Expert Column Geopolitical Risks and Logistical Impact of the Shanghai City Lockdown

Among the recent domestic and international issues, the war between Ukraine and Russia and the complete lockdown of Shanghai, China's largest economic city, are the issues that attract the most attention. There will be many questions about how much impact these two issues will have on global logistics and the economy. In this regard, we would like to briefly examine the reports and materials that have been published so far.

First, the war between the two countries, which started when Russia started military operations in Ukraine on February 2, shows no sign of ending easily even after a month and a half. It was expected that the war would end soon enough that not many experts thought of a long-term war after the outbreak, but now, no one knows when it will end.

In fact, after COVID-19, the global logistics market and supply chain suffered greatly, and the maritime freight rates rose significantly. Emerging as an alternative, the Trans-Siberian Railway (TSR) has fulfilled its role, and Russia naturally became a hub for global logistics.

After the war, as sanctions against Russia by the United States and Western countries began and TSR operations began to be partially suspended, the logistics supply chain through Russia is unable to function properly.

The global logistics market suffered from great difficulties due to COVID-19, and TSR seemed to be an alternative to better the situation. However, this alternative was blocked due to war. Especially, as air transport cannot pass through Russian airspace, time losses and physical damages began to mount by taking detours.

The setback to the logistics industry that started in Russia is highly likely to be further aggravated by Russia’s attack on Odessa Port in Ukraine. The Port of Odessa is the largest port on the Black Sea coast. If it is controlled, then the maritime trade through the Black Sea will be blocked, and grain exports to the Black Sea region, which accounts for more than 30% of the world’s grain production, will be halted, leading to a food crisis following the logistics crisis.

Another considerable problem is the soaring price of crude oil and raw materials as the supply of crude oil and raw materials has sharply decreased due to the complete blockade of Russia, a country with the most abundant resources. Europe relies on Russia for 25% of its crude oil and 40% of its natural gas, so a long-term crisis of raw materials is predicted. This difficulty is still ongoing, as it is expected that the price of crude oil and raw materials will stabilize only after the end of the war and the lifting of the sanctions on Russia.

Currently, the war between Russia and Ukraine is regarded as the greatest problem, surpassing the COVID-19 pandemic, which has been the most unfavorable factor in the world supply chain so far. If this war is prolonged, then it is expected that the current semiconductor shortage problem will worsen, and it will become a significant risk to manufacturing companies of automobiles, smartphones, and electronics.

The second issue is the logistics impact of the Chinese government’s lockdown of Shanghai city to prevent the spread of COVID-19.
To prevent the spread of COVID-19, the Chinese government started a partial lockdown of Shanghai, which is referred to as China’s economic city, by region on March 28, followed by a complete lockdown. As the spread of COVID-19 did not improve significantly, the city lockdown was extended indefinitely.
Originally, quarantine officials of Shanghai repeatedly declared that they would not lockdown the city because it would have a considerable impact on the entire Chinese economy as well as the global economy. But, in the end, they suddenly decided on the city lockdown. As a result, confused citizens began to buy food and daily necessities. However, this was only the beginning, and 10 days after the city lockdown, Shanghai is having an immense adverse effect on the global logistics and economy as well as the logistics crisis in China along with the news of riots from Shanghai citizens, who have not been able to obtain daily necessities such as food.
In addition, as the logistics impact that started with the lockdown of Shanghai city spread to the logistics crisis that started in the port of Shanghai, the logistics flow in China and the world is developing into a stagnant situation. Since the cargo truck drivers, the main pillars of land logistics, can only enter their destinations only after being tested negative for COVID-19, containers are piling up in Shanghai Port, which started with hundreds of ships waiting for unloading and increased to over thousands. This is causing severe stagnation in the domestic logistics of China and Shanghai. As the port of Shanghai is becoming stagnant, some regular container shipping companies are busy preparing countermeasures, such as canceling until May or skipping one or two voyages.

Unlike the previous closure of Shenzhen and Ningbo ports in China, the lockdown of an entire city caused disruptions in product production and inland logistics and limited cargo production and movement to the port. It is expected that the container ship freight market will continue to decline as a result, such as decreasing ship demand. Also, the impact of the Shanghai city lockdown is unlikely to subside easily.
Surely, the Chinese government announced the easing of some lockdowns, showing a lot of volatility; however, the logistics and economic problems caused by the lockdown of Shanghai are expected to continue for a very long time.

Let’s look at the forecasts from Korea Ocean Business Corporation. First of all, as the inland transportation capacity and logistics efficiency deteriorated due to the strong city lockdown, it was expected that the number of ship congestion and temporary cancellations would continue to increase. In addition, it is predicted that fluctuations in the container ship market will increase according to the sudden change in the international environment. Also, the maritime freight rates act as a factor in reducing exports from China due to the cessation of production in manufacturing centers in Shanghai and South China. Various forecasts have been made on the future impact, such as that if ships are allocated to neighboring countries such as China, cargo congestion will be alleviated, which will lead to a drop in freight rates.

So far, we have examined the war situation between Ukraine and Russia and the logistics impact of the lockdown of Shanghai, China’s largest economic city.

It may be one of several events that occur due to a series of issues; however, the problem is that the impact of logistics on daily life is so far-reaching that it can add to economic difficulties as well as simple inconvenience.
High oil prices due to the war between Ukraine and Russia and a sharp decline in China’s economic growth rate due to the prolonged lockdown in Shanghai are expected to deteriorate not only the Republic of Korea’s logistics but the economic situation. So far, the Korean economy has survived the COVID-19 relatively well. Manufacturing companies have not stopped their operations and have overcome the crisis by maintaining a steady upward trend in import and export logistics. However, as the war in Ukraine and the complete lockdown in Shanghai have overlapped, a warning light is being sensed in the economy, starting with the impact on logistics.
A great crisis has struck once again. If the government and corporations cooperate and overcome this crisis adequately through coherent response, then I firmly believe that it will be an opportunity for Korea to show its potential of why Korea was able to grow into a logistics powerhouse and economic power in a short period of time.

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