These highlights are from the Kindle version of Unmade in China: The Hidden Truth About China’s Economic Miracle by Jeremy Haft.
There’s a thought-provoking psychological study that was conducted during the 2004 US presidential election between George W. Bush and John Kerry. Scientists wired electrodes to the skulls of Republicans and Democrats and showed them left- and right-leaning political statements, monitoring their brain functions. Each time a partisan statement was flashed on the screen, the areas of the subjects’ brains that lit up were not the centers of reason, as you’d expect. They were the emotional centers.2 Feelings, not logic, tend to drive our responses to political issues.
Seen from the inside looking out, China is not a manufacturing juggernaut at all. It’s a Lilliputian. China is not a lethal competitor. It’s an economic helpmeet. China is not a killer of American jobs. It’s a big job creator.
Things fall apart. So the science of making things is to minimize risk. Of course, risk can’t ever be completely eliminated. But you strive to achieve a successful outcome again and again, reliably, not randomly, as often as possible. An airplane that flies. A bridge that holds firm. A medicine that cures, not kills. China is deceptive that way. It looks like a manufacturing powerhouse until you draw back the curtain. Then, you see risk everywhere.
The “Made in China” safety scandals cannot be blamed on a group of wrongdoers. They are endemic. China’s entire system is to blame for these ongoing safety failures.
Imagine you’re a parent in China. You live in a brutally competitive, Darwinian economy with no social safety net to speak of. So if you’ve got some money in your pocket, you’re going to spend it on products that you think will be safe for your family. Increasingly, that means Chinese are buying American. Though we rarely hear about it, China imports hundreds of billions of dollars’ worth of US manufactured goods, services, and agricultural products each year. In fact, China has shot up to become our third-largest export market behind Canada and Mexico.
Exploring China’s secret supply chain is the only way to get a clear picture of China’s competitiveness. For when it comes to accurate economic data, China is a black box. Its official metrics are highly unreliable, partly because they’re politically motivated and partly because comprehensive research on any given topic in China is either rare or non-existent. So the aggregate data are untrustworthy, and the small case studies are misleading. That’s why China’s own government officials disregard measurements of China’s economic size, trade volume, and exports as untrustworthy. Yet US academics, media, and politicians swallow these false numbers whole and regurgitate them as fact. A lack of good economic data has contributed to our China myopia. China looms much larger in the world because we are looking at it through a false lens.
China struggles to make a toy safely, much less a nuclear power plant. That China’s rise is mostly a ruse, and its economic might a myth. And why that’s really bad news and really good news for us.
When it comes to China’s rise, our eyes, ears, hearts, and minds mislead us. The labels are an illusion, the lessons in school inapplicable, and the rhetoric and punditry steeped in falsehoods. Make no mistake. China’s imminent eclipse of the United States is about as true as the earth’s centering the universe. And, like ol’ Copernicus, we can debunk these untruths with reason. Notions of China’s economic might are premised on three widely propagated myths.
GDP is a lousy metric to compare economies. Let’s say you wanted to measure your family’s wealth. Would you start on January 1 and add up everything you spend through December 31? So let’s say you shell out US$100,000 over the next 12 months on food, rent, school, and other expenses. Then the value of your household wealth is US$100,000? Not at all. To gauge your family’s wealth, you’d want to look at your assets and liabilities.
Since the 2008 recession, China has been hosing stimulus money into its economy like a fireman at an inferno. Yet, if you look at economic indicators that should track with GDP, you can see China’s national statisticians are up to their old tricks. Electricity consumption, imports, and exports are all way down, pointing to a sharp contraction. Yet China’s GDP keeps sailing smoothly along, growing much more quickly than any other major economy.
