Last summer, one of my primary positions when it came to the product safety scandal was that importers had to ensure their supply lines were just as compliant in China as they were in the U.S.

It is a simple.. SIMPLE.. risk assessment really that some (maybe many) failed to fully understand, and as we all saw in the media over and over again, there were firms whose inability to follow simple risk assessments and make investments in quality assurance got caught.

Toxic tanks, lead paint Barbies, killer toothpaste… and so on… and while China as a country took the initial volley of blame, I continually pressed the point that these quality problems were a commercial issue and that firms needed to stop treating outsourcing like a trip through the local McDonald’s Drive-thru

Product quality, quality control, and risk assessment are not abstract concepts, and spending money on ensuring the strength in them is not an expense. It is an INVESTMENT.

Cleaning up the problem is the expense, and if the fact that Mattel had to spend millions to recall defective toys didn’t convince executives that the brands would ultimately pay for their failure to understand risk, perhaps this article (h/t Consumerist) will Charges Filed Against Importers Of Toxic Toothpaste

the key phrase (emphasis is mine) in the article is:

The companies are liable for distributing the tainted product even if they had no direct knowledge of the risk because they were negligent in not ensuring the toothpaste was safe, Supervising Deputy City Attorney Jerry Baik said

no sir.. actually buy no having any direct control of the process I thought it was perfectly safe.. Look Ma.  NO HANDS!

Just uploaded a few hours ago, Global Atlanta has just posted an excellent two part Youtube conversation between their reporter Trevor Williams and Alan Holmer on the current state of U.S. China relations, the role of SED (Strategic Economic Dialogue), and some of the issues they are addressing.

What surprised me a bit was the fact that Ambassador Holmer’s comments are very moderate and do not resemble some of the things that are quoted in the press by others on SED… additionally, it makes me wonder why if he as one of the top persons in the SED is so moderate, why the media angle is so harsh.

For example, one of the points I like the most was when he was describing the fact that the trade balance is (1) complicated, (2) something most people don’t understand, (3) the U.S. benefits from, and (4) includes a lot of “American Goods” in it.

One section that I would have liked to heard more on was his thoughts on consumerism. Personally, I think China’s converting savings into consumerism is a scary thing, and he seemed a little unwilling to just say that Americans have no savings… and are facing some really scary economic times.

At 20 minutes, you may want to refill your coffee, but I suggest watching in one sitting. the topics are very important, and anyone doing business in China (or affected by those doing business in China) should see just what is going through the minds of the people on the SED.

Part 1:

Part2:

They both scare me more than Chinese toothpaste.

This afternoon while reading through some back stories on the U.S. China Economic and Security Review Commission, I came across an op-ed piece written by Kerri Houston for the Cincinatti Post called China’s business practices threaten jobs here.. and I was shocked.

Keep in mind, on the About Us page of the USCC website, it says:

The Commissioners are supported by a professional and administrative staff with extensive backgrounds in trade, economics, foreign policy, and U.S.-PRC relations. Some are fluent or proficient in Chinese (Mandarin), and most have significant prior working and traveling experience in China and Taiwan

So, I was shocked really to see a commissioner use this level of fear mongering, slander, and bs in writing up the core of her op-ed.

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Following a recent post called Is China Export Led, I recently found another paper written by Albert Kiedel of Carnegie Endowment for International Peace, who wraps up his summary of his article China’s Looming Crisis – Inflation Returns (PDF HERE) by saying:

U.S. intelligence analysis of this overheating risk should refute the conventional wisdom that China’s growth is export-led—it is clearly domestically driven.

Policy makers need to realize that China’s rapid economic rise is homegrown and sustainable. The United States should quietly remind China that harsh handling of inflation-related unrest could seriously damage U.S.-China relations—especially in a U.S. election year.

Far more aggressive than Jon Anderson in attacking common wisdom, Kiedel’s audience is obviously policy makers who he see are looking at China though McCarthy eyeglasses (tinted with Lead painted Barbie)… and that gives his analysis a much different feel (both reports are well written and as a lay person I have no trouble following the logic of either)

In his article, the tied between exports and the economy is actually a secondary concern as his primary concern is that inflation is a real threat to the Chinese economy (he pulls out a lot of stats in support).

