No, zero-COVID has not diminished China’s economic power

There can be no debate that China’s zero-COVID obsession is yet another example in the long list of countries voluntarily choosing to inflict economic self-harm in the pursuit of an idealistic but unachievable goal.

The current saga is, of course, all the more depressing given that China has had plenty of opportunities to heed the lessons so painfully learned by the rest of world. But what makes the stop-the-tide at all costs policy interesting, especially to us geographers, is its impact on the country’s status as the core of Asia’s economic system.

There is an argument that China is set to lose regional influence, both economic and political, as its efforts to eliminate COVID, particularly its border controls, result in greater isolationism.

After all, it is not a country’s absolute size that determines its influence but the extent to which it is integrated with other countries. It is this integration that allows a country to transmit economic and political power internationally. And if China becomes less integrated as a result of its apparent isolationism, then the region’s economic system will inevitably adjust to reflect its reduced gravitational pull.

Proponents of this view point to various developments which suggest that China’s regional role is being dented by its zero-COVID policies.

Foreign manufacturers are concerned about their ability to manage and supervise their operations under such conditions. This is causing some to reassess the attractiveness of new investments in the country, while others have shifted manufacturing to neighbors.

More visibly, Chinese tourists are absent from Seoul’s shopping malls and Thailand’s beach resorts, much to the detriment of Korean retailers and Thai hoteliers. And the decision not to host the next Asian Football Confederation Asia Cup, which was due to be held in China in July 2023, suggests that the country’s border controls will last at least another year.

It would be easy to conclude from these anecdotes that China’s regional influence has been weakened, however perceptively. But as so often, when it comes to discussions about China, this narrative lacks comprehensive empirical support. In fact, despite its strict border controls since the pandemic’s beginning, the country’s economic influence within the region has actually increased over the last three years, not declined.

This is most obvious in the region’s trade flows.

Over the last three years, China’s importance as a market for its neighbors’ merchandise goods has grown to new highs. The east and southeast Asian countries sent 27% of their total exports to the Asian superpower in 2020 and 2021, more than the 25% in the two previous years. And if Australia and New Zealand are also included, then China was the end destination for a record 28% of the region’s total exports in 2021.

More noticeable is that China’s importance as a trading partner has increased even for countries which are partners to American-led efforts to push back on its expanding influence. It now accounts for a greater proportion of Japan’s and New Zealand’s total trade than before the pandemic.

New Zealand, for example, sent nearly a third of its exports to China in 2021, compared with less than a quarter in 2018. Even Taiwan, very much in the geopolitical crosshairs, saw the mainland’s share of its total trade reach new highs in 2020 and 2021.

The country’s increasingly entrenched regional primacy is also very apparent in capital flows.

For all the excitement about China becoming less attractive to investors, the reality is that the country actually attracted a record $181 billion of inward foreign direct investment last year. It accounted for 28% of total FDI into Asia in 2020 and 2021, the highest since 2013, while its share of total global inward FDI in the same two years reached levels last seen in the 1990s.

At the same time, China has displaced Japan to become the region’s most important source of investment capital with nearly $300 billion in outbound FDI over the last two years, significantly ahead of Japan’s $242 billion and multiples of India’s $27 billion.

There are numerous other relevant trends, including the growing concentration of Asia’s capital and financial markets in China. In aggregate, they all highlight the country’s ever increasing gravitational pull within the region.

This is a long-term trend which has been persistent despite China’s closed borders. And although the current lockdowns may temporarily weaken the forces at play by slowing Chinese domestic demand and production, it would be a mistake to confuse a transient shock with the long-term structural dynamics entrenching the country at the core of Asia’s economic system.

After all, there are three self-reinforcing dynamics when it comes to Asia’s future economic geography.

The first is that international economic activity is primarily regional in nature, not global. The second is that most economic systems naturally adjust to a well-defined core-periphery structure, with a subsequent division of labor and trade. And the third is that no other Asian country can or will rival China’s economic powerhouse status. The International Monetary Fund, for example, expects the country to account for 65% of total east and southeast Asian gross domestic product by 2027, up from 56% in 2018.

All these mean that attempts to contain China’s growing regional influence, including the recently announced Indo-Pacific Economic Framework for Prosperity, are set against powerful pressures and are unlikely to be successful in the fight.

In the same way that King Canute demonstrated that no man can stop the tides, the gravitational forces entrenching China’s position at the core of the Asian economic system will not be disrupted by such piecemeal efforts nor even by the country’s border controls and current lockdowns. Those hoping otherwise are set to be disappointed.

Author: William Bratton, NIKKEI Asia

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