China’s GDP numbers are fiction, and GDP is the wrong metric to judge the true size and dynamics of China’s economy. The same goes with China’s famously red-hot economic growth. Like China’s trumped-up GDP statistics, its growth metrics are also fictional. The numbers from the provinces year after year outstrip the growth rate of the whole country. For example, in April of 2013, when all of China’s 31 provincial governments released GDP growth rates, none was lower than the national GDP growth rate – a statistical impossibility. The sum of the parts can’t be growing faster than the whole. Yet most US economists just lap up these growth numbers as proof that China is about to overtake us.
The People’s Republic of China is still far smaller and poorer than the US on the most important economic dimensions,” writes Derek Scissors, “so its true global weight is correspondingly limited.”12 Just how much smaller and poorer is simply not knowable by comparing GDPs – the amount China and America supposedly spend in a given year. You need to look at national wealth: how much a country’s government, households, and firms have saved minus what they owe – or, what a company would call its balance sheet. Credit Suisse, in a 2013 survey, estimates US private wealth at US$72 trillion.13 The US Federal Reserve puts American private wealth at closer to US$80 trillion. Compare this with compared with China’s estimated private wealth of US$22 trillion. So American households are around US$50 trillion wealthier than Chinese households, and we’re about to be surpassed economically by China?
Because China lacks a viable social safety net, the Chinese middle class saves all the money it can to pay for health care and retirement costs. (The upper class spirits its money out of China as quickly as possible, preferring to park it in safe, dynamic economies like the United States.) But with China’s negative interest rates, to put those savings in a bank, you’d actually lose money against the rate of inflation. So Chinese consumers with savings often invest in property, a second or third house or apartment, pumping more and more hot air into the real estate market and exacerbating the problem of excess capacity. Residential property makes up about 75 percent of all real estate development in China. This drives up demand for steel (40 percent of China’s steel sells into real estate) and ripples out into the economy at large, as China’s property market devours cement, glass, appliances, hardware, electrical fixtures, and so on.
America, though seemingly on the ropes, remains endowed with the attributes of an enduringly competitive economy. We have considerably more natural resources – water and arable land – and considerably less pollution. We have a much smaller labor force than China’s, but it’s much more productive. For every US worker, it takes China eight to achieve the same level of productivity. And we have a much wealthier, more balanced society – despite rising income inequality and concentration of wealth, our per capita average income is about US$48,000 a year. China’s? US$3,000. Adjusted for PPP? It’s US$6,000.
“Most global innovation surveys put the United States at or near the top.” China often doesn’t even rank in the top thirty. Innovation is an outcome of deeper structural strengths. Our system of government for centuries has permitted the free flows of capital, people, and ideas which gives rise to economic creativity. The extent to which China restricts the flow of capital, people, and ideas is the extent to which China holds itself back as an innovator. You can’t lead the next century if your sole accomplishment is making a cheaper copy of a spark plug.
iPhones, on the whole, aren’t manufactured in China; they’re just assembled there. China, in fact, adds only a smidgen of value to each iPhone it assembles. So while an iPhone costs about US$179 to make, China contributes only US$6.50 worth of value in putting together the parts that are made elsewhere. But because China is the last country to export the iPhone to the United States, trade statistics consider it as 100 percent Chinese-made!
Usually, American value is added at the beginning and end of the chain: in the beginning with invention, design, engineering, branding, and the manufacture of components; and at the end with transportation, warehousing, wholesaling, retailing, and service. China usually occupies the middle phases, which sometimes may involve engineering and manufacturing, but mostly consist of assembly. In the case of the iPads and iPhones and scores of other Chinese imports, China functions as the assembler – with virtually no engineering or manufacturing.
American factories have mostly exited lower value added, low-tech industries, like apparel, toys, housewares, and furniture. “US factories make lots of things,” continues Dr Ikenson in his Congressional testimony, “in particular, high-value products that are less likely to be found in retail stores − like airplanes, advanced medical devices, sophisticated machinery, chemicals, pharmaceuticals, and biotechnology products.
