The non-zero costs of zero covid
TIT TRADE the war between America and China has paradoxically brought some of the citizens of these countries closer together. Ben Kostrzewa, commercial lawyer for Hogan Lovells, has left Washington, CC, Hong Kong to help corporate clients navigate export obligations, sanctions and controls. He traveled two or three times a month on the mainland. If he timed well, he could pass border controls in 20 minutes. “I got to know these border officers very well,” he says.
The pandemic has changed all that. In the first half of 2019, busy Chinese agents recorded more than 344 million border crossings between the mainland and the rest of the world (including Hong Kong). In the first half of this year, that number fell by more than 80%, according to official statistics. Mr. Kostrzewa has not visited for almost 22 months. “It’s funny to talk about it in the past tense,” he said.
Talks, in the future conditional, between Hong Kong and the mainland have so far failed to facilitate travel between the city and the rest of China. But officials now say a pilot program may soon allow a small number of vaccinated people to travel to the mainland without quarantine. If the program works, some of Mr. Kostrzewa’s favorite checkpoints in Shenzhen could reopen by June, according to the South China Morning Post, although travel is subject to quotas.
For the rest of the world, visiting China will remain an ordeal. It’s like organizing a “state visit”, explains a banker who made the trip 30 times a year. Documentary requirements can be onerous and inconsistent. A delegation of senior businessmen, hoping to visit Shanghai, were invited to provide their primary school transcripts. After the bureaucratic hassles, the boredom of quarantine awaits: a minimum of 14 days, usually in a hotel of no choice. A well-connected married couple had at least the option of separate bedrooms. They took them without any hesitation.
The benefits of China’s zero covid strategy can be measured in lives saved and infections averted. The economic cost of the country’s self-isolation is more difficult to quantify. Travel restrictions make life more difficult for international “enablers” who move cross-border business forward, argues an investor in Shanghai. Distance communication can maintain existing relationships, but some things are best done face to face. The investor used to get to know his executives over dinners, drinks and cigars. “If you spend three hours a night together, at the end of this week, you know the guy.” No one has the stamina to duplicate this on Zoom.
Some know-how is also tacit, embodied in people or teams. To transmit this know-how, it is necessary to move the spirits who carry it. Increasing business travel spending by 10% increases productivity by 0.2 to 0.5% in the visited sector, according to a study of American travelers by Mariacristina Piva of the Università Cattolica del Sacro Cuore and its co-authors. Another study by Michele Coscia from THIS from the University of Copenhagen, as well as Frank Neffke and Ricardo Hausmann from Harvard’s Growth Lab, used aggregated and anonymized Mastercard data to map this movement of minds. They estimate that the Chinese economy would be 13% smaller if it had not benefited from the know-how diffused by international business travel. The biggest contributions were made by visitors from Germany and South Korea (see graph).
Foreign direct investment in China has so far remained strong, thanks to the rapid recovery of the economy after the pandemic. And few multinationals leave. Some foreign companies may even locate activities conducted outside of China to continue doing business there. Companies are “closing the hatches,” according to the European Union Chamber of Commerce in Shanghai, bringing more of their supply chain ashore, amid geopolitical tensions, covid restrictions and new laws that limit data sharing across borders. “Companies could be forced to operate two different systems: one for China and one for the rest of the world,” says Bettina Schön, vice-president of the chamber. “It will be horribly expensive.” It’s not that the world is leaving China; especially since China is becoming a world in its own right.■
For a deeper analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.
This article appeared in the Business section of the print edition under the headline “Seal of the Kingdom”