. With tight restrictions, global companies are already seeing production delays.

With the highly-contagious Omicron variant throwing a wrench in China’s manufacturing machine, companies from Samsung to Volkswagen to Nike are adjusting or suspending operations in China and tapping contractors in other countries.

The global supply chain has struggled since the first COVID shutdown in 2020, when imports from China to the U.S. fell by 50%. Repeated outbreaks over the past two years have had wide-ranging impacts, given China makes up about a third of the world’s goods.

Prior to Omicron, experts were looking to see significant supply chain relief in early 2022, two years in to the pandemic. But if Omicron takes hold in China as hard as it has in the U.S. and Europe, not only will that relief be delayed, it could reverse the improvements already seen in the global supply chain.

Powell and others warn the bottleneck could continue putting pressure on inflation, which is already at a 40-year high.