Even as American manufacturing employment has, by and large, been declining from its peak in 1979, the total value of US manufacturing has been trending upwards. With productivity gains – driven by advances in manufacturing technology – we are able to produce more with fewer workers. In the United States, for example, “97,000 steelworkers produced 9.5% more steel in 2011 than 400,000 workers did in 1980,” according to the Center for Innovative Media at George Washington University.44 As Chinese firms acquire better technology, they are shedding workers, too.
What’s the first image that comes to your mind when you think of China? Is it the “Made in China” label? Shuttered American factories? Chairman Mao in red wrestling spandex body-slamming Uncle Sam? How about a river of pigs? You may remember it was in the news a little while back? Not all the reporting on China paints a false picture. We sometimes see glimpses of the true nature of China’s economy. Swine River is one of those times when the curtain gets pulled back and we can view China for what it really is − not the Wizard of Oz, but the little guy nervously working the levers.
With popular items like salmon and crab, the seafood is often caught in America but processed in China and exported back to us, with no indication of that activity on the labeling. Many fisheries in the northwestern United States prefer to send their catch to China for processing. “There are 36 pin bones in a salmon,” says Charles Bundrant of Trident Seafood, “and the best way to remove them is by hand.”6 That kind of operation is China’s sweet spot − low-skill, low-value labor, which offsets the price of transporting the catch 14,000 miles back and forth across the Pacific Ocean. Same with Dungeness crab, which often gets de-shelled and filleted in Chinese processors before being exported back.
The US Department of Agriculture recently designated China’s poultry processing as “equivalent” to that of the United States. As such, we’ve been told that American chicken processed in China is safe for consumption, even though US inspectors will not be allowed access to Chinese chicken-processing plants. And labels won’t necessarily need to say where the chicken was processed. So the chicken in your can of noodle soup, or the breaded and fried buffalo wings at your local bar, or your McNugget may have been anonymously processed in China.
Imagine an auto part made in Detroit, exported to Canada where it is combined with other components, then re-imported by the United States for final processing before it is exported to China. Of course, the percentage of American content in other sectors, like business services and agricultural products, is much higher – over 95 percent, according to the ITC.21 Most of what we sell to China, then, is American made, unlike a lot of what China sells us.
In the top 15 exporting states, there are some real surprises. Michigan’s exports to China grew sixfold (this being the state where 73 percent of surveyed millennials said they were worried about outsourcing to China). Ohio’s exports more than tripled. Indiana’s exports more than quadrupled. These states are usually associated with the decline of America’s manufacturing power.
America sells a lot of higher-value goods to China, too, as well as services. The top two exporting states to China are California and Washington. California’s top export to China is computer hardware. Companies in Silicon Valley, such as Qualcomm, make semiconductors that are sold to China for assembly into consumer electronic products like phones that are then shipped back to us as finished goods. Of Washington State’s US$7.9 billion in exports to China, almost US$5 billion goes to the aerospace industry. Lockheed Martin, Honeywell, General Dynamics, and, of course, Boeing are based in Washington – and China is buying airplanes as it expands commercial aviation.
Premium-priced cars, ice cream, air purifiers, and faucets sell better in China than the local, cheaper competition, disproving the widely held belief that our firms are on a race to the bottom with the Chinese on price. This is a function of China’s risky system. Chinese consumers with disposable income will tend to spend more money on items they believe are safe. Since China has such a lousy reputation for quality among Chinese, imports are almost always preferred, no matter the category.
China’s corporate investment in US firms reached US$70 billion by June 30, 2014 – a record high. Though we hear a lot about China’s investments in Africa, it’s the United States that tops China’s list, having received more investment than any other country. The reaction from America? Fear and loathing, from media, politicians, and the public at large. Keep China out! But we’ve seen this movie before. In the 1980s, America was scared of surging Japanese investment.
