Why is there a chip shortage and when will the global chip shortage end?

The larger chips are older technology and are manufactured in China. The global chip shortages caused the greatest pain for car manufacturers which rely on chips from China. The computer chips shortage also exists but the same reason why there is a chip shortage for cars. The catalyst for the chip shortage started with China’s banned on importing Australia’s coal.

Why has China stopped buying coal from Australia?

China relies on Australia’s coal for powering its manufacturing industry. In the month of June 2020, an Australian vessel named the Topas left port in Queensland, Australia. The Topas was carrying coal—ninety-thousand tons, to be exact—and it was headed for the Chinese port of Jingtang; a seaport on the coast of Hebei, located in Northern China.

The Topas was prepared to deliver its coal to this deep-water, international harbor, and then return to Australia, sans cargo. However, this seemingly simple delivery was not to be.

While the Topas made it to its seaside destination, it was allowed no further, and no entry to the port on the coast of Tangshen Municipality, in Hebei, Northern China. What occurred has become an international and national flashpoint and symbol of not only changing relations between the countries of Australia and China, but also emblematic of the growing divide between China and the Western world.

The Topas was rejected from entering the port in Jingtang, and the delivery of coal was placed on pause. A month passed, then six, then ten, and ultimately the Topas and its crew were stranded on the ocean for 269 days.

This nearly nine-month event was perplexing, but to many, it represents an influential economic issue of today: a trade war that not only impacts seafarers and vessels but entire industries around the world.

China has a history of creating economic policies that caused unintended consequences such killing sparrows that resulted in 55 million Chinese people to die from starvation.

China’s Sparrows Problem and Up to 55 million Chinese People Died

Culturally in China, the Chinese sparrow has long been lauded as representative of both happiness, and the start of the spring season. However, in 1958, the government of China discovered that Chinese sparrows, on average, consumed four lbs. of grain during each year. While this may seem insignificant now seeing as the sparrow population in China consumes only a tiny fraction of the amount of grain in China; back then the government considered this ratio of four pounds per bird, per calendar year, simply too much.

It should be noted that during the 1950s, China was attempting to adopt economic policies that were mainly communist in nature, while also making its country self-sufficient agriculturally. To do this, the Chinese government stopped privatizing agricultural products. The government also decided to enforce policies meant to eradicate famine, especially in rural areas, by collecting and distributing food to its people. In an additional attempt to promote equality, the Chinese government also transformed their respective farming techniques, emulating the policies in place in the U.S.S.R. The Chinese accomplished this by decreasing the diversity of their crops, in order to bolster production quotas they decided to focus on. The final step in this process was to put a stop to the trading of varied resources with Western nations. China did this in an attempt to become totally self-sufficient as a country.

It should also be noted that all these policy decisions were made quickly and hastily, and this created a sense of alarm and shock within China’s system of agriculture. It was not long before China began to suffer a shortage in the production of food across the country, followed by a serious famine that impacted the entire nation.

What does this have to do with the Chinese sparrow? The government so vehemently disapproved of the grain that the sparrow consumed, that they took a drastic step. They ordered the rapid extermination of Chinese sparrows across the country, to ideally boost food production. This action was also intended to help end the nationwide famine. This fated policy was known to some as “Smash Sparrow,” at the time.

Over the next few years, sparrows were killed by the millions, and soon the Chinese sparrow was almost extinct. However, soon it would dawn on China that their hasty decision to kill these innocent birds led to a rapidly worsening famine. Why? This rash policy change soon showed that the sparrows were predators within their food chain, and therefore normally preyed on pests. These pests, such as locusts, now had free reign, and began to not only consume crops and grain, but actually destroy whole farms, villages, and anywhere that crops were grown.

This overwhelming famine lasted from 1959-1961. As a result of this damaging period in Chinese history, approximately 15-55 million people died from starvation. Why did this occur? A rushed policy decision was made, and because of this choice, millions of people suffered.

China’s Reliance on Australia Coal

Now, back to the Australian ship by the name of Topas. If you remember, this vessel from Australia was unexpectedly stranded at the Chinese harbor of Jingtang. This unfortunate circumstance also originated from a hurried decision by the government of China, and so we see history repeating itself.

In June 2020, as the Covid-19 pandemic began to gather steam, the prime minister of Australia Scott Morrison became focused on an investigation of the origins of Covid-19 within China. Many world leaders were wondering about the conditions and policies that may have played a hand in creating the right conditions for the pandemic, so this may appear innocuous. However, when Morrison doubled-down on his call for an investigation, a new crisis with various ramifications across the globe, was kicked into action.

Morrison’s insistence and determination in wanting an independent investigation into the origins of the virus in Beijing, infuriated China. Suddenly, these long-time trade partners and economic allies were locked into a vicious war of words.

China felt very suddenly persecuted by Australia—and the U.S., as well—at the time, and believed that Australia was engaging in a type of aggressive “victim-blaming.” However, Morrison refused to admit that his attacks were targeted, and claimed that the vast impact of the virus made it essential to analyze how it began, wherever that was, and find the truth.

Thus, a trade war started between Australia and China began, buoyed by additional harsh words from the Chinese embassy, and a firm stance by Australia. At first, the assumption was that China would have the upper hand in any sort of trade conflict, based on the ratio of their financial sphere to Australia’s: China’s economy is approximately ten times the size of Australia’s economy. However, China was unaware of how much it depended on Australia, especially in terms of the coal industry.

