Simulating prediction of epidemic prevention decoupling / Sheng Hong

Catalogue

I.  A simple imagination

II. Quantitative estimation of the cost of heavy measures

III. Estimation of international economic results of long-term implementation of heavy measures

IV. Model introduction and specific mechanism

V. Conclusion

Reference

Although different countries have different epidemic prevention models, they can be roughly divided into two categories. The first is the “dynamic zero- Covid” mode in mainland China, which aims to completely eliminate the virus. Therefore, it does not hesitate to take extreme measures to close down the cities for up to 30 to 70 days at a time. The whole people will conduct nucleic acid detection every day, the large-scale centralized isolation regardless nucleic acid Yin or Yang, close the market shut down the communities, cancel logistics, disinfecting and sterilizing in houses, etc. One is other countries outside mainland China. Although they have different degrees of strictness in epidemic prevention policies and different policies and measures, from no measures to nucleic acid positive isolation at home for 7 days, they have not taken such extreme measures as mainland China in general.

Assuming that these two kinds of epidemic prevention measures continue for a long time, mainland China has completely eliminated coronavirus at some time, but it is uncertain whether it will occur in the future; other countries have finally achieved mass immunization. They also need to carry out trade, tourism and other exchanges. On the premise of maintaining the existing epidemic prevention mode, how can they communicate? What impact will these epidemic prevention models and the restrictions on international exchanges have on the economies of the world and these two kinds of countries?

I. A simple imagination

Now the world is divided into two parts. The mainland China is called a “heavy-measure economy”, and countries in the world outside the mainland China are called “light-measure economies”. From the perspective of development trend, as long as the goal of “zero-Covid” remains unchanged, it is impossible for heavy-measure economy to gradually reduce measures. Its logic is that once there is an infection case, because Omicron has strong infectivity, it will spread in a short time, so it cannot be relaxed. The goal of light-measure economies is to achieve herd immunization. Finally, most people have antibodies. Even if there are some residual viruses, they will not be quickly infected. Even if they are infected, most people will not get sick, and the severe disease rate and mortality rate are very low. So when the light-measure economies reach their goals, they will gradually reduce their measures until the epidemic prevention measures are completely eliminated.

It is reported that the number of countries in the world that have relaxed the entry restrictions on the COVID-19 has increased to 57 (jiaxin.com, 2022), of which 45 have completely lifted the restrictions (fool visa, 2022), including large and important countries such as the United Kingdom, Germany and Japan. Other countries are also adjusting in this direction. No compulsory isolation is required for entry into the United States, only a vaccine certificate is required. As a result, light-measure economies may evolve into economies without measures. The heavy-measure economy may also relax some entry restrictions on the basis of the original overly stringent restrictions, but people still need to be isolated for at least 21 days after entry after two nucleic acid and one antigen tests before boarding. If the nucleic acid is positive, one needs to be isolated for a longer time. An extreme example is that a Chinese returned to China to visit his relatives was quarantined for three months (Lawyer Xue Liangquan, 2022). Leaving aside this extreme example, omitting nucleic acid test, antigen test and vaccination, the difference in the entry cost between the two different epidemic prevention modes is equivalent to the cost of 21 days.

The second cost difference between the two epidemic prevention models in international economic exchanges comes from the uncertainty of epidemic prevention measures in the heavy-measure economy. Due to the unpredictability of the emergence of the virus, the model emphasizes “early detection, early report, early diagnosis, early isolation and early treatment”, and takes “early closure of the city” measures against the strong infectivity of the virus. In fact, it is the practice of comprehensively closing the market, closing the community and interrupting the traffic in the whole city, which will bring about the expected instability, which brings high costs for international economic cooperation with high specialization and division of labor. Light-measure economies do not have such problems and their costs.

Third, as the heavy-measure economy in China will have viruses from time to time and the accompanying stringent control measures, the economic division and specialization among domestic regions will also be interrupted from time to time, resulting in a shortage of raw materials and parts, leading to work stoppages, which also weakens China’s original low-cost advantage. Light-measure economies do not have this problem.

The differences in the above three aspects will affect the investment. Investment requires high-frequency exchanges between personnel, talks, investigation, establishment of joint ventures, and application to the government. If the entry and exit are restricted by heavy epidemic prevention measures, these exchanges will be reduced or even suspended due to the high cost. Moreover, investment should also consider the international trade of goods or services, domestic costs, and the stability of the economic and policy environment. If there are negative factors in these aspects, foreign investment will further stagnate.

In addition, the severe restrictions on entry and exit imposed by the heavy-measure economy also affect the exchange of personnel, science, technology, education and culture. The development of science and technology depends on the flow of scientific and technological information, the mutual stimulation of innovative ideas, and the long-term development of science and technology depends on education. These exchanges have been hindered by the cross-border movement of people due to epidemic prevention, which will have a negative impact on the long-term development of the heavy-measure economy.