China’s own laws prevent it from reinvesting dollars in its own economy. China has amassed a big pile of dollars from trading with America for three decades. We pay China in dollars for all the products we import. But China’s closed economic system bars foreign currency from being invested domestically. So China’s dollar reserves can’t be used to build infrastructure and hospitals and universities. They’ve got to be invested elsewhere. And the fact of the matter is there’s no other bond market in the world with the depth of that of the United States to absorb this amount of money. Europe doesn’t have a continental bond market, and its national bond markets are too small to accommodate China’s massive holdings. So, when it comes to safe, interest-bearing securities, there’s nowhere else for the money to go.
China has about 90 general aviation airports and about 1,000 planes compared to 5,200 airports and 228,000 planes in the United States.
The din of China bashing from our politicians and news media contributes to an overall feeling of defeatism. This theme was typified in the 2012 election season. Curiously, we heard very little about the true causes of the cataclysmic economic crash and why millions of Americans lost their jobs and homes. Unregulated derivatives markets, mortgage-backed securities, subprime lending, banks run amok – neither presidential candidate dared delve into these issues. What we heard instead, over and over again, was how China is the culprit – how China is stealing our jobs, how China is stealing our economic primacy in the world.
Polluted land, water, and air contaminate the crops that are inputs into China’s food production. So the risk that eating Chinese fruit, veggies, and meat will poison you starts with the bad earth.
It’s a well-known fact that China consumes about 20 percent of the world’s food but possesses only about 8 percent of arable farmland.
Each year, the cities lop off at least another 1 percent of arable land from the total. Consider this trend in terms of the coming century, the supposed “China century.” With more than one-quarter of its land already desert, if China continues at its current rate of urbanization and desertification, there won’t be much arable land left at all in a few generations.
Water is scarce in China, and the water that’s available? Usually polluted. The Xinhua News Agency reported that 90 percent of China’s cities have polluted aquifers. Alarmingly, this groundwater provides 70 percent of China’s drinking water. Drink the tap water in a Chinese city, and you risk poisoning yourself. Over three-quarters of all the river water found in China’s cities is deemed unfit for consumption or for fishing.
Though China is trying famously to green its economy, coal, the dirtiest of carbon fuels, still makes up 70 percent of China’s energy mix. The intensity of China’s commitment to coal is staggering. From 2005 to 2009, China brought online the equivalent of the entire US coal-power plant fleet with 510 additional 600 megawatt plants. From 2010 to 2013, China brought online half again the entire US coal-power plant fleet. And over the next ten years, it is estimated China will bring online yet again the entire coal-burning capacity of the United States.
Though we imagine China’s agricultural sector as a powerhouse, it’s actually a throwback to the Middle Ages – arguably, the most inefficient and primitive farming system in the modern world. In a recent report from the Chinese Academy of Science, agriculture was deemed the economy’s “weakest link.”1 It also states that China is more than a hundred years behind the United States in agriculture and that China’s agricultural productivity is equal to 1 percent of Japan
At present, the vast majority of China’s farms are divided into tiny family plots of around 1.5 acres each. And they’re relics of the past. The Chinese Society for Agricultural Machinery estimates that as much as one-half of all China’s farms are still tilled by hand and beasts of burden, not machines.
It is very common in China that antibiotics are used to prevent disease – not just to treat individual animals that are sick. And that when an animal does get sick, the whole herd or flock is administered antibiotics. The threat from this widespread and aggressive use of antibiotics is becoming more understood. Chinese ranches and aqua-farms are breeding grounds for antibiotic-resistant bacteria.
Back in the 1970s and 1980s, when America was gripped with another fit of “Chicken Littleism,” the Great Japanese Menace was going to steal American jobs, sap American competitiveness, and take over the world. During those days, Japanese companies were actually doing some very innovative things, including figuring out ways to reduce risk in manufacturing. They designed quality control systems that would be the basis for what would become known as Six Sigma – procedures that were later adopted by the likes of General Electric and Pfizer. In a salute to Japanese corporate know-how, American companies often tried to imitate Japanese business practice – in management style, quality control methods, and even rituals like standing in meetings, to keep them short. I don’t know of a single company that tries to imitate Chinese business practice.
