China thinks the economic damage is worth it. Economists aren’t so sure.
Although China has 18 percent of the world’s population, it accounts for only 0.05 percent of global Covid cases. Many people credit this to China’s zero-Covid policy, which aims to reach a Covid-free society through restricting movement in entire cities, mass testing and tracing, and strict isolation of any confirmed cases.
Since the Omicron variant led to a spike of cases in Shanghai, one of China’s major cities, the city has been closed down for seven weeks and counting. Pretty much all businesses have been shut and millions of people have been confined to their home and not allowed to leave for pretty much any reason. This has taken a huge toll on residents’ physical and mental health, and had other big knock on effects on the Chinese economy. In April China's services sector, which accounts for more than half of the nation's GDP and over 40 percent of its employment, decreased at the second sharpest pace on record. In other words, the gap between the amount of work produced by this sector during April and the amount of work done in March before was pretty much the biggest it has ever been. GDP, by the way, is the total worth of all the goods and services that a country produces in a year.
This slump in GDP isn’t just affecting China. Shanghai is one of the world's biggest exporting and manufacturing hubs, which means its lockdown is also impacting the economies of anywhere that buys a lot of Shanghainese stuff, or makes a lot of stuff in Shanghai. This includes the UK, which imported nearly £70bn worth of goods from China last year. Although some Shanghai factories remain open, there is still the issue of getting the goods out of Shanghai and shipping them to places like the UK (this is called supply chain issues). Because manufacturing delays reduce the number of items available (in economic-speak, decrease supply), they tend to lead to price rises, as desperate customers become willing to pay a premium to get hold of the things they want.
The UK’s top imports from China are electronics, so it comes as no surprise that the prices of phones, computers and cars have all been bumped up recently. Overall, delayed production of goods because of the Shanghai lockdown is estimated to have cost international trading £22bn. Economists say that if China, the workshop of the world, continues its strict zero-Covid policy, the impact on the worldwide economy could be disastrous and prices for consumers could go even higher. It is estimated that if all four largest Chinese cities went into lockdown at the same time, national GDP could fall by 12 percent, creating more back up in exports and a further reduction in world trade.
Not everyone thinks things will get that bad. Looking back to the first wave, they note that after Wuhan (the first Chinese city to go into a complete lockdown) opened up again China’s trade activity surged and the economy began recovering quickly. Indeed, China was the only major economy to have grown in 2020. The Chinese Communist Party (CCP) defends the continuation of its zero-Covid policy partly by saying that the economy will recover just as it did after Wuhan. But there is more at stake in Shanghai. For example, if the city's port stops functioning, it will be difficult for other nearby ports to fill in the void given its gigantic capacity.
If China remains committed to its zero-Covid policy, it means supply chains in the future could be unstable. The supply chain shock that the UK is currently experiencing is leading our politicians to question whether it is right to put so many of our trade and manufacturing eggs in one, foreign, basket.
There are two possible solutions. One is lean into the globalisation that has been characteristic of our modern economies for so many years and continue to develop and expand trade deals with as many countries as possible. This should mean that we will not be as impacted by supply chain issues that may occur in one country, because we have other sources of trade we can depend on. Alternatively, the UK could bring more stuff in-house: manufacturing more things in Britain and buying more British goods. This policy is known as protectionism. It is associated with higher costs (for businesses and consumers) but would give the UK government much more control over the supply of goods and give UK citizens much more certainty.
Read our explainer on: globalisation