When the cost increases caused by epidemic prevention in these three aspects are superimposed together, the cost of goods and services in the heavy-measure country rises by a large margin, the cost of tourism also rises by a large margin, and the investment cost rises by a large margin, resulting in a decline in investment, which brings disadvantages compared with the light-measure economies. The light-measure economies are composed of many countries. Due to the lack of obstacles and costs caused by epidemic prevention measures, they are unobstructed in terms of goods, service trade and tourism. Compared with the heavy-measure economy, they have formed a relatively close light-measure economy, forming a more effective division of labor and cooperation, thus replacing the original division of labor and cooperation with the heavy-measure economy.

Therefore, if the heavy-measure economy and the light-measure economies implement the existing epidemic prevention policies for a long time, it will lead to a substantial decline in the former’s trade in goods and services, tourism and investment, significantly reduce its economic growth, or even negative growth, and seriously weaken its economic strength. On the other hand, since there is no barrier of epidemic prevention measures among the light-measure economies, they can smoothly trade, travel and communicate with each other, so as to form closer economic ties and show the trend of integration. If these two modes remain unchanged and parallel for a long time, the heavy-measure economy may have obvious cultural differences from the light-measure economies.

II. Quantitative estimation of the costs of heavy measures

The first is the cost estimation of entry quarantine measures. For simplicity, we assume that entry will bring a transaction income equivalent to the annual per capita GDP of the country of entry. That is to say, he or she may be engaged in international trade, investment investigation, or tourism, and the value it creates is equivalent to the per capita GDP of the country to which he or she belongs. This is, of course, too high an estimate, but it is acceptable for the sake of conservatism and convenience. For the same reason, the cost of entry epidemic prevention is only the isolation cost, and other costs, such as nucleic acid detection and vaccination, are ignored. The isolation cost is calculated according to the isolation days, which is 21 days in mainland China and zero days in other countries. Isolation not only brings the cost of not working, but also causes physical and psychological losses, so it cannot be estimated only by the loss of work income. Assuming that the physical and psychological losses are equivalent to their losses of work income, the cost of isolation should be 42 days.

Then estimate the relative value of this isolation cost, that is, dividing 42 days by 365 days a year, and get 11.8%. Since we estimate the value of international exchanges according to the per capita GDP of each country, this ratio directly represents the relative value of the cost of international exchanges and epidemic prevention of each country. That is equivalent to 11.8% tariff increase for all trade, investment, services and tourism.

Second, it is necessary to estimate how much the uncertainty brought about by mainland China’s epidemic prevention measures  is equivalent to the cost for international partners. When financial economics estimates the risk, it thinks that the risk means the cost, and the risk uses the fluctuation standard deviation as the index to measure the cost. For example, for two kinds of financial assets with the same expected return, the financial asset with small price fluctuation, that is, the financial asset with small fluctuation standard deviation, is a better choice. This shows that volatility means increased costs. However, the nature of the uncertainty caused by the epidemic prevention model in mainland China is not quite the same. This is not a cyclical fluctuation with roughly regular patterns, but an interruption of production and cooperation that does not know when it will occur. Assuming that there is a 10% probability of such a situation in a year, and each time it is interrupted for one month, it is also a heavy blow to international collaborators. This will affect the contract execution of partners and even lose the market. If an asset has a 10% probability of interrupting production and operation, the asset will be depreciated by 10%. In the long run, this is equivalent to a 10% increase in tariffs in the field of trade and investment.

Third, it should be estimated that the uncertainty of epidemic prevention measures will lead to the loss of domestic specialization and cooperation. The estimation method is roughly the same as the above method. Only in China, the probability of interrupting production and operation is higher. Because any one of the cooperative parties may be interrupted by sudden epidemic prevention measures. Not only the places where the epidemic occurred would be closed, but also the national or local transportation system would be interrupted. Therefore, we assume that there is a 20% probability that the production and operation will be interrupted. If each interruption lasts for one month, it may be interrupted for two months in a year. This is equivalent to a 20% increase in production costs for domestic enterprises.

Taken together, these three parts account for about 41.8% that is the cost of products or services in mainland China has risen by 41.8%.

III. Estimation of international economic results of long-term implementation of heavy measures

According to some data, assuming that the average cost of goods or services in other countries is 13.5% higher than that in mainland China (Ten Dimensional Vision company, 2021; this is certainly a higher estimate), we estimate that there is only the cost of entry isolation, equivalent to 11.8% of per capita GDP; adding international uncertain cost 10%, together is 21.8%; again adding the domestic uncertain cost 20%, together is 41.8%. These three cost increases are equivalent to the imposition of tariffs at the same rate. Put the data into the international trade model of ten dimensional spatial economics and institutional economics model, and the results are shown in the figure below.

Figure 1 estimation of economic contraction caused by heavy measures of epidemic prevention

When the cost of entry isolation is 11.8%, the GDP drops to 88% of the normal level. 11percentage points are the demand directly reduced due to the increase of costs, and 1 percentage point is the demand of Chinese enterprises whose goods or services were replaced by other countries.

When the international uncertain cost is added to 10% and the cumulative cost is 21.8%, the GDP drops to 78% of the normal level. 12 percentage points of the decrease are the reduction in demand caused by the increase in cost, and 10 percentage points are reduced by the replacement of the market by other countries.

