Climate change could exacerbate supply chain disruption

Damaged vegetation after a fire burned through a farm near Mulino, Ore., Sept. 10, 2020. (Kristina Barker/The New York Times)

Chinese factories shut down again in late August, a common occurrence in a country that has periodically imposed lockdowns to fight the coronavirus. But this time, the culprit was not the pandemic. Instead, a record drought has crippled economic activity across southwestern China, freezing international supply chains for cars, electronics and other goods that have been regularly disrupted over the past three years.

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

Much remains unknown about how rapid global warming will affect agriculture, economic activity and trade in the coming decades. But one clear trend is that natural disasters such as droughts, hurricanes and wildfires are becoming more frequent and unfolding in more locations. In addition to the toll of human injuries and deaths, these disasters are likely to wreak sporadic havoc on global supply chains, exacerbating 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 into what the climate could do,” said Kyle Meng, an associate professor in 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 across the globe in recent decades are studies in modern efficiency, stringing products like electronics, chemicals, sofas and food across continents and oceans at ever-cheaper costs.

But those networks have proven 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 goods in short supply, prices have soared, fueling rapid inflation worldwide.

The drought in southwest China has also had ripple effects for global business. It drastically reduced hydropower generation in the region, forcing blackouts at factories and disrupting supply chains for electronics, auto parts and other goods. Volkswagen and Toyota scaled back production at nearby factories, as did Foxconn, which makes electronics, and CATL, a maker of batteries for electric cars.

The Yangtze River, which bisects China, fell so low that ocean-going ships that normally cross its upper bank from the rainy summer to early winter could no longer run.

Companies have had to scramble to secure trucks to transport their goods to Chinese ports, while China’s food importers have been chasing more trucks and trains to move their cargo inland. Heat and drought have withered many vegetables in southwestern China, causing prices to nearly double and making it difficult for surviving pigs and poultry to lose weight, driving up meat prices.

Recent rains have temporarily restored power to homes and businesses in western China. However, drought remains in much of central and western China and reservoirs remain at a third of their usual level.

This means less water not only for hydroelectric power, but also for the region’s chemical plants and coal-fired power plants, which need vast amounts of water for cooling.

China has even resorted to using drones to seed clouds of silver iodide in an attempt to induce more rain, Zhao Zhiqiang, deputy director of the China Meteorological Administration’s Weather Modification Center, told a news conference on Tuesday.

At the same time, the coronavirus and China’s insistence on a zero-COVID-19 policy continue to create supply chain risks by restricting movement in important areas of the country. Last Thursday, Chinese authorities locked down Chengdu, a city of more than 21 million people in southwest China, to fight the coronavirus outbreak.

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

The Biden administration, in a plan released Tuesday outlining how the United States plans to boost its semiconductor industry, said the current concentration of chipmakers in Southeast Asia has 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, both for businesses and for consumers to whom companies would pass on their costs in the form of higher prices. Just as the pandemic has led to higher prices for consumers, Meng said, the same could happen with climate change, particularly if extreme weather events simultaneously affect large areas of the world.

Companies could also face new costs from carbon taxes when shipping goods across borders, as well as higher transportation costs for moving products by sea or air, experts say. Both oceans and air transport are major producers of the gases that contribute to climate change, accounting for about 5% of global carbon emissions. Companies in both sectors are quickly scrambling to find cleaner fuel sources, but that transition is likely to require major investments that could raise prices for their customers.

Natural disasters and coronavirus lockdowns in China have been particularly painful, given that the country hosts much of the world’s manufacturing. But the United States has also felt the growing effects of extreme weather events.

A multi-year drought across much of the Western United States has weighed on American agricultural exports. Wildfires on the West Coast have messed up logistics for companies like Amazon. Winter storms and power outages shut down semiconductor factories in Texas last year, adding to global chip shortages.

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

“As networks become more interconnected and climate change worsens, the frequency and magnitude of supply chain-related disasters is increasing,” the report said.

The National Centers for Environmental Information, a federal agency, estimates that the number of billion-dollar disasters that occur in the United States each year has jumped to an average of 20 over the past two years, including severe storms, hurricanes and floods. In the 1980s, there were only about three a year.

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

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

One risk is that increased competition for food could encourage countries to introduce protectionist policies that limit or halt food exports, as some have done in response to the pandemic and Russia’s invasion of Ukraine. These export restrictions allow a country to feed its population, but they tend to exacerbate international shortages and raise food prices, further exacerbating the problem.

The World Trade Organization, citing the damage that protectionist policies could cause, urged countries to keep trade open to combat the negative effects of climate change.

In a 2018 report, the WTO pointed out that global food trade was particularly vulnerable to disruptions in transport that can occur as a result of climate change, such as rising sea levels threatening ports or extreme weather degrading roads and bridges . More than half of the world’s traded grain passes through at least one of 14 global “choke points”, including the Panama Canal, the Straits of Malacca or the Black Sea rail network, the report said.

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

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

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

In some cases, trade can help mitigate the effects of climate change — for example, by allowing communities to import food when local crops fail due to drought, he said.

“That’s on the bright side of the ledger,” Hsiang said. “But the downside is, as everyone understands very well, we are so connected to our supply chains that events on one side of the world can dramatically affect the well-being of people elsewhere.”

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