Traders in Yiwu suspected Donald Trump would win the 2016 US election. The city, though little-known outside China, hosts the largest low-cost wholesale market in the world. Trump supporters ordered far more flags, caps and other merchandise than fans of Hillary Clinton.
Yiwu may struggle to repeat its psephological coup following the Trump administration’s new round of tariffs. Trinkets for the next elections are more likely to be made somewhere else. On Tuesday new levies on $200bn worth of Chinese imports were announced. China cannot retaliate tit-for-tat. Its imports from the US are only worth $130bn. Instead, expect pressure on the renminbi and disruption to cross-border M&A.
The theory of comparative advantage predicts that US companies lose profits and productivity if they do not focus on what they do best, while consumers face higher prices. So what? China is already comfortable with the costs of mercantilism. Underlying President Trump’s trade policies is the belief they are bearable for the US too, if they help pry open China’s restricted markets.