When the domestic uncertainty cost is added to 20% and the cumulative cost is 41.8%, the GDP drops to 51% of the normal level. The 14 percentage-point drop is the demand reduced due to the increase of cost, and the 35 percentage points are the market share replaced.

Figure 2 Schematic diagram of Chinese enterprise market being replaced by foreign enterprises

Of the three situations, one is more serious than the other. In fact, if we take the existing epidemic prevention model in mainland China as a whole, the most likely scenario is the third. In this case, the economy is equivalent to collapse. The market shrank by a large margin, and capital (not only foreign capital) fled in large numbers. Due to the lack of investment, the economic prospect was even bleaker.

If this epidemic prevention model is implemented for a long time, the mainland China will be isolated from all other “light-measure economies” and finally become decoupled. This is epidemic prevention decoupling. If decoupling, the mainland China and the world will lose the benefits of global integration. Compared with mainland China, all other countries can maintain smooth economic exchanges, so they are a relatively close economy compared with mainland China, and they suffer less losses in decoupling from mainland China. This is because their enterprises partially replace Chinese enterprises, and the price is higher.

Figure 3 Estimation of economic consequences of epidemic prevention decoupling

The above figure is the result of using the “International trade model of ten dimensional spatial economics and institutional economics model” to simulate the decoupling of mainland China from the rest of the world due to excessive epidemic prevention. After decoupling, the world economy is equivalent to 92.4% of that before decoupling, while the economy of mainland China has dropped to 68.6% and that of other countries is equivalent to 97% of that before decoupling. The reason why other countries do not reduce much is that they obtain the market the mainland China gives up. This estimation method is different from the previous method of considering epidemic prevention measures equivalent to tariff hikes. The reason why it is not reduced to 51% is that the domestic cost increased due to heavy epidemic prevention measures in China is not taken into account here.

Decoupling does not seem to reduce much of world GDP. In fact, this is not the whole loss of decoupling. The benefits of free trade are mainly the increase of consumer surplus, which is reflected in the decline of prices. The price decline will not be reflected in GDP. Decoupling is equivalent to the suspension of free trade, and it will not reflect the loss of the reduction of consumer surplus.

It is worth pointing out that the above estimates are only static estimates, without considering the dynamic results of decoupling losses, including the multiplier effect caused by decoupling static losses, the reduction of division of labor and specialization, the weakening of competition, the enhancement of monopoly, the weakening of innovation intensity, the slowdown of scientific and technological development caused by the reduction of international exchanges, and so on.

IV.  Model introduction and specific mechanism

The model used in this paper is developed on the basis of the “ten dimensional spatial economics and institutional economics simulation model” (Sheng Hong, 2022) that I constructed to analyze international trade. Because this model has the function of institutional economics, it can be used to test policies and institutions, and it can also be used to test the limitations on international exchanges. In our analysis of China US decoupling in 2020, I used this model to make a rough estimate of the results (ten dimensional vision company, 2021). The figure below shows the static loss estimation caused by chip decoupling in this study.

Figure 4 Static loss of the world market of China’s electromechanical products caused by chip decoupling

Source: Ten dimensional vision company, 2021.

On the basis of testing the population density distribution, economic distribution, industrial distribution and their institutional policies, this model converts epidemic prevention restrictions into equivalent tariff hikes, and can estimate the situation of heavy-measure economy. In economics, an obvious difference between trading and non-trading is that trading will bring trading dividends, while non trading will not. In the calculation, it simply shows the difference between the total income after the accumulation of the cost function and utility function of both parties to the transaction and the sum of the income formed by their respective cost function and utility function before the accumulation.

V. Conclusion

We have seen that the authorities have a clear understanding of the consequences of decoupling. It once proposed “never decoupling” and adopted a series of counter decoupling measures.

However, on the other hand, it claimed that it would “unswervingly” adhere to the heavy measures. The above research shows that the result is epidemic prevention decoupling. This is to use its own policies to achieve the goals it “never” want to see.

“Unwavering”  in adhering to heavy measures for epidemic prevention and “never decoupling” cannot be achieved at the same time. Therefore, this shows that the authorities lack the logical consistency of policies on the macro level.

The reason for this result is that a single administrative goal is above the constitutional principles and comprehensive social goals, and a government that theoretically takes into account the overall social situation is narrowed into an epidemic prevention department.

The way to overcome this problem is to return to the Constitution and put epidemic prevention under the Constitution; the authorities return to a theoretical government, and cannot continue to be an epidemic prevention department above the theoretical government.

Reference:

Jiaxin. Com, “The 57 countries do not need vaccination and isolation”, Jiaxin. Com, May 27, 2022.

Fool Visa, “list Summary – 45 countries / regions in the world have cancelled all entry restrictions related to Covid”, Tencent News, May 28, 2022.

Sheng Hong, “Simulation and comparison of several epidemic prevention models”, Professor Sheng Hong, May 5, 2022.

Ten dimensional vision company, “The degree of decoupling between China and the United States and its impact”, Professor Sheng Hong, February 26, 2021.

Lawyer Xue Liangquan, “My three-month magical journey in China”, Lawyer Xue of the United States, April 6, 2022.

Author: flourishflood

Economist, Confucianist

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