China Lockdown: the Economic Cost of a Zero-Covid Policy



War. Inflation. And now, deja vu Covid lockdown in China. It is a perfect cyclone for the global supply chain - how goods and materials get from one country to another.

After two years of disruption because of the pandemic, the global economy’s complex supply chain has been dislocated. This caused a sharp rise in the prices of food, commodities and consumer goods.

The war in Ukraine intensified inflation, especially in oil and grain prices, and further shutdowns in China will make it worse. The world economy may be on the edge of a new inflationary era where consumers will be facing higher prices and rising interest rates due to the retreat of globalization.

When disruptions take place in China, it affects the global economy because about a third of the world's entire manufacturing capacity is based in this country.

So, when Shenzhen went into lockdown after a massive increase in Covid cases, it sent shockwaves through the world's economies. The restrictions spread to other major cities and provinces like Shanghai, Jilin and Guangzhou.

Cities turned into ghost towns and factories had to suspend production.

The number of ships waiting at some Chinese ports has already increased with 28.5%.

The new restrictions come at a time when the production in China was just starting to recover after the Chinese Lunar New Year holidays in February.

China's economy and the global consumers it supplies will feel the real pain, if the country continues with its zero or close-to-zero Covid strategy.

The Russia-Ukraine war and the Covid lockdown in China has torn apart the expectations of recovery of the supply chain.

The experts say that the companies have long term costs, making them re-think their positions in the Chinese market.

A lot of companies started looking at other options than China and they have already diversified some of their resources and their plans, not to put all their eggs in one basket.

Companies' plans include growing their stocks of inventories to setting up production facilities in neighboring countries, or to bring some manufacturing back close to where their main customers are.

In response, the White House said that the lockdown policies like those being instituted in China are unlikely to work and should not be a model for the U.S. and the rest of the world.