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For those who read Last week, you may have noticed that I made a quick reference some Dr. Tea gave to the boys inside the beltway… well, here are a few more details on Dr. Tea as well as her testimony.

So first… Dr. Tea (Professor Mary Teagarden), is a close friend of mine and of many Thunderbirds is one of those old China hands who have spent the better part of the last 30 years working with China. She lived in Beijing when you still had to ride your bike across town to schedule international phone calls, she has advised dozens of companies entering China, she has worked with various government entities, and that is why she was asked to The Hill to give her thoughts on the recent product recalls.

Next.. the hearings Committee Questions Consumer Product Safety Commission, Mattel on Lead-Tainted Products and Toy Recalls

The session was split into two panels, and while toys were the primary focus, more important issues were discussed (support for agencies, legislation needed, etc). The participants included:

Panel 1 included:
Dana Best, M.D., M.P.H. – American Academy of Pediatrics (PDF testimony here)
Olivia D. Farrow, Esq., R.S. -Assistant Commissioner,Division of Environmental Health Baltimore City Health Department (PDF testimony here)
Michael Green - Executive Director, Center for Environmental Health (PDF testimony here)
Lori Wallach – Director, Global Trade Watch (PDF testimony here)
Mary Teagarden - Professor of Global Strategy, Thunderbird School of Global Management (PDF testimony here)

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Perhaps by continuing to post on product failures, I am flogging a dead horse, but once again I have found another report that should be highlighted

Spoiled, Keeping Tainted Food Off America’s Tables (PDF Here) is written by Jessica Milano for the Progressive Policy Institute. She actually works for Competition Policy Associates (COMPASS)

Written from the perspective of an American looking for ways to protect consumers from imported products, Milano focuses primarily on the government agency infrastructure in her report and offers up the following 5 “simple ideas to improve food safety”

1. Improve and simplify the regulatory process by creating a single food inspection agency.
2. Double resources for food safety by cutting waste.
3. Shift to a risk-based allocation of resources.
4. Create a stronger recall authority.
5. Use the Container Security Initiative (CSI) program to strengthen pointof-entry food inspections.

In coming to these conclusions, she lays out some very compeling evidence and arguments:

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UBS Managing Director Jonathan Anderson recently released an excellent report entitled Is China Export-Led? that is a must read. It is one of those documents where everyone will learn something or have a myth busted

Part of their Asia focus, Jon and his team have 1-2 reports that come out each week, and this week they have decided tolook at one of the biggest myths (“The Granddaddy”) surrounding China and its development… that it is led by exports.

Peeling the layers of the onion off, Jon and his team structured the report to address the following issues (many of these issues are supported by their own reports) to understand the actual contribution of exports to China.. and more importantly what that means in terms of global exposure should something occur (US recession…)

Please note: as I am not a master or PhD in economics and as it has been 10 years since I have looked at an econ book, I would suggest you read the report yourself as what I am about to write may not fully reflect what UBS found… but here goes.

1) How “big” are China’s exports?

For anyone who has been to China, it is clear that exports have historically played a large role in the macroeconomic picture. The cities on the east coast have outgrown the cities in the west, central, and northeast, and that phenomenon has defined China. But counter to the thoughts of many, this report shows that China actually may not be as dependent on growth from exports.

In building this, the first thing the report does is address the statistics, and how looking at a pure export/ GDP ratio is not the best way to measure. After all, were that the true measure, then HK would have exported its economy twice over (exports/ GDP = 2 in HK).

So, to get to the real figure they:

we need to restate the headline export figure in valueadded terms, and this means two things: (i) stripping out the associated import content to find out how much of export revenue actually accrued to the domestic economy, and then (ii) converting that domestic content share into value-added terms by subtracting input purchases from other domestic sectors.

and what they found through their exercise (read report for to understand adjustments), they found that the 40% figure was reduced to under 10%.. a much different perspective

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The last 3 months have been a nightmare for anyone with a Made in China sticker on their goods, and for China as a whole.