In China, there is no bedrock rule of law. Sure, there are plenty of laws on the books – many of them good laws – but their enforcement is extremely spotty, and often depends on whom you know and how much you are willing to pay. China is still a country ruled by administrative fiat, where paying off a judge to get a favorable ruling is normal. Business as usual in China would be considered out-and-out fraud in the United States. It is a well-known custom in China, for example, that negotiations don’t seriously begin until after a contract is signed. This would never fly in the West. Once a contract is signed, it’s enforceable in a court of law − in China, not really. It is also typical business practice in China to keep multiple sets of books. There are numbers for your investors, numbers for the taxman, numbers for your local government, and still other numbers for your partners. This kind of practice in the United States or EU would land you in jail. In China, it’s just another day at the office.
Since state-owned companies are legacies of China’s old command economy, in which the factors of production were controlled, managers are acclimated to this way of doing business. If you ask the manager of a large state-owned firm how the year went, you will usually hear, We had a great year. We produced 10 million tons of output. But that’s beside the point for competitive modern companies. The key metric is sales. How much product did you move? How many reorders? How much profit? Were your customers happy? It’s quite rare in China, especially among state-owned firms, to hear this kind of analysis. They act as government-backed budget spenders, not market competitors.
Like scores of China’s laws and regulations, it’s not so much a matter of what’s in the book as what’s enforced.
So, to enable the order to go forward, SWS was presented with conditional accreditation and free money. Tellingly, SWS refused. Their domestic market was deemed big enough to ignore the inconvenience of improving their systems, even if that meant forgoing the large order and potential billions of dollars of future business from Shell. This posture is typical of China’s state-owned companies. Lazy, bloated, and uncompetitive, they tend to prefer the path of least resistance. China’s government makes a lot of voluble pronouncements about how it’s climbing up the manufacturing value chain, investing in advanced manufacturing, yet SWS is a common example of what this really means on the ground. A lot of noise and chest-thumping from government officials, but zero follow-through at the firm level.
If you’re just looking at the hardware, Chinese firms can fool you. Caltrans, for example, got taken in by how big ZPMC’s facilities are. Like a Potemkin village, you think you’re seeing something really impressive, when you’re not. Even the most seasoned of spectators can be fooled.
When corporate governance isn’t anchored in enforceable rule of law, the risk of unsafe outputs intensifies. Unsafe food, drugs, infrastructure, and consumer products leap immediately to mind. Yet, since a minority of Americans actually work in farms or factories, it’s hard for many of them to gauge the competitiveness of China, where farms and factories are the mainstay of the economy. The “flat world” paradigm would have us assume there’s a basic equivalence to an American company and a Chinese company. Because of the flattening effects of information technology, products are available from around the world at the click of a mouse, so US and Chinese firms must now be competing head to head. If you buy into the “flat world” perspective, it’s easy to imagine, then, that China is populated by American-style corporations staffed by cheap Chinese labor − an unbeatable combination. But assuming parity between China and the United States is misleading. The very DNA of American corporations – their governance, their personnel, their culture – is arguably centuries ahead of the typical Chinese corporation. You can’t just leapfrog over 400 years of evolving corporation law and the acculturation of these conventions.
Despite the fact that America has mainly ceased building nuclear reactors at home, and therefore some of the largest parts of the reactors in China are being supplied by other countries, such as Japan Steel Works, in many cases, US nuclear technology cannot be replicated anywhere else in the world. An example is reactor coolant pumps, which are an innovative aspect of the next-generation Westinghouse design. Nuclear reactors produce power by using the heat from fission to boil water, which creates steam, which moves turbines, which generates electricity. The coolant pumps are a critical part of this process, moving water from the reactor vessel to heat exchangers and back to the vessel. In Westinghouse’s design, the coolant pumps keep the radioactive materials separate from uncontaminated water.
