The long term effects of China’s zero covid policy on the world economy

china's zero covid policy

In 2021 most markets came out of lockdown and eased Covid restrictions. However, China and Hong Kong continued with a zero covid policy. 

In China continued lockdowns have meant that it has been very challenging to plan shipments and production in 2022 for many industries. Since the New Year holidays this year, factories in our industry have repeatedly locked down and reopened for short periods. The lockdown in Shanghai over the past month has had a devastating effect on international trade. Backlog of ships waiting to offload containers and delays in shipping out ready goods will mean huge shipping delays for the rest of the year. Probably Santa Claus will not be able to cater to all children’s needs this coming year.

In 2020 and 2021 our Chinese colleagues were definately in agreement with the zero covid policy in China. Life could continue as normal in those days, so long as nobody wanted to travel abroad. But in 2022 we have increasingly heard the voice of frustration from factories unable to satisfy their overseas clients.  In China the government does not give financial support to factories who are ordered to close. Factory workers often do not get paid for staying at home and cannot feed their families.  China factories can’t participate in international exhibitions due to return strict quarantine requirements , but the rest of the world is now back to business as normal. The Covid lockdowns have coincided with a period when China government policies to reduce pollution have made production more complex and expensive. All this has meant that China suppliers are having a difficult year.

Freight costs are still far higher than pre covid. Shipping costs peaked in 2020 to become more than four times the pre covid levels (largely caused by shortages of containers and reduced air freight capacity). Rates are still not back to pre Covid levels, as increased crude oil prices, as well as reduced shipping routes, have exacerbated a difficult situation.  

So what is the outlook for the future? What will be the long term effects of China’s zero covid policy on the world economy?

We could easily face future lockdowns across China if the zero covid policy continues. The World Health Organisation has recently advised the China government that a zero covid policy is no longer tenable. But it is difficult to move quickly from this policy when a large percentage of the elderly population still remains unvaccinated. The answer now is to vaccinate more of the vulnerable elderly population so that the rest of society can open up.

Many overseas buyers have been alarmed to see the huge reliance we have on supply from China nowadays. We have been shocked to see the worldwide supply problems which occur when this supply is disrupted.  In the long term many companies worldwide will try to switch to alternative supply sources for some items. Some emerging countries may be able to take advantage of the situation, provided that they already have the necessary industry set up. Some UAE packaging suppliers we know have already gained short term sales in the past year at the expense of China. This occurred because increased shipping costs made the difference in cost between China and UAE supply much smaller.

We are not going to see the whole world walk away from buying in China, but we will see other alternative sources of supply being investigated more carefully from now onwards. To stop this happening China suppliers must prevent big price increases this year and shipping costs should also decline substantially.

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