Fault Lines #1: Zero-Covid in One Country
Beijing seems determined to stick with its Zero-Covid policy at all costs. It will lead to a more isolated, confident and assertive China. The consequences are likely to be far-reaching.
As Omicron crashes through Europe and the US, and there are calls to start treating Covid like an endemic illness, perhaps the most intriguing pandemic puzzle for the year ahead is how long China will stick with what I call its ‘Zero-Covid in One Country’ policy, and what the consequences will be for geopolitics and the world economy if it does?
Backstory
Following the initial shock when the novel coronavirus emerged in Wuhan, the Chinese government has pursued a strict Zero-Covid policy, even after other countries in Asia like New Zealand and Australia have moved away from it, as vaccination levels and population immunity have increased.
On its own terms, this strict approach has worked. China has had minimal numbers of infections and under 5,000 deaths compared to almost 850,000 in the US.
More notably, despite regular headlines about its impact on global supply chains, Zero-Covid has in fact enabled China’s export economy to continue to perform strongly throughout the pandemic.
The country was able to rapidly adapt its factories and production lines following the initial shock from the pandemic, with industrial production up by 2.8% in 2020 and 10.1% in the first 11 months of 2021.
Remarkably exports to Asia and Europe have recovered to above pre-pandemic levels. By contrast, exports to the US have flatlined.
In reality, as Ryan Petersen, CEO of freight-forwarder Flexport, has shown, disruption to supply chains is far more a story of chaos in international shipping and at US ports as American consumers have switched their demand from services to goods during the pandemic, rather than China’s ability to remain the world’s ‘manufacturer of last resort.’
Zero-Covid has also worked politically for President Xi Jinping. Far from being China’s ‘Chernobyl Moment’ predicted by some at the beginning of the outbreak, the manner in which the government has managed to control the pandemic has consolidated the institutional strength of the Communist Party and enabled it to contrast the success of the Chinese model with the devastation in the West, particularly the US.
Fault Lines
Despite these striking successes, all is not well with Zero-Covid in One Country as we enter the pandemic’s third year.
Over 80% of the population has been vaccinated with domestically produced ‘inactivated’ vaccines, however, they have been shown not to protect against Omicron. This means there is very limited population-level immunity from either prior infection or vaccination in a country of 1.4 billion people.
China’s Centre for Disease Control concluded late last year that the country was not ready to live with Covid like Western states with high levels of both. Meanwhile, the government has not been willing to license a foreign mRNA vaccine, preferring to develop its own instead.
China’s export boom may also start to peter out as other countries re-open their production fully. Because the country has been closed to the outside world for two years, its services trade deficit has dropped dramatically which has significantly boosted its current account balances and balance of payments surplus and in turn the renminbi exchange rate, thereby undermining export competitiveness.
Furthermore, as in every country that introduced lockdowns, China’s domestic consumer economy has suffered considerably more than its traded sector, and this will continue into 2022 as strict lockdowns continue to be the primary tool used in response to outbreaks.
The lack of sympathy for the plight of businesses in the consumer economy is consistent with the political vision behind the wider tech crackdown, which is intended to redirect the country’s economy away from services and towards strategic industries.
For the first time since the Wuhan outbreak, there have been some signs that Chinese citizens are growing more vocal and angry about the repeated cycle of lockdowns, restrictions and travel bans and the difficulties they have faced in obtaining essential supplies of food and medicine.
Upshot
However, these fault lines are likely to convince the Communist Party to double down on Zero-Covid in One Country.
First, despite signs that social cohesion may be fraying, reporting on the lockdown of 13 million people in Xi’an illustrates the extent to which the millions of minor officials implementing the policy are hardening their approach as a way of “working towards Xi”:
“China’s early success in containing the pandemic through iron-fist, authoritarian policies emboldened its officials, seemingly giving them license to act with conviction and righteousness. Many officials now believe that they must do everything within their power to ensure zero Covid infections since it is the will of their top leader, Xi Jinping.
For the officials, virus control comes first. The people’s lives, well-being and dignity come much later.
The government has the help of a vast army of community workers who carry out the policy with zeal and hordes of online nationalists who attack anyone raising grievances or concerns.”
This discipline is likely to persist until at the earliest the 20th Party Congress in November, where a number of senior posts will be filled. The most important positions of president, prime minister and senior ministers will be appointed at the National People’s Congress in March 2023.
Given the deteriorating epidemiological situation with Omicron, the resilience of the economy, and the increasing control and surveillance of the population Zero-Covid has given the regime, it is hard to see what would lead it to move away from the policy before then.
