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Suddenly, the world’s executives are shocked, shocked
about quality-control problems in China.
It seems
many are having a Captain Renault moment. The reference
here is to Claude Rains’s character in
Casablanca.
Police Captain Renault professed to be “shocked, shocked
to find that gambling is going on in here!”—just before
being handed his winnings for the evening.
That, in
a nutshell, is how many multinational companies risk
looking amid disclosures of contaminated food, tainted
pet products, defective toys, fake mineral water and
other quality-control nightmares in China.
“More
Western firms are scrambling to find food sources
outside China that are safer,” Donald Straszheim, vice
chairman of Newport Beach, California-based Roth Capital
Partners, told clients in a July 5 report. “But this
takes time and is very expensive. When the Western
casualties mount, these firms will need all the lawyers
they can afford to prove they were attending to the
safety of their products.”
By
“casualties,” Straszheim means those multinational
companies in for a rough few years of litigation. For
Hillary Clinton, Barack Obama and others running for the
US
presidency, the issue could be a godsend. They are sure
to see it as just the thing to placate those blaming
China for widening income inequality in the
US.
Protectionism
There
are huge risks here for markets, of course. “China’s
problems in this regard could lead to even greater
protectionist tendencies,” Gary Kleiman, senior partner
at Washington-based Kleiman International Consultants,
told me in Hong Kong.
It may
be inevitable. We can debate whether it’s acceptable for
the US Congress to chastise
China
about its undervalued currency. What’s less debatable is
that China, the so-called factory floor of the world
economy, has a growing crisis on its hands as companies
such as General Mills Inc., Kellogg Co. and Toys ‘R Us
scrutinize its products.
One part
of the crisis is the economic fallout. “If you’re a
parent in the US or Europe, you’re going to start paying
close attention to where something is made—looking for
the word ‘China’—and that could affect the economy in a
big way,” says Michael Pettis, associate director of
finance at Peking University.
Pettis
says officials in
Beijing
are beginning to grasp the magnitude of this problem and
will act forcefully. Still, the issue remains quite the
wildcard for the world’s fourth-biggest economy
Political angle
The
other part of the crisis is politics. China’s food- and
product-safety scandals dovetail with shocking news from
Shanxi and Henan provinces. Last month, police rescued
about 600 people, including almost 40 children, from
illegal brick factories. It shone a spotlight on labor
standards—and the underbelly of China’s 11-percent
growth.
“Should
we not buy the products because of their ‘inadequate’
standards—should that be a consideration in currency and
trade negotiations?” Straszheim asked. “My guess:
Washington is going to start down this road, making even
bilateral trade agreements ever more complicated. And
making multilateral trade deals close to
impossible.”
Of
course, hypocrisy colors the issue. Something gets
forgotten in all the carping in Washington about China
destroying US jobs: about 85 percent of
China’s
trade surplus is generated by foreign companies there
exporting products that are no longer made in the US,
such as shoes.
Blame
game
“We
should not easily blame the other side for our own
domestic problems,” Chinese Vice Premier Wu Yi said in
Washington
in May.
Wu makes
an important point. In the 1990s, US lawmakers were
silent as Corporate America built factories in China.
Now that an ascendant Chinese economy is putting
politicians on the hot seat, Capitol Hill is all of a
sudden irritated about companies using China to boost
profits.
Yet
China’s product- and food-safety woes need to be
addressed. If Clinton and Obama handle this issue in a
nuanced and forward-looking way, it could be a winner
politically.
While US
politicians won’t be happy, China’s quality-control
shortcomings make a yuan revaluation even less likely. A
competitive currency is the key to China’s growth, and
uncertainties about foreign demand amid these scandals
will make officials in Beijing even more cautious.
Overreactions
Protectionism is rarely the best way to go, and Clinton,
Obama and other lawmakers should tread carefully. The
Smoot-Hawley Tariff Act of 1930, which raised US tariffs
on many imported goods, was a dreadful mistake. It was
made in a far less globalized environment than today’s,
and the US should be careful not to overreact
Yet,
with the 2008 election on the way and many economists
betting on slower US growth, China’s role in US politics
is likely to increase. That’s especially true now that
China is turning the tables on the so-called Wal-Mart
economy—that economic race to the bottom with
bargain-basement prices, low wages and benefits.
While
Chinese consumers are on the receiving end of the
goods-quality problems, the Wal-Marts of the world owe
much of their success to cheap Chinese labor. As China’s
role in the global economy grows, so are complaints
about the safety of that country’s exports. Politicians
will be all over this issue.
China
would be wise to take the concerns of the world’s
consumers seriously and act quickly to address them.
Otherwise, US lawmakers may take steps that do little
good for either economy.
William Pesek is a Bloomberg News columnist. The
opinions expressed are his own. |
