The authors’ opinions expressed in this article do not represent the position of FLIA or FLIA’s research team.
What Difficulties Have Yiwu Foreign Trade Companies Encountered During the Pandemic?
Authors: Liheng Xu, Wenchong Xu, Xinyu Xiao, Rui Ke, Hengen Qi (listed in no particular order)
“One of my friends lost 600,000 RMB in an account due to black money handed to him by a customer, and he now has nothing,” said Muhammad, a 24-year-old native of Jordan. He moved to Yiwu six years ago to work as a middleman. Such stories are not unheard of in recent years. Since 2020, the pandemic has spread widely throughout the world, causing a lot of trouble to foreign trade companies. During the pandemic, Muhammad’s bank account was frozen due to the infusion of black money into Yiwu, where he was doing business.
Muhammad and his friend Bashar are telling the students about their experiences and difficulties when trading
Yiwu, a county-level city in central Zhejiang Province, is situated in south-eastern China under the authority of Jinhua. Yiwu is widely renowned for its light industrial commodities and is regarded as the world’s commodity capital. As a result, many foreigners travel to Yiwu to build their own foreign trade companies that purchase goods from one country and sell them to another country.
Throughout the pandemic, the overall situation of international trade, not to mention Yiwu as the bridgehead of China’s global business, has not been optimistic. As the intermediate link in this process, foreign trade companies also face enormous impacts at home and abroad. Now Muhammad faces a slew of new challenges, including rising costs resulting from exchange rate fluctuations, increasing tariffs due to global economic shocks, and rising raw material and container prices. All of these have made it more difficult for middlemen like Muhammad and international trade enterprises to operate.
Exchange Rate Fluctuations Cause Foreign Trade Companies to Lose Profits
Sami is telling the students about his experiences and difficulties when trading
The fluctuation of currency exchange rates poses a risk of loss for foreign traders in China during the pandemic. Since the Chinese Yuan is not the global currency, foreign intermediaries have to convert their local currencies first into US dollars and then into Chinese Yuan to purchase Chinese goods. “This process is too long.” Sami, an African businessman, noted in an interview. Besides, during the long interval of exchanging currencies, the fluctuation of exchange rates between currencies may harm the profits of foreign trade merchants.
For example, a foreign trade company owner claimed that the Chinese Yuan continued to appreciate in the second half of 2020, affecting middlemen’s profits. “When the exchange rate was between 6.8 and 6.9, we signed a lot of orders with our customers. However, a few months later, when we received the payment, the exchange rate had changed to 6.55, which caused us a serious loss of profit. Our usual profit is around 6 percent, but currency fluctuations have impacted a lot on our profit.”
Money Laundering Leads to the Freezing of Middlemen’s Bank Accounts
Due to the shortage of foreign currency and high expenses during currency exchange, intermediaries try to find other methods to reduce the costs. However, some of the ways may be harmful.
During the pandemic, many foreign traders seek payment from underground money changers to save costs. If the trader receives laundered black money, their bank account will get blocked, which results in the freezing of a large amount of capital in different blocked bank accounts. Also, since all bank accounts with black money will be blocked, traders can’t avoid this problem by creating more bank accounts.
Yiwu traders’ frozen bank accounts caused by money laundering lead to problems in capital turnovers. For example, Zhang You is the owner of a company with more than 160 employees and is rated as a national high-tech enterprise. He had invoiced sales of approximately 80 million RMB last year. However, last July, local police froze four of Zhang You’s bank cards. The total amount of money involved in the crime is about 100,000 Chinese Yuan. Still, more than 7 million balances in the card were frozen, cutting off most of Zhang’s capital flow.
Government Policies Create Difficulties for Intermediaries in Yiwu, Including Visa and Tariff Issues
Apart from the problems caused by changes in currency exchange rates, traders are also negatively affected by national policies and rising prices of raw materials and containers.
Certain foreign countries and the Chinese government policies have created difficulties for traders in Yiwu, including visa policy and tariff.
Foreign merchants require long-term visas to operate businesses in China. The number of visas given out by the Chinese government during the pandemic had an explicit decrease of over 50% in 2020, from 8.7 million in 2019 to 4.0 million in 2020. According to the Ministry of Foreign Affairs of China, foreign merchants who have business negotiations or trading partners in China could apply for M-visas. These visas only hold validity for a maximum of 90 days. Merchants could choose to renew the permit, but such a move contains a risk that could deem the renewal unsuccessful. “Visa issues are distracting our attention from work. Before the pandemic, all we had to focus on was looking for goods and contacting traders!” exclaimed Sami, a leader of the Yiwu Trade Union.