Building, deploying, and running complex systems requires much more than just an ability to copy a spec. To implement the development of advanced manufacturing, you need reliable quality control, which can happen only in companies that are transparent, with clear lines of reporting and managerial accountability. You need trained personnel. And you need effective oversight. “China’s most famous public-works project was an ecosystem almost perfectly hospitable to corruption – opaque, unsupervised, and overflowing with cash,” writes Osnos of the New Yorker.30 With corrupt companies, untrained workers, rushed timetables, lax quality control, and regulators who looked the other way, China’s high-speed rail is not proof of China’s infrastructure prowess, as is usually thought, but rather a shining example of systemic risk in China’s manufacturing base – and how this risk impedes attempts to reverse-engineer advanced technologies.
The same attributes of Chinese business practice that give rise to risk – weak corporate governance, untrained personnel – also stifle innovation and the ability to evolve. So seemingly simple products like light bulbs become difficult to make in China, not just big infrastructure projects.
Toys, consumer electronics, cars, medicines, even airplanes usually have long, complex, cross-border supply chains, which are often opaque. And when that chain extends into China, the risk magnifies significantly because, in China, it will typically take two to three times as many firms than in the United States to make and bring a product to market – whether that’s an apple or an oil rig. Instead of moving through five or six firms, a product will often move through twelve, eighteen, or even more.
When Deng Xiaoping took the helm from Mao, he tried to steer China away from the horrific period that had just been endured, in which an omnipotent central government used its power to inflict wide-scale “reforms” that killed millions of people. Deng sought to wrest power from the central government and vest it in the provinces, enabling them to enact and enforce their own laws and to collect and spend their own funds.
Yet, despite divesting certain powers to the provinces and supporting (to some degree) the adoption of private forms of corporate ownership, the central government did hold on to one important power, as chief employer of government officials through the Chinese Communist Party. Advancement within the party structure was based on economic performance. If a province hit its growth targets, the officials were promoted. Nothing much has changed since then. Since the days of Deng, local officials’ priorities, then, are almost exclusively economic growth, maximum employment, and tax inflows; a distant fourth is social welfare, and only if that supports stability.
Remember that China is not, as is often presumed, a capitalist economy with an autocratic regime. It’s a hybrid economy, part communist, part capitalist. In China, they call it Chinese socialism, or capitalism with Chinese characteristics. What has resulted from this belt-and-suspenders economy is a situation where descendants of Mao’s original state-owned firms exist alongside hundreds of thousands of small and mid-sized nonstate-owned firms.
While Mattel was preening in the pages of the New York Times, lead-laced toys were quietly rolling off the production line. A few weeks later, reports of lead contamination caused Mattel to recall nearly one million toys – the seventeenth recall in ten years – and its brand (and stock price) were in free fall. If you believed Mattel’s press, it shouldn’t have happened. In the New York Times article, the key to Mattel’s mastery of China, according to outside advisors such as Professor Johnson, was that it had invested in its own Chinese factories, twelve at the time of the recalls. Mattel presumed that asserting command-and-control over its own suppliers would eliminate risk. Yet Mattel’s problems in China highlight how difficult it is even for experienced international companies to manage the risks that come with China’s fragmented supply chain – even when they own their own in-country factories.
Mattel struggled to come to grips with what actually happened. Where the offending paint was sourced from, how, and why. China’s fragmented chain is like a shattered hall of mirrors. When unsafe products emerge, it’s difficult to see exactly where they came from.
Each of the major China safety lapses over the past decade involved major multinational firms that lacked supply chain oversight – Mattel’s lead-laced toys, Baxter International’s tainted blood thinner, Fonterra’s poisoned baby formula, Raytheon’s counterfeit night vision parts for navy helicopters, Nestlé’s Alpo doggie death treats, Firestone’s flimsy tires, and on and on.
During the torrent of 2007 recalls, the Chinese government tried to calm things down. Its Minister of Commerce, Bo Xilai, stated that more than 99 percent of Chinese exports are safe.9 Yes, that would be the same Bo Xilai who was later convicted of bribery, embezzlement, and abuse of power as the head of a massive patronage network, while serving as the Communist Party chief in Chongqing. The tainted official claiming China’s exports are untainted.
