3 takeaways from my visit to Yiwu, the frontlines of the trade war

China's second globalization push and a self-inflicted wound I didn't quite realize

Two weeks ago, I went down to Yiwu, the famous wholesale manufacturing hub, to do some reporting for The Atlantic on the trade war, which you can read here. Yiwu is a quintessential artery in the “world’s factory” and increasingly a kind of weathervane for global trade. It has entire factories churning out the most specific items you’d expect to find in your Walmart or Target—I visited one that made sun-resistant women’s fleece jackets.

The week I was there, Trump had elevated his tariffs to triple digits and it was having a palpable effect. Everybody was talking about it. Orders stopped coming in. Production lines were halted, and workers were meandering around factories trying to find new work. The thrust of the piece is that China is going to be fine weathering this because its manufacturers seem to be fine (for now.) But here are some takeaways I couldn’t find space for in the article.

1. Very few sellers told me this trade war would be existential for them. Of the fifteen or so sellers I talked to, the average exposure to US trade was 10-20% which is roughly the same as the overall percentage of Chinese exports to the US last year (15%.) For the few sellers who told me it might be existential, the problems were either compounded by other domestic factors or it wasn’t going to exact any political costs for the Communist Party because they blamed Trump. This wasn’t like the Covid-19 lockdowns, which was unambiguously self-inflicted, hence why it eventually sparked widespread protest.

2. Globalization doesn’t look to be over; it’s just increasingly happening without the United States. The Yiwu manufacturers told me they had been preparing for this since at least 2018, when Trump started the first trade war. Just as Europe realized they can’t rely on the American security umbrella, Chinese producers realized they can’t rely on the American consumer. Yiwu diversified a lot in recent years, finding new customers in South America, the Middle East, and Eastern Europe. Part of this came organically: the average quality of Yiwu products is low and so it became harder to sell them to the US, where the standards are relatively strict. Those sellers who sell mostly to Europe and North America moved production to Southeast Asia (like Vietnam and Cambodia) or Mexico to avoid paying high tariffs. This was consistent with the kinds of foreigners I met there—mostly Arabs and Africans.

3. Labor costs and depressed consumption are bigger problems. Although I didn’t hear much panic about the trade war in Yiwu, all is not well in the manufacturing hub. Yiwu manufacturers cited two bigger issues that they fear will be existential in the coming years. The first is labor costs. Many sellers told me they can’t find workers anymore or they’re paying workers too much. They’re getting squeezed by foreign buyers asking for discounts. Gone are the days when everyone needed to buy Chinese made goods. Buyers have more leverage now thanks to cheap options in Southeast Asia.
   
   The second problem is what Chinese call “consumption downgrading,” (消费降级), which just means people are buying less luxury items and are now more price conscious. This is the opposite of what should have happened as China grew richer. Instead of boosting consumption after the pandemic, the government mostly fueled its export-driven economy even as its population was aging and its labor force is shrinking. I often felt as though Yiwu’s merchants were part of a slow-moving car crash. They were getting squeezed from all sides with no clear way out.
   
   In truth, Yiwu seems to me to be a relic of a bygone era. Had China had a better-prepared economic transition from a low-income to middle-income nation, this totem of China’s economic rise might have looked very different now. Instead of the entire city being devoted to producing cheap goods, as it still is, it could have moved toward more high-end products—electronic components, smart appliances, or robotics. Better rural incomes could have contributed to more domestic demand and a self-sustaining ecosystem of entertainment, bars and restaurants. Better education might have spawned a service sector and attracted knowledge workers. It’s hard to say why this transition didn’t happen given the Chinese system is supposedly known for long term planning. In any case, I went to Yiwu to seek out the impact of the U.S. tariffs, but I ultimately came back with the impression that China had done far more damage to itself.