China’s initial action was to enact a series of bans and stoppages on products from Australia, such as beef and live animal products, and this list included coal. Therefore, when the Topas, as well as sixty additional carriers, arrived at the Chinese port, they were forbidden entry. Seemingly overnight, China had put a stoppage on trading coal with Australia, and the ships—including the Topas and its crew—were frozen.

It is widely known that coal is not an integral compound to countries such as France, Canada, and England, as well as many of the Nordic countries including Denmark and Finland. These countries produce only ten percent of their heat from coal, or less. Countries such as the United States, however, or Germany, produce only approximately fifteen to twenty percent of electric energy from coal. Nevertheless, China is heavily dependent on coal, and more than sixty-five percent of the country’s electricity is derived from coal. Why is this important? Without coal, China absolutely cannot produce and utilize electricity in its towns and cities, and its people will be left in the dark.

You may be thinking: isn’t China one of the world’s top producers of coal? It is true that China is the most significant coal producer in the world. Seventy-five to ninety percent of the coal that China uses is produced in the country and used for electricity. But, China also needs a large amount of coal for processes that are industrial by nature, such as producing metals. China also relies on imported coal for a significant portion of its power plants.

From where does China usually receive this large influx of coal? You guessed it: their neighbor to the North. Prior to the Covid-19 inspired ban on coal, Australia was regularly importing approximately seventy-eight million tons of this energy source to China, per year. Next up is Indonesia, importing coal at a mere forty-eight million tons.

The trade war, and specifically this ban on coal, has created a major issue for China. The country’s reserves of coal are being continually reduced, and there is no end in sight. Further adding to this troubling trade issue is the fact that a number of major flooding events have occurred over the last few years in Eastern and Southern Asia, as a result of climate change, leading to severe economic concerns, not to mention many lives lost. These floods have also caused numerous Indonesian and Chinese mines to shut down, and obviously this has been a factor in China’s struggle to find and use coal to maintain their economic productivity and integrity. Additionally, there were policies enacted in 2020 in order to increase the safety of coal mine workers in China, and lower rates of flooding and explosions. These humanitarian efforts did decrease coal production, but were touted as saving lives. Many of these policies, however, have been relaxed in 2021-2022, as a result of concern over incoming economic hardship.

Thus, a hurried decision concerning Chinese international trade policy, in conjunction with other policies and the environmental issues that the entire world is grappling with in some form, pushed China to the brink by the fall of 2021. Indeed, a large portion of the country had to contend with power outages from May through November 2021 due to a narrow, dwindling supply of coal, which is a key energy source for the country. During this time, power was impacted across the board, from Chinese factories to homes. In addition, banks in China that held loans with coal companies started contending with the fact that coal was in short supply, leading some loans to default. As consumption increased in the colder months, and the generation of hydropower fell, coal prices skyrocketed. What could China even attempt to do in order to right the ship?

Aggressive new policies have been the answer over the last couple of years, and the country has begun doing everything possible to increase coal production within mines that were still viable. China has also begun the process of importing coal from new countries, and at the same time has required its citizens to conserve electricity. As everyone from factory workers to private individuals have attempted to use less electricity, China has also encouraged their national bands to take on questionable loans from fledgling coal companies across the county.

Sadly, none of these solutions accomplished enough in the short-term, and by May 2021, China had no time to be patient. The country was suffering, but so were the close to 1000 stranded seafarers stuck on their ships. Some of them grew sick, some suicidal. While eventually some of these vessels turned around and some were sent to other markets such as India, in May 2021 China allowed a small portion of the stranded boats to unload their coal shipments at the port. This signaled the beginning of the end of this unique energy crisis and others in China have simply called the “Coal Shortage;” but this debacle is far from over, and has been shown to still have wide-ranging consequences nationally and globally.

Global Supply China Issues

The impact of this shortage, indeed, has been seen worldwide, since numerous large companies rely upon Chinese manufacturing. These companies, found across the world, are experiencing long delays that have been worsened by the presence of the Covid-19 pandemic. Based on these conditions, a number of corporations have chosen to look elsewhere for their manufacturing needs. Unfortunately, trade with China is now being viewed as increasingly unreliable and unstable, based on the decision to block Australian deliveries of coal that started it all.

In what is widely recognized as a trickle-down effect, China’s coal shortage has led to the closing of some of their largest factories and hindered the entirety of their manufacturing industry. In fact, China’s normally prosperous manufacturing industry decreased in 2021, in a shocking turn of global events.

This noted crisis in coal has impacted China’s economic capabilities, not to mention reputation, and this impact is bound to have some longevity. As we continue to struggle with the lasting pandemic, and China’s coal industry slowly recovers, the stalwart country maintains its ban on coal from Australia. We can only hypothesize the exact origins of the trade embargo, but we are easily able to note its wide-ranging ramifications, both domestic and global.

How long will the chip shortage last for cars?

China has expanded its use of natural gas and solar energy sources, they have not created close to enough energy to fuel demand.

As we press on through Q1 of 2022, China appears to be recovering, albeit slowly. When will the chip shortage end?

First, enormous issues of national and global consequence can arise from actions that are seemingly insignificant. We see this first with the example of the sparrow, and then in terms of the heated exchange between Australia and China. The global chip shortage is among the unintended consequence of trade wars. Until China lifts the ban on Australian coal, chip manufacturer outside China has to pick up the slack. The world’s largest chip maker, Taiwan Semiconductor Manufacturing Company – also known as TSMC – is picking up the slack and building more factories, including in Arizona.  According to Bloomberg, TSMC has an estimated global market share of 56%. Intel Corporation is building several chip factories in the United States; located in Ohio and Arizona. Economists and hedge funds managers who track chips estimate that the chip shortage will end between 2023 and 2025.