Has The Trade War Taken A Bite Out Of China's Economy? Yes — But It's Complicated

Originally published on October 10, 2019 8:07 pm

In the industrial city of Dongguan, China, the effects of the trade war on the Chinese economy are measured in idled machinery and empty bar stools.

"One year ago, you probably couldn't even get through the crowd because it would be so busy. But right now, even the smallest vendors can't survive," says Song Guanghui, the owner of Crowdbar, a tricked-out food stall in an open-air market in Dongguan.

The market is across the street from an enormous factory complex that specializes in making shoes. Crowdbar's flashy electric sign, cold beer and bombastic owner used to draw crowds of workers at shift change.

But shoes are among the thousands of products that the Trump administration has slapped double-digit tariffs on since the trade war began in early 2018. Trade talks between the U.S. and China resumed Thursday. But a deal is far from done.

Meanwhile, 70% of footwear sold in America is imported from China. And with tariffs cutting into their bottom lines, many manufacturers have already relocated operations to countries like Vietnam and Indonesia.

That has left Song and Crowdbar short of workers to buy his barbecue skewers and beer. "I'm probably going to pick up and move elsewhere. If I stay here for much longer, I'm not going to be able to make it," says Song.

There are clues like this about the Chinese economy's health nearly everywhere in Dongguan. It's a sprawling manufacturing hub of more than 8 million people in southern China, nicknamed the "workshop of the world." Cities like Dongguan are among the hardest hit in a trade war that targets goods manufactured on razor-sharp margins.

Crowdbar is a food stall in an open-air market in Dongguan, across the street from a factory complex that specializes in making shoes. "Right now, even the smallest vendors can't survive," Crowdbar's owner says.
Jolie Myers / NPR

"I think there's a pretty major impact if you just look at the numbers," says Victor Shih, a political economist at the University of California, San Diego, who studies the Chinese economy. China exports more goods to the U.S. than to any other country in the world, and those exports have dropped by more than 12% this year alone, he says.

That drop has clearly hit the Chinese manufacturing sector. Industrial output growth in China fell to its lowest level in 17 years this summer.

On top of the trade war, China's economic growth has been slowing down for years. It's difficult to pinpoint exactly how many of China's current economic troubles are due to the trade war or the existing slump. But tariffs have undoubtedly contributed to slower growth since the early months of 2018, when the economic standoff began, experts on the Chinese economy say.

The Dongguan Fangjie Printing and Packaging Company produces brightly colored plastic bags, including bags for detergent, candy and dog poop.
Jolie Myers / NPR

President Trump's trade war has hit the U.S. as well. Economist Arthur Kroeber, head of research at Gavekal Dragonomics, says that tariffs have made products imported from China more expensive. "The brunt of the burden of tariffs is being borne by U.S. consumers," Kroeber says.

American farmers who've had retaliatory tariffs placed on the goods they export to China have also suffered, despite aid packages supplied by the U.S. government.

The Chinese government has many more tools at its disposal to alleviate some of the trade war's pressures. The central government recently slashed taxes on businesses and corporations to help cushion the blow. The government also devalued its currency so that Chinese goods were cheaper, and thus would be more attractive, to trade partners around the world.

Another tool available to the central government, experts say, is massaging official data coming out of Beijing. The official unemployment rate in China, for instance, has hovered between 4.3% and 3.6% for nearly 20 years. A lack of fluctuation beyond a percentage point for such a period of time is highly unusual. And the government even shut down the release of regional manufacturing statistics out of Guangdong province, where Dongguan is located, that cast doubt on rosy national numbers.

Workers in green polo shirts and blue caps monitor machines making plastic products at the Dongguan Fangjie Printing and Packaging Company.
Jolie Myers / NPR

But if some of the data is not to be trusted, anecdotal evidence on the ground in Dongguan paints a somewhat clearer picture.

On the dusty outskirts of the city, a dog of indeterminate heritage lazes in front of the entrance to the Dongguan Fangjie Printing and Packaging Company. The mood inside the plastic bag factory, however, is one of brisk efficiency. Workers in green polo shirts and blue caps monitor machines spitting out brightly colored plastic bags — bags for detergent, candy and dog poop.

