one of the hardest things to endure Shanghai closed city, a contact who has been locked up with her father in a small apartment for the past two weeks said it was uncertainty. She spends her days in WeChat groups trying to coordinate bulk food orders or looking out the window to see where the authorities have set red lines that residents are not allowed to cross. There is very little other information.

Social media shows a city on the fringes. Residents shouted from their balconies, demanding food. The drones broadcast messages asking them to return inside. Thousands of people who tested positive were crowded into quarantine centers.

exist Tuesdaythe U.S. State Department ordered non-essential staff to leave its consulate in the city due to “arbitrary enforcement of local laws and Covid-19-related restrictions.”

This is one of the worst lockdowns in the entire pandemic. It will affect the economy of Shanghai, China and the world. However, this is happening at a time in Europe and the US where many people are going through a third or fourth round of infections and are ready to ignore the whole thing. So they risk missing out on the big consequences of what’s happening in China’s largest city.

Three economic impacts stand out: on supply chains, on China’s own growth, and on the debate on reform within the country.

One of the biggest inflationary shocks to the world economy in the early days of the pandemic was supply chain disruptions caused by shipping delays at ports. Shanghai is the largest port in the world. While its terminals are in a “closed-loop” bubble — staff have no connection to the outside world — there are logistical problems across the region, so ships are starting to line up in offshore waters for loading and unloading. Factories across Asia will have to wait for components. Europe and the US will feel the disruption after a time lag of weeks or months.

This will manifest as an inflation shock at a time when Western economies already have too many other problems to deal with, from the surge in commodity prices caused by the war in Ukraine to the disruption of their own labor markets after the pandemic.

The impact should be less severe than in 2020 or 2021, as the new delays will be felt as previous supply shortages ease, but it will at least add additional uncertainty to an already chaotic price environment for the beleaguered central bank.

Domestically, the blockade of its business capital will have an escalating impact on economic growth, with Premier Li Keqiang sounding the alarm several times over the past week. Jingjing Chen, an economist at Tsinghua University, and colleagues used tracking data from 1.8 million long-distance trucks to study the economic impact of China’s city-by-city lockdown. When a city went into total lockdown, truck traffic to the city dropped by about 60%; incorporating these effects into trade models allowed them to estimate spillover costs elsewhere.

According to their modelling, a month-long lockdown in Shanghai — close to the current scenario — would cost 4% of that month’s national income. That alone would be enough to have a meaningful impact on annual growth, but in the extreme case of all Chinese cities being locked down, national income would more than halve for the month — a huge and unsustainable cost.

The more the coronavirus lockdown weighs on China’s growth, the harder it will be for policymakers to stick to their real estate deleveraging plans, as exemplified by giant developer Evergrande. The greater the economic damage from the pandemic, the greater the pressure to boost activity with a new real estate spree.

Fundamentally, it is the question of how Chinese policymakers explain Shanghai’s suffering and what it prompts them to do next.

One explanation is that Shanghai, or any other city, cannot be expected to experience two such lockdowns, so China must prepare to end its zero-coronavirus strategy and live with the virus. Another explanation — more likely to dominate local officials without a clear signal from the top — is that Shanghai’s mistake was to delay the lockdown until it was too late.

Guangzhou, which recorded just 27 cases on Monday, has moved schools to online learning and restricted access to and from the city. All but 13 of China’s 100 most productive cities have implemented some degree of quarantine, according to an analysis by research firm Gavekal. Given how contagious the Omicron variant is known to be, this could mean frequent lockdowns in China for the rest of the year – a downside risk that the market has barely priced in.

President Xi Jinping’s best political option may be to take a hard line on the lockdown, as he aims to win a third term this fall. The best option for China’s economy is clearly to maximize vaccine coverage, preferably with a more potent mRNA vaccine, and then exit zero Covid-19. That choice – politics or growth – will drive the global economy for the rest of the year.

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