Geopolitical tensions and the enhanced role of governments will bring about a return to more extensive industrial policies in many developed countries. It is therefore possible that misallocated resources and subsidies to certain industries will result in further tensions in global trade and commerce. As a result, new mechanisms are needed for building global cooperation and containing conflicts, otherwise the law of the jungle will prevail, writes Xu Sitao, Chief Economist, Partner of Deloitte China, and speaker at the third session of the 18th Annual meeting of the Valdai Discussion Club, titled “A Closed Society and Its Friends. Who Needs Freedom and Why?”
The phrase "freedom is the appreciation of necessity" has indeed gained currency since late January 2020 after Wuhan, a city of 9 million residents in China, was placed under lockdown for 76 days. Despite a gradual global economic recovery which has gathered momentum, led by the world's major economies, China in 2020 and the US in 2021, fears of the Delta variant and rising protectionism continue to prevent humanity from moving forward. The question is: whether we will go back to the pre-Covid era once human beings have decided to live with the virus or whether persistent protectionism and distrust among countries will result in a protracted disequilibrium in terms of travel and capital mobility. The answer to this question depends upon capacity-building in major economies and geopolitical factors.
To understand the future, one needs to understand the past. Let me recap the origin and underlying forces behind the lockdowns. The drastic move of sealing off Wuhan was initially viewed as overly draconian by most external observers, but some form of such practices were then replicated throughout much of the world. Even developed economies where the importance of liberty is often more highly regarded than all other principles put health first and imposed fairly extensive lockdowns, not once but multiple times.
Notwithstanding the unorthodox nature of lockdown and the tenacious means of tracking people's movement in China, the general public in China has been supportive of Beijing's zero-case tolerance policy. Why?
First of all, Chinese people are conformists, culturally. Such conformity has also been observed in other Asian societies (Japan, Taiwan, Hong Kong and Singapore) which were influenced by Confucianism. Not surprisingly, Covid was contained relatively effectively in those societies. Second, Chinese consumers always favor convenience over privacy for historical reasons. Such evident bias can partially explain the rapid development of e-commerce and mobile payments in China in recent years, which came in handy during the pandemic. Third, Chinese citizens in many ways hold a paternalistic view of the government and therefore, ‘tough love’ is simply more accepted in China. The effective containment of Covid in China has allowed its manufacturing activities to recover with a short hiatus of several months and the economy only suffered a shallow downturn in the first half of 2020.
Given that the Chinese economy has performed strongly, the country does not rely on inbound tourism, and there is ample room for stimulating demand, would certain make-shift measures to control human movement become "permanent" even after Covid fears fade? I do not think so. The Chinese economy is very integrated into the global economy and its dependence on energy and commodities is unlikely to subside in the next ten years. China's fraught relationship with the West has prompted Beijing to undertake moves which are aimed at preventing economic de-coupling with its major trading partners. The Regional Comprehensive Economic Partnership (RCEP), championed by China, is expected to deepen regional economic integration in the Asia Pacific. But China's bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), has surprised many pundits because certain elements of the Chinese economy such as the role of the state and the cross-border management of data seem unsurmountable barriers for its entry into this trade pact. However, increasingly policymakers in China are equating China's application to join the CPTPP as China's second accession into the WTO. Indeed, China's accession into the WTO in 2001 is being credited for its economic take-off. Meanwhile, in the West, the stigma which is associated with the lockdowns has subsided somewhat as societies have grown frustrated with repeated waves of Covid and a sluggish vaccine rollout in certain countries. The reality is that most people have proven to be less capable in gauging relative risks.
Globally, post-Covid, what we are seeing is that governments' commitment to limit economic downturns by providing unprecedented stimulus entails a revised social contract regarding their greater presence in societies. As living with the virus has become a new normal, people will soon long for freedom.
Geopolitical tensions and the enhanced role of governments will bring about a return to more extensive industrial policies in many developed countries. It is therefore possible that misallocated resources and subsidies to certain industries will result in further tensions in global trade and commerce. As a result, new mechanisms are needed for building global cooperation and containing conflicts, otherwise the law of the jungle will prevail. With regards to restrictions on movement, scaling back contact tracing applications on mobile devices once herd immunity is achieved would go a long way towards restoring individual freedoms under the new mechanism.