"We make about 15 different kinds of doggie doo-dah bags," says Christopher Devereux, the managing director of Omnidex, a company that connects foreign companies from all over the world with Chinese factories like Fangjie that can manufacture their products.

Christopher Devereux is the managing director of Omnidex, which connects foreign companies from all over the world with Chinese factories that can manufacture their products. He recently pulled most of his clients out of the Fangjie factory and moved their business to factories in Vietnam "because of the tariffs, [because of] the trade war," he says.
Jolie Myers / NPR

Until the trade war, Devereux's business was called ChinaSavvy. But earlier this year, he changed the name because, increasingly, he's working with factories outside China. In fact, he recently pulled most of his clients out of the Fangjie factory and moved their business to factories in Vietnam, "because of the tariffs, [because of] the trade war."

And new business has evaporated, he says: "My inquiries from American customers about coming to China have dropped off considerably."

But Devereux concedes that he had already been considering a move to Vietnam when the opening shots of the trade war were fired.

"Wages have been going up steadily over the years, which happens when you get a more educated populace," says U.C. San Diego's Shih.

A more educated population means fewer low-skilled workers for production lines in factories like Fangjie Printing and Packaging Company. Factories have to offer higher wages to attract the best workers. And those wages eat into the bottom lines of the companies that Devereux places in Chinese factories.

"If you look at Vietnam now, you've got wages being roughly one-third of what they are here in China," says Devereux. And so the trade war merely sped up his move out of China and into Vietnam. "Two or three of our American customers, knowing we were looking in Vietnam, asked us to accelerate that" when the trade war began, he says.

"Even in the absence of a trade war, China's growth rate would have come down. The trade war makes it worse, but the trade war is not the primary reason," says Shang-Jin Wei, an expert on the Chinese economy at Columbia University and a former International Monetary Fund official.

With tariffs cutting into their bottom lines, many manufacturers have relocated operations to countries like Vietnam and Indonesia. Some foreign companies that relied on Dongguan Fangjie Printing and Packaging Company have shifted business to Vietnam.
Jolie Myers / NPR

The real challenges to the Chinese economy, Wei says, are structural issues like a lack of low-skilled workers to populate factories, an over-reliance on the manufacturing sector and an aging workforce.

Those factors, Wei says, pre-date the trade war. In fact, China's GDP growth has dropped by 3 percentage points in the past decade, from a growth rate of 9.6% in 2008 to 6.6% in 2018.

Still, at the plastic bag factory in Dongguan, a cluster of brand-new machines sits idle. "These four machines they bought especially especially for us," says Devereux, sweeping an arm toward the shiny machines on the factory floor. "And now we're saying bye-bye."

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ARI SHAPIRO, HOST:

President Trump started the trade war with China because he was sick of how China has been doing business. He was hoping that tariffs would inflict enough pain on the Chinese economy to extract concessions from the government.

But more than a year and a half into the trade war, talks are still dragging on. They pick up today in Washington. And just how long this trade war will last hinges on how much pain China is actually feeling. And the best way to figure that out is to go to China, which is exactly what our co-host Ailsa Chang did.

(SOUNDBITE OF VEHICLE HORNS)

AILSA CHANG, BYLINE: We're at an outdoor market in this part of a sprawling city in southern China. Dongguan is often called the workshop of the world. It manufactures everything from shoes to power tools. The pulse of the city rises and falls with China's industrial economy, which is why we figured Dongguan was where to crack the question of how the trade war has been hitting China. We found our first clues at the barbecue stands, where factory workers flock during shift breaks.

SONG GUANG-HUI: (Through interpreter) In a nutshell, there fewer and fewer people in Dongguan.

CHANG: Song Guang-hui operates a beer and barbecue stand here, and he says he's noticed a dramatic shift over the last year.

SONG: (Through interpreter) A year and a half ago, at the same spot, same time of day, the market would be so crowded you can't move.

