Canton Fair “self-employed” China’s foreign trade is quietly changing

After the visa capacity was improved, Guangzhou regained its “third world capital” essence during the Canton Fair, and the foreigners on the streets became shoulder to shoulder. During the four years of the epidemic, the new form of e-commerce industry represented by live streaming e-commerce and cross-border e-commerce has developed rapidly, so there are also many online shop owners among the buyers of the Canton Fair. They excitedly broadcast live in the huge Pazhou Exhibition Hall, showing audiences around the world that the world’s largest exhibition hall contains a wide range of goods.

If you think about it, China’s trade has changed a lot in recent years. The online shop owners and Internet celebrities taking selfies in front of the Pazhou Pavilion represent a new phase in China’s foreign trade – one in which live-streaming e-commerce and cross-border e-commerce combine to empower China’s powerful supply chain to sell to millions of ordinary self-employed people outside the country. This opens up a unique non-traditional channel for Chinese goods, so that the traditional sense of “low-end production capacity” can avoid being eliminated in a short time.

The discussion needs to start with China’s export structure. According to the composition of shareholders of export customs declaration enterprises, we can divide exports into two categories: domestic exports and foreign exports. In 2014, China exported about $39.4 billion in goods every day – of which foreign exports accounted for about 46% of $18.1 billion. This figure has been falling for a decade – foreign investment accounted for less than a third (29%) of the $18.7 billion of goods that China exported on average every day in the first nine months of 2023. During the decade, the total value of foreign exports increased by only 3.1% (0.3% per year on average), lagging not only the overall 63.5% (5.0% per year), but also far behind the 114.7% (7.9% per year) of domestic exports.

So what does the change in China’s export structure reflect?

Let’s start with the characteristics of foreign and domestic exports. If we further break down the types of foreign capital exports according to the way of trade, we can find that most of the foreign capital exports are still exported in the form of “incoming processing” and “incoming processing”. In other words, these exports are still processed trade in which both the upstream component supply channels and the downstream sales channels are outside.

As a result, foreign exports have traditionally not relied on “Canton Fairs” – they usually have sophisticated design and sales capabilities, and simply use China as one link in their supply chain. For export-oriented foreign-invested enterprises, China is often chosen because of its relatively low production costs – and this production cost is indeed likely to be replaced by policy factors.

The biggest problem with this “processing trade with both ends outside” is that the processing part of China obviously has no bargaining power when the supply chain and sales channels are controlled. This is where the “smile curve” comes from. According to this theory, if China’s labor costs in the so-called “low-end industries” such as clothing are no longer advantageous compared with other countries, then these industries will naturally face the transfer to other countries, and practitioners will naturally face the fate of decline and disappearance.

But the cost of production is only part of the price of a product – if you can cut the cost of other parts, you can still produce in China at competitive prices. Among the “costs of other parts”, circulation and sales costs are the largest part. Many goods that sell for one yuan in China may sell for one dollar in the United States, and the price difference between them is the cost of circulation and sales.

Under the traditional mode of large-scale trade that relies on foreign investors, the so-called “channels” of circulation and sales are actually monopolized. Because the bulk trade needs customs clearance and other procedures, as well as the final consumer-facing channels have a certain knowledge and capital threshold, so there are relatively few people who can do this business, and the cost of circulation naturally rises.

However, as we said in the article “Cross-border e-commerce folding smile Curve”, e-commerce has greatly lowered the knowledge threshold of cross-border trade – cross-border trade has become a very low threshold business under the optimization and “enabling” of large platforms. This has led to an explosion in the number of practitioners who quit their day jobs to start side businesses, or who use their time outside of their day jobs to get involved.

This is similar to the trend of opening stores on eBay and Taobao in the past – but unlike the logistics system was not mature enough to make it difficult to make big stores, logistics is much more mature today. In order to take full advantage of their infrastructure, large e-commerce platforms like Amazon and Walmart have begun to allow small and medium-sized sellers to enter – after listing on the e-commerce platform, small and medium-sized sellers can immediately use the e-commerce platform’s capital collection and logistics capabilities (of course, at the cost of taking money) to achieve rapid delivery of goods.

For these traders and micro business, commodity management and logistics problems have been solved. So there’s only one problem left – the supply chain. Unlike large traders who have enough manpower to investigate the supply chain, individual traders and micro businesses obviously do not have such energy to go country by country. For them, the only option is to follow their intuition – and the ubiquitous “Made in China” of everyday life is the best.

If you search for “Sourcing from China,” you’ll find a wealth of videos and articles (66 million Google results) that guide online shopkeepers on how to source from China. From how to apply for a Chinese visa, buy a Chinese mobile phone card, how to find a shop in a trade city, how to take high-speed rail and online car booking, how to use e-commerce websites to find business opportunities, how to communicate with the shop customization, the content of these videos and articles can be described as everything.

And in these “business online courses”, in addition to the use of e-commerce website online wholesale, the most popular keywords are Yiwu  and Canton Fair- in the field of household goods, gifts and ornaments and other small commodities, there are enough suppliers can choose the Canton Fair, it is their grand stage.

If you look closely at the exhibits of the Canton Fair, you can find that the entire second and third phases are often the traditional “low-end production capacity.” However, with a large number of individual “turnover” to join the market brought about by the decline in channel costs, these “low-end production capacity” in the face of capacity competition in other countries are not timid – after all, even if the input price of goods has risen, the total cost is still relatively stable.

In other words, the traditional “low-end production capacity” of clothing is low-end production capacity because its trade channels are traditionally concentrated in the hands of a few large enterprises with mature channels in foreign countries. These large enterprises, in pursuit of profit, will of course put production in the cheapest place.

However, large companies are profitable because of their control over the channel. This channel control comes from the knowledge threshold introduced by the complexity of import and export trade and logistics in the past – knowledge threshold limits the number of participants and thus affects the competitive landscape in the market.

Therefore, whenever the threshold of knowledge is lowered (as is happening in the e-commerce industry today), whether in China (for example, brands such as SHEIN) or overseas (the “individual micro business” we just discussed), there will be challengers to this traditional distribution system. For the challengers of these traditional systems, the supply chain has always been the biggest challenge. In the face of such challenges, the first choice for new entrants remains China – and the most attractive of them is still the all-inclusive Canton Fair.

The best lesson we can draw from this is that the so-called “low-end industries” are not all bad: if the right model is found to reduce costs elsewhere, the “low-end industries” can still compete.