Through this process, one of the things I keep coming back to is “what level of product failure is acceptable”. For consumers, the first response is none. No product failures should be accepted. that 1 is too many…. but is that reasonable? Is it economical?

or have consumers gone a bit overboard?

In debating this, there are three examples that have particularly bothered me, or at least have led me to ask this question:

1) FTS/ Hongce Tires – One of the first cases to hit the press, this story received a lot of attentention early on.

Through press accounts, of the 450,000 or so tires imported, 2 tires failed. a failure rate of .0004%.

2) Mattel – Probably the most covered of all the recalls, Mattel has announced 3 recalls this year of more than 20 million toys across multiple categories. 20 million toys is a lot of toys, and according to a WSJ article today 2.2 million of the toys were recalled for led paint and 17.4 million pieces for magnets being too small
So, 19.6 million toys were recalled… of the more than 800 million Mattel produces on an annual basis. That is a 2.45% failure rate (manufacturing failure rate was .275% vs. product design failure rate 2.18%) assuming all the toys were made this year…..

3) Baby Cribs – The most recent recall, this is the one that really makes me scratch my head. Following the death of 3 babies/ toddlers, a recall of more than 1 million baby cribs has been initiated.

That is a failure rate of .0003%

But according to reports

in all three deaths, consumers had installed the drop-rail side of the crib upside down, the agency said. This creates a gap in the crib that children can slide into and suffocate.

so… 999,997 put the cribs together properly?

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It is funny how 6 weeks can make all the difference, and how villains today can be vindicated through time.

Well, China… take your victory lap!

Maybe I am going making too much of it, but the fact that the COO of Mattel recently apologized to senior leaders of China for the recent recalls (and their failure to properly assess the responsibility) must be a huge boost to Beijing who has contended all along that the majority of recalls were design related.

Now.. if only FTS would come out and take responsibility for their products….

In doing some research on the currency bill (post coming soon), the actors behind the movement, and the underlying issues, I cam across tow documents that are must reads: Seven Myths about U.S. – China Trade and Investment authored by the U.S. China Business Council and Facing Protectionism Generated by Trade Disputes authored by Wing Thye Woo and Geng Xiao of Brookings Institute.Seven Myths about U.S. – China Trade and Investment (PDF download here) is a simple 2 pages that breaks with members of the administration

1. American companies invest in China to shift jobs there and export back to the United States
2. China is causing the decline of American manufacturing
3. China’s market is closed to American companies
4. China WTO entry was a bad deal for America
5. China doesn’t allow American companies operating there to be profitable
6. China’s undervalued currency creates a large trade deficit and prevents American companies from selling more to China.
7. China forces American companies into joint ventures

Simply put, USCBC is looking to shatter some of the most common myths that are found in the media today, and they have in 2 pages done a great job of covering the basics. For myself, I agree on all points as China actually does not force anyone to do anything, and if you look at the markets of China one will see that American products from every category can be found. the problem is that “American products” made in America and “American products” made in China are treated differently by the administration.

If I were going to add a myth buster of my own, it would be that the surplus that China counts is actually more relevant than the defect the United States reports as the U.S. lumps Hong Kong into the statistics. Maybe I am parsing the line, but the next report does make a strong case for me.

Facing Protectionism Generated by Trade Disputes (PDF download here) is a much more robust article at pages, and is one of the best piece I have read recently (partially because they back up my theory that historic trade statistic tools do not represent today’s reality – see here and here). Through this paper, the authors sought to answer the following:

1. What are the problems caused by the trade imbalances?
2. What are the problems revealed by the appearance of trade imbalances?
3. Is a large Yuan appreciation the best cure for the trade friction?
4. What is to be done?

Why this document is so powerful, and should be read by anyone interested in the trade deficit, is that unlike a lot of economist writings this paper is easy to understand, the logic is easy to follow, and they are plenty of statistics to support their conclusions

I could pull out a lot of information on the report, but I think it is best just to encourage readers to go and download the report. there is a lot of background, there are supporting stats, and unlike a lot of reports, it is very balanced in its approach and reasoning.