The “Made in China” safety lapses, then, are not so much a symbol of China’s ethical collapse. Framing them in moral terms plays into the perception that the Chinese are somehow intentionally trying to poison us. This fuels the kind of hate and fearmongering that we heard so often from politicians in the last few election cycles, narratives that demonized China and cast America in the role of hapless victim. Rather, the safety lapses are the result of a manufacturing and agricultural platform riddled with risk, in which errors and omissions are refracted and magnified through concentric circles of danger. The whole system is to blame for these ongoing safety failures, not a handful of evildoers.
In the West, perishable goods travel along what is known as a “cold chain,” and there is a high degree of technology and coordination involved. Products move from climate-controlled warehouses to climate-controlled trucks to climate-controlled ships and planes without a breach in the chain. China’s cold chain is often sketchy or non-existent. A typical example is ice cream which, in China, usually proceeds from a freezer at the ice-cream maker to a series of hot trucks and warehouses, where it melts. Then it’s refrozen at the destination point. Most warehouses in China are old and lack refrigeration. But even logistics companies that do have cold facilities often leave the refrigeration off to save costs. Then they switch on the cooling when the goods arrive. So the cold products are going into hot rooms that gradually cool down: again, a case of hardware that may be comparable to the West, such as a modern cooler, but procedures and standards that are sub-par. Ice cream that’s melted and has been refrozen tastes gray and crystalline. But imagine if the product moving through China’s logistics is a medicine that needs to be kept cool. You see how fragmentation and different operating standards can lead to contamination and danger. It’s not always a case of corruption or unethical behavior. The risk that comes with fragmentation in and of itself is often enough to poison your product.
When Baxter and the FDA dispatched investigators to try to find the source of the adulterated heparin, upstream consolidators and workshops barred their doors.21 All too often, Chinese firms and officials block US inspectors – whether they’re from the FDA or the buyer. And at the government-to-government level, Chinese authorities have resisted American attempts to beef up the FDA’s local staff of inspectors. Today, the FDA has a woefully small skeleton crew in China – just 27 people tasked with policing the vast amount of Chinese food and drug exports to the United States. The FDA sees this as a victory, having had to fight hard to increase its staff from just thirteen and, before that, from two.
Aside from the systemic failure of all these intermediaries to inspect the parts they procured from China, like Baxter, Mattel, and Aston Martin, the buyer in this case, the US government, also shares the blame. The buying criteria for the Department of Defense usually dictate that contracts must be awarded to the cheapest bidder, and so companies like Raytheon pursue low-cost inputs on the open market, exposing product integrity to risk.
Senator John McCain, on the other hand, had this to say in summation: “The Chinese Government can stop it. And if the Chinese Government does not stop it, then it continues to pose a national security risk.” But the Chinese government can’t stop it, and they’re trying. After the myriad safety scandals started to emerge in 2007, the central government deployed thousands of inspectors and police across the country in an attempt to shut down firms that were making harmful, fake products – especially in food and drugs, but also in electronics. The problem is that most of these offending firms are small and can disappear, reopening in some other incarnation in the future.
To Senator McCain’s point that “the Chinese Government can fix it” – again, clearly, it can’t. The whole system needs to be reformed to “fix it.” “What we see in China is particular to a country that has a medieval farming system serving a product to a twenty-first century market.”
“There’s a premium for foreign dairy products. People would rather have a product that says ‘Made in New Zealand’ or ‘Made in the USA.’ ”32 With hundreds of thousands of babies suffering from renal failure, you can see why. That preference is driving up prices and supporting thousands of jobs in the US dairy industry, which is, as China’s Academy of Science correctly noted, a century ahead of China’s. Though the typical dairy supply chain in America involves small- to medium-sized dairy farms that sell into collectives that, in turn, sell to big processors, this system is much safer than China’s for many reasons. Modern sanitary and testing practices are employed at the dairy farms, which are overseen by a functioning regulatory system and anchored by rule of law.
