Images of Shanghai’s lockdown are surely not as worrisome for Western observers as the war in Ukraine, but its negative consequences on the global economy could be even larger.
There are two reasons for this. The first and most obvious is that the Chinese economy is 10 times as large as Russia’s and many more times that of Ukraine. Second, while Omicron has proved to be milder than other Covid-19 variants, China is sticking to its “dynamic zero Covid” policy in marked contrast with the rest of the world.
This policy basically implies drastic mobility restrictions, including outright lockdowns that have been imposed on several cities, Shanghai being the largest, and all in all accounting for 40% of China’s gross domestic product. In addition, half of China’s highways are not able to be transited and ports are operating inefficiently because of large mobility restrictions.
The consequences on China’s own economic growth are noticeable in March data, especially in the service sector but increasingly also in manufacturing, as some companies have decided to close their doors temporarily.
A sudden stop in China’s manufacturing would be a major shock for the global economy, as China exports as much as one-third of the world’s intermediate goods. This is over and above potential international transportation problems, which are already becoming apparent in renewed increases in shipping costs.
Beyond the reduction in domestic mobility, we cannot forget that since the Covid pandemic started in late January 2020, China’s borders have been closed to the world. This situation has an important – but unfortunately negative – bearing on the global economy.
An obviously immediate consequence is the plummeting number of physical exchanges between China and the rest of world, including both tourists and business exchanges.
The former has caused economic recessions in several tourist destinations that had been of interest for Chinese travelers, such as Thailand. The slowdown in business exchanges one of the main reasons China’s outward foreign direct investment has stalled since the pandemic started.
This is particularly relevant for emerging economies with large financing needs, since they rely on external capital to build their infrastructure and upgrade their industrial capacity.
The second unintended consequence of China’s closed borders is the increasing lack of mutual understanding of the recent developments between China and the rest of the world. The much larger number of Covid cases in most countries when compared with China developed a strong impression among Chinese citizens of security at home and risk elsewhere, resulting in a waning interest in the rest of the world.
This obviously does not bode well for future scientific or business collaboration between China and the rest of the world, although it is very hard to measure its immediate impact on the global economy.
A good example of how much border restrictions contribute to dystopian views of the outside world is the state of affairs of the global economy at this current juncture concerning the war in Ukraine and its devastating consequences.
All in all, China’s dynamic zero-Covid policy could ravage the Chinese economy if lockdowns continue. And this also matters for the rest of the world. with consequences on the global economy.
Beyond the reduced demand for imports from China, an even more immediate effect is inflation given the world’s dependence on China’s production of intermediate goods.
Finally, the lack of exchanges with the rest of the world for close to two and a half years does not bode well for the future of globalization and engagement between China and the rest of the world, especially the West.
Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis. Follow her on Twitter @Aligarciaherrer.