CHANG: His arm sweeps across the scene in front of him. It's dinner time for factory workers. And there are empty tables, barely any lines. Song says his business has tanked by more than half over the last year.

SONG: (Through interpreter) I have thought about moving. It's hard to get enough business in Dongguan. We're all looking for better places, and for sure we would move if we find one. If it goes on like this, we won't be able to put food on the table.

CHANG: It makes sense that Song is seeing fewer workers around these days because factory output growth in China is at its lowest level in 17 years, a reality that is hitting other parts of Dongguan's ecosystem. Next stop - a neighborhood bar.

MARCUS HEMOPO: Like "Cheers."

CHANG: Like "Cheers."

Except it's called Irene's. It's a watering hole that's become a favorite among Western business types like product designers, engineers and manufacturing executives who work with Chinese factories.

HEMOPO: From time to time, my band will play in here.

CHANG: Marcus Hemopo is from Auckland, New Zealand. He and his wife, Irene Fong, have been operating the bar for nine years. Irene hand wraps a thousand dumplings a week here.

IRENE FONG: Also, I'm making chimichanga, fajitas.

CHANG: You make dumplings, chimichangas and fajitas?

FONG: I like to cook all the food.

CHANG: Oh, OK. Let me have a bite of the chimichanga. All right. I'm going to also put the whole thing in my mouth. It fits. It's delicious, Irene.

But these days, Irene's is selling fewer chimichangas and dumplings.

HEMOPO: Certainly, since the beginning of this year, things have dropped off. And hopefully, it will bounce back at some point.

CHANG: What are you noticing? Are you seeing customers coming in less often who you used to see more regularly?

HEMOPO: Yeah. A typical profile might have been four people to come on trips every couple of months. Well, instead of every couple of months, it might be every four months, or it might be that they've stopped coming altogether.

CHANG: Why do you think that is?

HEMOPO: Well, obviously because, you know, the guys - or the ladies, as the case may be - are off servicing products in other countries.

CHANG: They've moved their manufacturing outside of China, outside of Dongguan.

HEMOPO: Yeah, that would be true. Certainly the problems that exist in the trade situation for many companies have accelerated things.

CHANG: There's no question - things are slowing down in Dongguan. Chinese exports to the U.S. dropped 12% this year, which China isn't exactly advertising right now. You see, the country states its national pride on its status as an economic superpower, and any sign of economic weakness hurts that image. It's why China massages official data and prevents people from speaking openly about the economy, which is why we had a lot of trouble getting into the next place we wanted to visit - a factory.

Factory owners turned us down left and right. They told us the stakes were too high, the topic too sensitive. But then, after several weeks and dozens of phone calls, we finally got one yes.

CHRISTOPHER DEVEREUX: We make 15 different doggie doo-da (ph) bags.

CHANG: Doggie doo-da? I love that.

(LAUGHTER)

CHANG: Meaning dog poop bags - it's one of the products made by Fangjie, a printing and packaging company, a Chinese-owned factory in Dongguan. Christopher Devereux runs a firm that connects foreign companies with the Chinese factories that make their products. He says China has few rivals in the world when it comes to manufacturing prowess, and he wanted to show us what that looks like. That is after I suited up in a smock and booties and got sanitized.

We are in a tight little closet, getting blown with air. Oh, my God.

A blast of air ensures I am dust-free. As you walk the floor here, you see the factory's values emblazoned on these tall pillars next to the machines. They read hardworking, organized and practice.

TSAO MAI-HWA: (Through interpreter) We see quality as our life. We think the survival of our enterprise depends on our quality, our efficiency, our service.

CHANG: Tsao Mai-hwa is one of the people in charge here. She points to gigantic presses spitting out sheets and sheets of colorful plastic.

TSAO: (Through interpreter) This machine prints at least 300,000 square meters a day.

CHANG: A day?

TSAO: Yeah, a day.

CHANG: A day?

TSAO: (Through interpreter) We survive by efficiency.

CHANG: Wow.

Then we stop at a cluster of machines that look remarkably brand new.

