China’s trade shifts away from U.S., even in Yiwu

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy.

Three young boys eating lollipops joined me on the elevator inside the five-story Yiwu “International Trade Market,” which ships the majority of the world’s Christmas decorations.

The kids ran out before I got off. There were more children than buyers when I visited what is one of the world’s largest wholesale markets in late August, just days before the end of summer vacation in China. Lego pieces lay scattered at store entrances, while escalators were halted — signs said it was “for the safety of children.”

Whether on a weekday morning or afternoon, the legendary Yiwu marketplace — which has the reputation of being the “world’s supermarket” — was unexpectedly quiet.

Was the U.S.-China trade war to blame?

Li, a seller of sponges and cleaning supplies, claimed it wasn’t the peak season for foreign buyers, and that his customers were from the Middle East and Southeast Asia — not the U.S.

The impact of tariffs isn’t large, said Li, who declined to share his full name. But he hinted that factories in his home province of Guangdong were harder hit.

It echoed the silence I encountered during my Yiwu visit. None of the dozen or so other businesses I spoke to agreed to be interviewed.

But it was clear that their customer base had shifted. I spotted more signs in Arabic, and sometimes Korean or Russian, instead of the usual English and Chinese. Large swaths of one floor selling scarves were focused on headscarves, or hijabs.

Exports to the U.S. from Yiwu have slipped from about 20% eight years ago to 15% last year, and is now even lower, said Ashish Monga, founder and CEO of trading firm IMEX Sourcing Services.

The decline of Yiwu’s exports to the U.S. mirrors a national drop. China’s exports to the U.S. have dropped by 12% for the year through July, while exports to the 10 largest economies in the Middle East are up by 13% during that same period, according to a CNBC analysis of official data accessed through the Wind Information database.

Since many of Yiwu’s products don’t meet EU compliance standards, that limits how much businesses can sell to Europe, Monga said. On the other hand, demand from Latin America, for example, has grown so much that Yiwu officials have supported Spanish classes for local merchants.

But it’s not just a matter of replacing U.S. orders.

“If you lose one big customer in the U.S., you need about five in emerging markets to make the same margin,” Monga said. “It’s more work for less money.”

While the total value of China’s exports to the U.S, as of July this year, stands at $251.4 million — far larger compared to the $116.5 million to the Middle East — Beijing has also ramped up its shipments to Europe and Southeast Asia, which is now China’s largest regional trading partner according to official data. Chinese exports to Africa for the year through July have surged by 24% from a year ago.

“Some of [the shift in Yiwu customers] is the hangover from the first [U.S.-China] trade war. People don’t want to be beholden to the States,” said Cameron Johnson, Shanghai-based senior partner at consulting firm Tidalwave Solutions.

“This year it’s definitely very clear that suppliers are turning to new, non-U.S. markets, particularly at scale, because they’re more stable, even though they’re at slower growth rates,” he said.

Pivoting away from the US

There’s little sign that Yiwu merchants will find it attractive to sell to the U.S. again soon.

Negotiators from the U.S. and China met in Madrid this week for the latest round of trade talks. But instead of announcing progress on tariffs, both sides only highlighted a “framework” agreement on the drawn-out divestiture of TikTok from Beijing-based parent ByteDance. U.S. President Donald Trump said he’s set to speak with Chinese President Xi Jinping on Friday to finalize details.

For businesses, the roughly 55% U.S. tariffs on most Chinese goods are still well above the 25% rate they faced during Trump’s first term. Ahead of his second inauguration in January, many U.S. companies ramped up orders to get ahead of the increased tariffs.

This frontloading helped support China’s exports — and stave off a Christmas crunch.

A Costco retail store in the U.S. was already selling the holiday decorations when Tidalwave Solutions’s Johnson visited over the weekend. “The only reason they would have done that is if they had gotten it in a few months before,” he said.

But planning can only go so far. He expects U.S. businesses will have to start raising prices significantly in a few months.

In addition, new fees affecting China-made cargo ships arriving in the U.S., even if they are not Chinese-owned, will start to kick in on Oct. 14 — with estimated charges potentially in the millions of U.S. dollars.

For the Chinese supplier faced with growing uncertainties, tapping a different market may simply be the safer bet.

Nvidia probe drags on. Amid high-level U.S.-China talks in Madrid, Beijing said Monday that the U.S. chipmaker violated the Chinese anti-monopoly law, and that an investigation would continue.  

China’s economic slowdown steepens. Retail sales grew by just 3.4% in August, missing forecasts, while fixed asset investment for the first eight months of the year barely grew as the real estate drag worsened.

Uproar over processed food. Fast-casual chain Xibei is in hot water after an internet celebrity last week criticized the restaurant for selling expensive, pre-made dishes. The company’s initial response irked many consumers further, as it revealed that industry standards for processed food are looser than many consumers believed.

Mainland China’s CSI 300 was up 0.47%, while Hong Kong’s Hang Seng Index rose 1.16% as of 11:15 a.m. local time. The Hang Seng Tech index jumped 2.89%.

Hong Kong-listed shares of Baidu surged as much as 14% as the company ramps up its artificial intelligence plans and partnerships. Shares in the Beijing-based firm, which holds a dominant position in China’s search engine market, had gained 9% overnight in U.S. trading.

Late Sept: U.S. House lawmakers are expected to visit Beijing in their first formal trip since 2019