In practice, the clear benefits the government has gained from the pursuit of Zero-Covid may tempt it to go further. Dan Wang is one of the most astute observers of China’s political economy, and his year-end letter is a must-read if you want to better understand the country’s dynamics.
His 2021 edition reflects on what life is like in Zero-Covid China and then moves to this startling conclusion:
“In 2018, I started to say to people that China would close its doors in 40 years, by the centenary of the country’s founding. At that point, the Celestial Empire would be secluded once more, while its people can be serenely untroubled by the turmoils of barbarians outside. Everyone reacted with disbelief, saying that there’s no way to shut down a country. But it looks like I was off only by the wrong centenary: China has been mostly shut in 2021, a hundred years after the party’s founding. I think that the government has no real exit plan for this pandemic. Any time it looks like it might relax, another variant shows up. The leadership probably has no firm aspiration to open the border at any date, and instead will assess the situation of variants and medical treatments every so often. If things don’t look good, then it won’t open up.
After all, the border closure doesn’t seem to incur significant economic costs. Goods are still flowing in and out, while people keep their spending domestic. The cost is more political and therefore intangible. What is easier to observe is that 99% of Chinese have no intention of going overseas. They’re terrified of the virus and think that the rest of the world is a mess. I miss international travel of course. I’m keen to visit the US, but upon return, I would have to do two weeks of quarantine in a designated hotel; my friends who have gone through that ordeal report that the experience ranges from unpleasant to traumatic. Still, the prospect of the quarantine does not deter me too much. The problem is that if I catch the virus overseas, the government might not allow me to return for months, which creates too much uncertainty.”
While Wang’s scenario remains speculation, there are many instances in Chinese history when it has isolated itself from the outside world for long periods. Unlike in the past, the country is now the essential node in the world economy.
However, the revelation of the pandemic for the Communist Party is that through Zero-Covid in One Country it may be in a position to achieve the best of both worlds: both shutting itself off from external influence and interference, while also continuing to enjoy the benefits of integration with the global economy.
This, in turn, is likely to lead to a more confident, isolated and assertive China in the coming years.
The implications for the EU, and particularly small and medium member states like Ireland, are stark.
The current dispute between China and Lithuania provides a clear warning. Bejing is increasing the economic pressure on Lithuania as punishment for opening a representative office for Taiwan last year. China’s measures against Lithuania are also being imposed on goods from other EU countries — such as France, Germany and Sweden — that include parts from Lithuanian supply chains.
As a result, China’s actions are directly undermining the single market. The fact that the EU has shown no intention of retaliating with harsh countermeasures or a trade war exposes the fundamental power imbalance between the two sides.
While the focus on the single market in Ireland relates to the impact of Brexit and the Northern Ireland Protocol, at the other end of our continent the single market is being put to the test by a considerably more formidable rival than Boris Johnson.
Zero-Covid in One Country is a policy that will fundamentally change the world.
Further Reading
The closest historical analogue to China’s geopolitical position in 2022, may well be the United States of a century ago as it came to dominate the global order after the first world war. I recently re-read ‘The Deluge’, Adam Tooze’s revelatory history of that era and recommend you do too.
His central argument is that the US came to dominate through the financial dependence of both the winners and losers of the war in Europe on it. As a result, the US was free to pursue a policy of dominance despite isolationism which lasted largely intact until Pearl Harbor. My re-reading prompted this exchange with Adam on Twitter:
The Supchina platform is absolutely essential if you want to get a comprehensive and contextual understanding of the political, economic and social dynamics of modern China.
This recent discussion on the Communist Party’s chief ideologue Wang Huning, particularly his concepts of cultural security and cultural sovereignty provides the intellectual background to the regimes thinking on ‘Zero-Covid in One Country’:
“So the sense of cultural security that Wang has, and in a sense that he innovated, is this sense that China has to build barriers against this Western infiltration. And that side of his thinking would not have been unfamiliar to Mao, Deng and others.
What Wang sees also though, is that globalization is like peaceful evolution 2.0. And so there’s this new danger and we can see it. Now, an option that that Mao had was to essentially — I don’t want to go too far with this because there are historians who would quibble with it — but from a broad strokes perspective, Mao had the option of being able to cut off China from the outside world. And so the China of the ’80s, ’90s, now is not a China that necessarily has that option. So what Wang has to figure out is how to have globalization, but not have all the cultural detritus….”