The Economist: The Inevitable Cost of China’s ‘Zero COVID’ Strategy

The trade war between the United States and China, paradoxically, brought some citizens of both countries closer together. Ben Kostrzewa, a business attorney for Hogan Lovells, moved from Washington, DC to Hong Kong to help his corporate clients deal with tariffs, penalties, and export controls. I used to travel two or three times a month to Mainland China. If he timed it correctly, he could get through border controls in 20 minutes. “I knew those border agents very well”, dice.

The pandemic has changed all that. In the first half of 2019, China’s busy agents registered more than 344 million border crossings between mainland China and the rest of the world (including Hong Kong). In the first half of this year, that figure fell by more than 80%, according to official statistics. Kostrzewa hasn’t paid a visit in almost 22 months. “It’s fun to talk about this in the past tense”, dice.

Talks, in future conditional tense, between Hong Kong and Mainland China have so far failed to facilitate travel between the city and the rest of China. But officials now say a pilot plan could soon allow a small number of vaccinated people to travel to mainland China without quarantine. If the plan works, some of Kostrzewa’s favorite checkpoints in Shenzhen could reopen in June, according to the South China Morning Post, although travel would be subject to quotas.

For the rest of the world, visiting China will continue to be an ordeal. It’s like organizing a ‘state visit ‘says a banker who used to make the trip 30 times a year. Documentary requirements can be burdensome and inconsistent. A delegation of high-level businessmen, who were hoping to visit Shanghai, were asked for their grade school transcripts. After the bureaucratic hassle, comes the boredom of quarantine: a minimum of 14 days, usually in a hotel that is not chosen. A well-connected married couple was at least given the option of separate rooms. They took them without hesitation.

The benefits of China’s zero COVID strategy can be measured in lives saved and warnings of infections. The economic cost of the country’s self-isolation is more difficult to quantify. Travel restrictions are making life difficult for ‘facilitators’ international companies that make cross-border business work, says an investor in Shanghai.

Remoting can maintain existing relationships, but some things are best done face-to-face. The investor used to meet his managers at dinner parties, while they drank and smoked cigars. “If you spend three hours together at night, at the end of that week, you already know the person”. No one has the energy to replicate that in Zoom.

Some knowledge is also tacit, it materializes in people or teams. To convey this’know-how‘it is necessary to move the minds that carry it. Increasing business travel spending by 10% raises productivity by 0.2-0.5% in the visited sector, according to a study of US travelers conducted by Mariacristina Piva from Catholic University of Sacred Heart and their co-authors.

Another study conducted by Michele Coscia, from Copenhagen IT University, as well as by Frank Neffke y Ricardo Hausmann, del Growth Lab de Harvard, made use of aggregated and anonymized data from Mastercard to map this movement of minds.

They estimate that China’s economy would be 13% smaller had it not benefited from the know-how spread by international business travel. The largest contributions were made by visitors from Germany and South Korea.

Foreign direct investment in China it has remained strong so far, thanks to the early economic recovery from the pandemic. And few multinationals leave. Some foreign companies may even locate activities outside of China to continue doing business there.

The companies are “closing the hatches”According to the European Union Chamber of Commerce in Shanghai, bringing more of its supply chain to shore, due to geopolitical tensions, COVID restrictions and new laws limiting data sharing across borders.

“Companies could be forced to have two different systems in place: one for China and one for the rest of the world.”, dice Bettina Schön, vice president of the Chamber. “This will be insanely expensive”. It is not that the world is leaving China; rather China is becoming a world unto itself.