Intermediaries in Yiwu are also profoundly impacted by the imposed tariffs on local exporters. The tariffs are issued by the governments of numerous foreign countries such as the United States, India, Pakistan, etc. These policies have been established on account of the shock of their national economies under the pandemic. For instance, India, the 6th biggest exporting country of China in 2020, imposed a tariff of 3.2%, according to ASKCI Consulting Corporation. India issued substantial tariffs on various products during the epidemic, including toys from 20% to 60% and shoes from 25% to 35%.
These tariffs are undoubtedly an obstacle for the local suppliers in China because the exporters are the ones who have to afford the taxes. To sustain profit, the sellers boost their prices, which become difficult for buyers to accept, making middlemen’s businesses harder to operate. After a long sigh, a Nigerian middleman confirmed this phenomenon during a street interview in Yiwu Wholesale Market.
Increases in Raw Material Prices Make it Impossible to Negotiate Orders
An increase in the price of raw materials and containers leads to a rise in the overall cost, which brings further difficulties to foreign intermediate merchants.
The increasing product price makes it difficult for intermediate merchants to maintain their profits. Since the second half of 2020, the cost of domestic bulk raw materials such as copper, iron ore, etc., has been steadily rising. Especially this year, the rate of increase has been quite shocking, with some raw materials’ prices rising by more than 20% in a month.
Copper is a typical rising price representation. China is the biggest customer of refined copper. The product’s raw ingredient is imported copper ore, with Chile owning the largest deposits of copper ore. Because of the labor shortage in Chile, the decrease in copper supply led to the increase of its price by 18.2% in 2020.
The increase in the price of raw materials has resulted in higher product prices. Those middlemen become the most awkward part of the supply chain. Muhammad, the intermediate merchant from Jordan, said, “Many of us do not grasp the situation today, as opposed to the previous year when many people went out of business due to costly shipping, supplies, and everything else. Since many merchants do not understand the price rise, the original contract will be impacted, and there is currently no remedy, which brings us great difficulties.”
Increases in Containers’ Prices Make the Cost of Transportation Rise Sharply
Goods are piled up in front of the container
Cargo containers, which play an essential role in cargo transportation, are used in large numbers. Containers are mostly made of steel. The price of containers also rises a lot partly because the raw material prices increase during the epidemic. According to the National Bureau of Statistics of China, after the 2021 Spring Festival, the average price of steel per ton has risen by more than 1,000 yuan from last year’s low point. In addition, under the pandemic, many countries have rolled out strict import rules. Containers are now stranded for four weeks in the foreign ports after the cargo arrives. In comparison, containers could return to the exporters in only about 7-10 days before the pandemic.
Therefore, foreign trade merchants have to bear a much higher cost of transportation. According to Wu Zhou, an international logistics company principal, “A 40 feet container was USD 2,000 before Covid-19. But on November 11, 2020, the price increased to USD 2,850. In December, the price became USD 3,400.” The outrageous price increase of containers has given an immense economic burden to the middlemen and discouraged many traders from exporting goods and cargo.
Because of the rising price of raw materials and a surplus of demand during Covid-19, the cost of containers increases inevitably. Rodolphe Saadé, CEO of the world’s fourth-largest container shipping company, emphasized, “America needs to buy many goods from China. For example, Amazon and Walmart bought tons of toasters. The company is bringing in vessels from other routes to meet the demand on this route.”
Overall, under the pandemic, intermediaries encounter problems such as black money and frozen accounts, currency exchange difficulty, the extreme rise of price, tariffs, etc. So far, it is almost unrealistic to solve these issues altogether. Utilizing online platforms to build connections is a potential solution for intermediaries. “Due to the lockdown in various countries, we have switched to hold online exhibitions to introduce our products to the foreign sellers,” said Ms. Zhong, the leader of an exhibition company, as well as a successful middleman. Here, intermediaries serve as introducers, as they get buyers’ goods from the sellers. Moreover, since the intermediaries hold sources from local factories, they could hire streamers to introduce these goods and popularize them on online platforms. In the information era, intermediaries need to adapt to new methods of generating their businesses.