- [Narrator] China is currently experiencing
an unprecedented level of civil unrest
as people are flocking to the streets
to protest harsh lockdown measures
that have been in place for almost three years now.
The country's zero COVID policy has come
at a significant social cost
with new stories about families being separated
and people's apartment doors been welded shut,
all in an attempt to stop the spread of an illness
that the Chinese population is starting to realize
might not be as bad as the measures taken to avoid it.
This most recent unrest is just the latest
in a long line of bad news stories
coming from the second largest economy in the world,
an economy which is governed by leaders
that the people have no direct say over.
Civil demonstrations protesting lockdown restrictions
are nothing new,
but within mainland China, it's a little bit different.
These protests are demanding direct political change
at the highest levels of government
and they don't seem to be showing any sign of slowing.
This all came before the government
effectively reversed its COVID policy overnight
and opened the country up to a wave of infection
that is happening all at once
with reports of as many as 37 million people a day
catching COVID and forcing entire cities back into lockdown.
Now to be clear, the chance of an outright revolution
is incredibly small despite what some outlets might present.
And as we've explored multiple times
with foreign videos that we make covering China,
that's probably a good thing.
Despite the understandable animosity
we as outsiders might feel towards China,
nobody should want the economy to collapse
through something like a violent revolution
or social breakdown.
Altruistically, we shouldn't want this
because the current system, as problematic as it is,
still supports hundreds of millions
of extremely economically vulnerable people.
Any type of widespread disruption
in an economy as large and still mostly poor as China
would cause untold human suffering
among the people that have no say
in the actions of their own leadership.
Even if we are being entirely selfish,
one of the very reasons we pay so much attention to China
is because we are dependent on it.
It buys a lot of our raw materials,
invests into a lot of our economies,
produces a large share of consumer items that we enjoy
and the equipment that we rely on to run our own economies.
So with all of the instability in the country at the moment,
maybe it's not a bad time
to try and answer some important questions.
First and foremost,
what effect would a Chinese economic collapse have
on the global economy?
What are the most productive ways
to minimize the impact that this situation could have
on our own economies?
And finally, could this unfortunate situation
actually be a net positive
to certain countries around the world?
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As always,
I have to give the big disclaimer
that nobody can predict the future,
least of all economists.
And that applies to hypothetical futures as well.
There is no possible way
to know exactly what a Chinese collapse would look like
and what situations the rest of the world would be in
if something like that were to happen.
But with that said,
this hypothetical isn't entirely unprecedented.
The Soviet Union
was once the second largest economy in the world.
It was a heavily industrialized state
with authoritarian leadership
that eventually collapsed not in small part
due to civil unrest, economic stagnation,
and a series of large scale disasters.
The impact of the Soviet system falling apart
basically overnight threw the member nations of the Union
into almost total anarchy as they had to reinvent a system
of government from the ground up.
The countries directly dependent on the USSR also suffered
but most nations outside of Soviet influence were just fine.
By 1991, the Soviet Union
was either the third or fourth largest economy in the world
behind the USA, Japan, and potentially West Germany
which must have been pretty embarrassing
considering that the Soviet Union also included East Germany
in addition to 14 other member states.
The reason we can't be certain
if it was the third or fourth largest economy in the world
at the time of its collapse
is that record keeping in the union
was so corrupted and unreliable
that institutions like the IMF and the World Bank
could only be confident of its output
within a range of around half a trillion dollars or so
at the time.
It's probably worth pointing out
that China also has systemic issues
with producing reliable economic data.
But to be fair, it's not nearly as bad as it was
during the late stages of the Soviet Union.
Now regardless of precisely where it sat
in relation to the largest economies in the world,
the Soviet Union was undeniably
very substantial and very influential.
But despite this,
global GDP actually went up following its collapse.
This is surprising because all other things being equal,
even if the collapse of the Soviet Union
had absolutely no impact on any other economies at all,
the very fact that a nation
representing an appreciable percentage
of the total global output,
almost stopping operations entirely,
should have brought the average down just by itself
and it did sort of.
Global economic growth was still positive
in the years following the union's collapse
but it was lower than average,
and it was brought up by a general trend of high growth
from countries like Japan, Germany, South Korea,
and of course, China,
which by this time was well and truly into the swing
of their economic transition to a market economy.
If you look at this chart for long enough
you'll notice that the fall of the Soviet Union
almost did about as much damage to global economic growth
as the oil and gas crisis of the mid 1970s,
the recession of the early '80's and the dot com bubble
combined with the September 11 attacks in 2001.
Since 1961 when the World Bank
started actively tracking global GDP figures,
its sustained growth has been pretty consistent
only falling into negative growth twice,
once in 2008 during the global financial crisis,
and once in 2020 during the pandemic.
Now, none of these periods were particularly fun,
especially when a global slowdown was actually caused
by a more concentrated slowdown in a particular region
that just happened to bring down the average.
But maybe all of this suggests
that a systemic collapse in China,
like the one in the Soviet Union,
wouldn't actually be catastrophic on a global scale,
but of course, that might be naive
because there are some big differences
between China and the Soviet Union.
The first is simply size.
When the USSR collapsed
it had a total output of around $1.6 trillion
according to the best figures
that could be obtained by the World Bank.
At the time, that accounted
for around 7% of total global output,
which was $23.8 trillion.
Today, China has a GDP of $17.8 trillion,
again according to the best figures
that could be obtained by the World Bank.
