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Over the past several months, much of the world has taken a less-restrictive approach to COVID. Even once-rigid U.S. mandates have given way to a “living with COVID” mentality. That is, except for China.

After the initial outbreak in early 2020, China rejected a strategy of mitigation. Instead, the Chinese Center for Disease Control and Prevention argued that “Future waves of COVID-19 can be stopped, if not prevented.” China’s zero-tolerance policy was born.

The goal is simple, but lofty – to eliminate the transmission of the virus within China’s borders. The zero-tolerance policy relies on aggressive, and some may argue inhumane, controls to contain the virus. Individuals who test positive are isolated, with a mandatory 14-day quarantine for any close contacts. Entire residential and commercial buildings are locked down. Factories and shipping ports frequently close, sometimes from a single, positive test result.

Entire cities have been placed on lock down. On March 27, Shanghai, China’s biggest city of more than 26 million people, was locked down. Shanghai is also the world’s largest shipping port. More than 25% of all China’s incoming and outgoing cargo run through it. Shanghai’s lock down comes less than a week after Shenzhen, China’s third largest city and second largest shipping port, had its lock down removed.

Lock downs force factories and ports to operate at reduced capacity, due to limited availability of workers. Partial shutdowns are rampant. Truckers and their cargo are sometimes not allowed to enter or leave a city. This strains global supply chains.

China is the world’s largest manufacturer. According to the United Nations, in 2019, China produced $4 trillion of manufacturing output, 28.4% of the world’s total output. The U.S. was No. 2, producing $2.3 trillion, 16.7%, of the world’s total manufacturing output.

China’s Top 5 exports are broadcasting equipment, computers, integrated circuits, office machine parts and textiles. China is also the world’s largest exporter of steel. In 2019, China accounted for 15% of the world’s total steel exports, double that of Japan, the world’s second largest steel exporter.

The U.S. relies on a steady stream of Chinese raw materials, component parts and finished goods to satisfy demand. The U.S. is the world’s largest importer of goods. According to the Office of the United States Trade Representative, in 2019, the U.S. imported $2.5 trillion of foreign goods. Our top supplier was China, who accounted for $452 billion, or 18%, of all foreign goods imported into the U.S.

For America’s factories and businesses, China’s policy has further compounded the limited availability of materials and goods. It’s also led to skyrocketing shipping costs. According to global logistics company Freightos, the cost to ship a 40-foot container from China to America’s west coast has risen from $1,359 on Jan. 1, 2020, to $15,552. The cost to ship that container to America’s east coast has risen from $2,609 to $17,150. Both shipping routes set record highs above $20,000 in September 2021.

Despite its zero-tolerance policy, China continues to be battered by the virus. The latest variant, omicron, created the largest spike in COVID cases in China since the start of the pandemic. Those infections show the inherent limitations – and, perhaps, futility – within China’s controversial policy.

Many argue the near-impossibility of China’s monumental task – to stop a virus in its tracks. Critics increasingly note with the vast availability of vaccines, the human and economic costs of a zero-tolerance policy far outweigh any proposed benefit. For China, it’s a policy that’s getting harder to justify.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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