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Economy

The Economic Ripple Effect Of Chinese Supply Chains

The auto and electronics sector in Brazil is a prime example of how manufacturers around the world came to depend on Chinese-made supplies, and are now struggling because of it.

A textile factory in Campinas, Brazil
A textile factory in Campinas, Brazil
Helmuth Hofstatter*

-Analysis-

CURITIBA — China is the world's principal products supplier, and various nations depend on its exported goods to propel their own economic activities and to process raw materials to produce basic or even luxury goods.

Over the past two decades, many firms settled in China to take advantage of cheap labor and produce and export goods at competitive prices, though in doing so they also took on risks.

On the back of big growth rates, China has become the main trading partner for many countries, including Brazil. Last year, Brazilian exports to China constituted 28.1% of all its sales abroad, and imports from China were 19.9% of all the country's purchases.

The dependence of Brazilian factories on Chinese products became an important risk to production in the first quarter of 2020, as the COVID-19 pandemic took off in China. The virus was first registered in Wuhan, China, on Dec. 31, 2019. To contain it, Chinese authorities extended the new-year holidays and confined people to their homes, first in Wuhan, then elsewhere.

Brazilian factories are highly vulnerable in terms of their need for Chinese products.

From Jan. 25 to Feb. 10, total confinement was imposed, production halted, and the economy became paralyzed. For the first time in 30 years, Chinese industrial production shrank by 13.5%. This affected not just its economy but those of its main trading partners, as affected areas like Wuhan — a manufacturing hub — are at the center of many global supply chains. Chinese exports fell by about 17%, reducing the inflow of foreign capital and destroying jobs, local incomes and consumption and further along, growth and development.

The consequences will impact the world economy, with possibly lasting results as many countries base their own economies and productions on goods from China. Brazil is one such country, where factories have seen production disrupted due to a shortage of supplies and components that often are only made in China. Brazilian factories are, in other words, highly vulnerable in terms of their need for Chinese products.

Brazil's trade balance registered a 3.6% drop in imports compared to the January-February period in 2019. The transformation sector, which turns raw materials into products like cars, electronic goods, household appliances or textiles, was the worst hit. According to the country's foreign trade ministry (SECEX), 60% of supplies, components and raw materials for making electronic products are imported, and only 40% come from inside.

The consequences will impact the world economy.

Imports of telecommunication equipment and components fell 5.9% (in the January-February period), those of electrical machinery and devices fell by 2.4%, cloth, weaves and synthetic textile materials fell 6.7%, and aluminum 21.3%. The figures may not seem much to some, but if we understand that most industries work with limited stock, a drop in imports can come to affect the survival of firms.

The products cited are essential components for making Brazilian goods like ovens, fridges, washing machines, hairdryers, audiovisual equipment, ventilators, cars and more. The Brazilian Electrical and Electronics Industry Association (ABINEE) found on March 27 that work had slowed in 24% of the country's electronics factories, with a partial paralysis in 58% of them and total stoppage in 42%. In the sector, 70% of firms said they had trouble obtaining supplies and components from China, though as China began to renew supplies, Brazilian firms were now obliged to implement contingency plans as the virus had come to Brazil.

These firms say industry will return to normal only 63 days after a total reactivation of supplies from China, all else being equal here. No new products would be launched furthermore until the pandemic had passed. The economic imbalance, lack of production, the dollar's appreciation will all mean more costly products, to be paid, in principle, by the end consumer.



*Helmuth Hofstatter is a founder of the Curitiba-based IT and automation consultancy LogComex.



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