That is roughly 18.5% of the world's total economic output
of $96 trillion.
If we just go off the raw numbers
a similar proportional drop would mean
that the effect of China collapsing
would be 2.5 times as bad,
which means the global economy would suffer a hit
roughly as large as the COVID pandemic.
But that's just going off the raw numbers
which is probably a silly thing to do.
For starters, global economic growth
is currently not as strong as it was in the 1980s and 1990s.
It's roughly half a percent lower on average.
Remember, a big reason that the collapse of the USSR
didn't result in negative global growth figures
was because of the growth of countries like China.
Today, there aren't those massive economies on the rise
to bolster average global figures.
What's more is that when the USSR
splintered into its constituent states,
some members didn't actually do that badly for themselves.
East Germany, for example, was already in the process
of economic reunification with West Germany
and it actually benefited from becoming one
with what was at the time
the third largest economy in the world.
Then of course, there is the biggest difference
between the USSR and China,
one that I'm sure most of you
have probably been thinking about all along
and that is that China
is much more integrated into the global economy
than the relatively isolated USSR ever was.
Even the world as a whole is much more interconnected
than it was just 30 years ago
with global supply chains,
the prevalence of multinational corporations,
international finance,
and even just regular communications spanning countries
being far more common than it was back in 1991.
I don't want to downplay
the impacts that the Soviet Union had on the world,
but if ever there was an economy
that could be neatly removed
with little interruption to the rest of the world
it would've been one that lived behind the Iron Curtain.
At its height, the USSR was responsible
for less than 1% of all global trade,
and this was at a time when the world traded
far less intensely than it does today.
China is currently responsible
for 12.5% of total global trade according to the UN.
Global trade is currently responsible
for 52% of global output.
Now, trade as a percentage of total global output
is really worth understanding here
because what this does is look at the value
that is added to the global economy
due to the trade of goods and services between countries.
That 52% figure might not make that much sense
when you consider that only around 10% of the output
of the American economy comes from exports,
trade just being a component of output
along with consumption, investment and government spending.
But these two numbers
are actually measuring different things.
There are lots of goods and services
that globally integrated economies, like China and America,
import and export that makes the world a wealthier place
but doesn't actually get consumed domestically
so it doesn't count towards domestic GDP figures
but it does count towards global GDP figures.
There are actually countries like Belgium
where trade represents 169% of their total GDP, nice.
And even places like Hong Kong
where trade is 403% of their total output,
this is because places like Hong Kong act as a middleman
and accommodate lots of international trade and services
that make other countries richer
but don't get used by Hong Kong itself.
Now, global trade as a percentage of global output
is actually down from its all time peak,
which occurred in 2007
when trade represented 61% of global output.
The decline in the following years was caused by the GFC
and amongst other things the gradual decline since
has primarily been caused
by China developing its domestic market
and relying less
on simply being a cheap place to produce things
and then ship them overseas.
Then, of course, the most recent sharp drop
was caused by COVID,
and the World Bank hasn't yet produced figures
for 2021 or 2022, but the general expectation
is that it should be back up around 55%.
Regardless of this decline,
even at 52% of total global output,
if 12 and a 5% of that disappeared overnight
and wasn't rapidly replaced by other countries
or whatever regime takes over in China,
then this theoretical total collapse
would single-handedly plunge the world
into the greatest economic downturn in recorded history.
Of course, despite what the clickbait headlines
and thumbnails might have you believe,
the economy of China
completely collapsing in the immediate future
is incredibly unlikely.
They have problems, sure, pretty serious problems to be fair
but it's also important to consider
that the industries that deal most with a global economy,
as in those that are providing international services,
importing raw materials and exporting manufactured goods,
are going to be the most resilient to internal turmoil
purely because they are more dependent on the global economy
than they are on the domestic Chinese economy.
An extremely small scale example of this
would be someone like myself.
I run a business that provides a service
of making videos that explain economics.
This service is mostly exported
to viewers all around the world,
and yes, a service like entertainment or education
is counted as an export
if it's consumed in a different country
from which it is made.
If the economy of Australia completely collapsed tomorrow
there is no reason that I wouldn't keep on making videos
because I could still make money
by exporting my work to viewers
in economies that are still functioning.
This assumes that the economic collapse is not so extreme
that I don't have access to electricity and the internet,
but if that did happen, then I could just move my business
and continue my operations in another country
and the world wouldn't have to do
without the value that this service provides,
which, wow, this example made me sound
incredibly arrogant and self-important,
but you get the idea.
Of course, a move like this on the scale of the businesses
that we are talking about in China
would cause massive short-term disruptions,
but also, if we're talking about a situation
where China's electricity grid has gone offline,
then the world would probably have bigger problems
than just an economic recession.
Finally, the very fact that we are dependent on China
gives its economy a level of robustness
that means it's unlikely to just cease contributing
towards the global economy.
There are potential situations like an invasion of Thailand,
that that might spark Russian style sanctions
that could cut it off from the world quickly and severely.
But short of that, any type of economic collapse
specifically within China
is likely to happen on a long, drawn out timescale
that would give industry enough time
to establish operations in alternative economies,
kind of like they're doing right now.
So, sorry, it's not the exciting answer
that you might have been hoping for
but exploring extreme economic situations
can be really great thought experiments
to learn about things like global trade,
economic interdependence and even how our world
has evolved to be a far wealthier
albeit potentially more delicate system
over just the past three decades.
Thanks for watching, mate.
Bye.