Economics Macro Keys – China and North Asia Face New Supply Chain Disruptions

China, Korea, & Taiwan import mostly capital goods, industrial supplies, components & parts from developed economies now most affected by COVID-19. This could lead to supply shortages of machineries & components for China & North Asia.

31 Mar 2020

Capital Goods & Production materials form the majorities of North Asia's imports from the developed economies most affected by COVID-19

Source: UN Comtrade, UBS

Developed economies likely a new source of supply chain disruptions

Not long ago, some of Korea's auto production lines were suspended due to the shortage of a particular component as a result of China's production suspensions amidst the COVID-19 outbreak. Investors watched China's work and port resumption closely and worried about the impact of supply chain disruptions on other economies. In recent weeks, the rapid spread of the virus outbreak has led many developed economies to take drastic mobility restrictions and suspend production as well. This could lead to supply shortages of machineries and components for China and North Asia (Korea and Taiwan).

Production in China and North Asia could face material impact

China, Korea, and Taiwan import mostly capital goods, industrial supplies, components and parts from developed economies currently most affected by COVID-19 (DMs). We estimate that this group of DMs hold 30% or more of the supply share for >20% of China's total imports. Of which, 2% of China's imports are products that these DMs collectively hold more than 90% of the supply share. Similar structures are found for Korean and Taiwan imports as well. As such, any supply shortages emerging from DMs could lead to material disruptions in China, Korea and Taiwan.

Autos, tech, pharma are among the more exposed sectors

We identified a list of imports that are significant in overall imports and vulnerable to supply shortages in DM. Based on this list, we found that the air transportation equipment industry is most exposed to shortages in DM. Some pharmaceutical and medical instrument production is at risk, too. Auto industries in both China and Korea are exposed to a potential shortage of components, while Korea and Taiwan's tech industries are heavily dependent on machineries from the DMs.

Indirect effect along the supply chain could be important

On the surface, China's tech industry (e.g., consumer electronics) does not have high import dependency on the DMs. However, Korea and Taiwan are both significant suppliers to China's tech industry and they depend on key machinery and parts in DMs. If Korea and Taiwan's tech industries are disrupted by input shortages, China will also take the hit indirectly via supply shortages from Korea and Taiwan. Similar indirect effects may apply to the auto sector as well.

Things could be worse

Our analysis is based on the group of developed economies that have reported large daily increases of new COVID-19 cases and have implemented some mobility and activity restrictions such as the US and big EU economies. Another very important supplier in the global supply chain, Japan, is not included. In some of the key production areas, e.g. autos and tech, adding suppliers from Japan to the analysis would imply almost 100% of import share for China, Korea and Taiwan. A further escalation of COVID-19 spread could mean more serious disruptions.

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