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Why China should act before US lawmakers do

Why China should act before US lawmakers do
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First Published: Tue, Jul 10 2007. 12 48 AM IST
Updated: Tue, Jul 10 2007. 12 48 AM IST
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’ 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, Llc., told clients in a 5 July 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.
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, said in Hong Kong.
It may be inevitable. We can debate whether it is 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.
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 labour standards—and the underbelly of China’s 11% 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 colours the issue. Something gets forgotten in all the carping in Washington about China destroying US jobs: About 85% 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 had 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.
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 is 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 labour. 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. (Bloomberg)
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First Published: Tue, Jul 10 2007. 12 48 AM IST