DEVEREUX: These four machines over here they bought specially for us.

CHANG: But those four machines are mostly idle now because of a decision Devereux made just this year. He pulled almost all of his business out of this factory and moved it to Vietnam. The economics of staying in China just didn't make sense anymore, and that is what I wanted to hear more about. But first, I had to de-robe.

I am so ready to take off this smock. I am so sweaty.

Tell me why you've decided to move a lot of the manufacturing - at least of these particular doggy poop bags - to Vietnam.

DEVEREUX: Purely because of the tariffs.

CHANG: The trade war between the U.S. and China?

DEVEREUX: Yeah, the trade war.

CHANG: But as you start to tease out exactly why Devereux blames the trade war, something interesting happens. He starts painting a much more complicated picture. Turns out, he had already been thinking about moving to Vietnam several years ago, way before the trade war even started. Wages were going up in China, environmental regulations were tightening. Doing business here just got more and more expensive.

Those trends are part of the reason why China's economy has stalled over the past decade. And it's hard to disentangle the effects of that broader economic slowdown from the effects of the trade war. But talking about any of this stuff in China can get you into trouble.

OK. Some state security officials have just arrived at the factory. We just finished our interview, and we've been ushered into a conference room to wait. It looks like the state security officials are talking to the officials at this factory about what happened during the interview, what we discussed.

We wait in that conference room for almost an hour. Then one of the factory executives scrambles back in wearing an anxious smile, and she's trying to reassure us that everything's just fine.

So everything OK?

UNIDENTIFIED PERSON: OK.

CHANG: OK, great. Yay.

It was strange. I mean, on the surface, everything went back to normal, but something had clearly shifted. The state security officials stuck around, chain smoking on the couch while we finished our interviews. And their presence underscored just how much China wants to control what people say about its economy and the trade war. I asked the factory's president about this, and I could hear Jerry Bao (ph) walk a careful line.

Has the Chinese government encouraged you to keep sending an optimistic message about your outlook for the future here at this factory?

JERRY BAO: (Through interpreter) Absolutely. They tell us that China is a vast country with abundant resources. Demand for products inside China is huge.

CHANG: And how much do you personally believe that message is true?

BAO: (Through interpreter) We will have to trust our government 100%. We trust our government to help us out and to solve all the problems.

CHANG: Bao says the Chinese government has been really helpful in insulating the factory with things like tax reductions. And besides, he says the trade war hasn't hurt their company that much because they have been so resourceful in finding new business to replace clients like Devereux who want to leave China.

The thing is, though, not that many companies can leave China right now even if the tariffs are denting their profits because China is simply irreplaceable for a lot of businesses. Other countries like Vietnam just don't stack up. They have a smaller labor force, not the right skills, underdeveloped infrastructure, lower quality control. And, Devereux says, there is another problem.

DEVEREUX: Attitude.

CHANG: What do you mean by that?

DEVEREUX: I think that the Vietnamese - I mean, here you've got a work ethic, fantastic work ethic. In Vietnam, you've got almost negative attitude to work.

CHANG: Is it a matter of people don't want to work, say, six days a week, which is very common here among manufacturers in China?

DEVEREUX: Or seven days a week.

CHANG: Or seven days a week. That's difficult to do in Vietnam.

DEVEREUX: It's very difficult to do.

CHANG: I see. So in your estimation, how long would it take to transform Vietnam so it's up and running at the level that China is right now?

DEVEREUX: I don't think Vietnam will ever catch up.

CHANG: Are there any other countries outside of Vietnam that you could foresee becoming the next China?

DEVEREUX: Frankly, no.

CHANG: And that is the problem for President Trump. The whole strategy behind starting a trade war was to inflict enough damage on the Chinese government for it to change its protectionist ways. But with so much of the global economy tied up with China, some short-term pain may not be enough to shake up the whole system.

(SOUNDBITE OF KIDSWASTE'S "ALONE")

SHAPIRO: That's our co-host Ailsa Chang reporting in Dongguan, China. Transcript provided by NPR, Copyright NPR.