There are two types of fragmentation in China that obstruct effective oversight. There’s horizontal fragmentation, in which the regulation of a portfolio, such as food safety or environmental protection, is divided among several competing bureaucracies. And there’s vertical fragmentation, in which power is then divided among central and local authorities. China’s regulatory regimes are fractured in both directions. This makes regulatory enforcement especially difficult.
The exporting of unsafe food and drugs is not expressly prohibited in the 2009 Food Safety Law, despite the fact that China is one of the world’s largest food and drug exporters. Importing regulations are much more explicit. There are six provisions governing the obligations of China’s food importers in the “Import and Export of Food” section of the law, but only one provision governing China’s exporting obligations – namely that “sample inspectors and food exporters go through the record-filing formalities of entry/exit inspection.”
“Safeguarding the legality, safety, and quality of raw materials imported for use in pharmaceuticals is the responsibility of the importing country.” That’s very reassuring to know, given that the FDA has only 27 people deployed in China, who must police thousands of firms that vehemently resist inspection and are abetted by the local authorities.
Every regulatory regime in China is organized along similar lines: with competing and overlapping bureaucracies, horizontal and vertical fragmentation, arbitrary and inconsistent enforcement, and, ultimately, ineffective oversight.
Wherever you fall on this ideological spectrum, America by comparison is arguably centuries ahead of China in terms of its regulatory system. For one thing, there’s a functioning system of laws and enforcement. Of course, our system is not without corruption – high and low. Critics point out how many regulators, such as the FDA and Nuclear Regulatory Commission, are far too cozy with industry. Others lament the corrosive influence of big money in our political system. However, on the whole, there is a bedrock rule of law in America, a system to redress cases of fraud, abuse, and liability, and a civil society, which has the freedom to speak out against abuses. Not so in China. Parents who have complained about the melamine poisoning of their kids have been put in prison for disrupting social harmony.17 Also, though we are certainly not free from our own lapses in safety in manufacturing and agriculture, the proof of our system’s superiority is in the pudding. We have lapses, but we don’t have thousands of them over the course of a few years – spanning the breadth of basic manufacturing and agricultural industries, from food and drugs to infrastructure and consumer goods. And, truth be told, often the safety lapses in American products can be traced to Chinese imports.
When imported food is restricted, such as with baby formula, Chinese consumers will engage in very creative ways to purchase it. They’ll have their kids attending college overseas send back baby formula via FedEx. Or they’ll even smuggle the goods into China from Hong Kong, Taiwan, and other Asian nations where western-made baby formula can be purchased. A New York Times article of July 25, 2013 describes how the Chinese are buying baby formula anywhere they can lay their hands on it around the world, causing shortages in at least six countries. The large retailers Boots and Sainsbury’s in the United Kingdom have instituted a new limit on baby formula to two cans per customer. And Hong Kong customs is enforcing the two-can limit as well for anyone trying to spirit baby formula through Hong Kong into China. A recent sting by Hong Kong customs officials targeted three baby formula smuggling syndicates, with the arrest of ten people and the confiscation of nearly 220 pounds of contraband.19 Chinese don’t even trust the imported milk powder being sold on Chinese retail shelves. Since the melamine scandal of 2008, there have been media reports of imported formula being mixed with Chinese-made formula. So consumers insist on buying formula outside China.
China supports millions of jobs in our economy through trade and investment. As China struggles to make things safely and reliably, it must import them.
If you really want to minimize your exposure to unsafe Chinese imported foodstuffs, stop buying processed foods. Anything in a box, jar, bag, bottle, or can is suspect. Even if it’s labeled organic. Because China still does not grant the United States permission to inspect its farms. So any additives coming from China that go into an organic product need only be stamped “organic” by two independent Chinese authorities. Unfortunately, document forgery is practically its own industry in China. You can actually buy fake receipts on the street to provide your boss for expense reimbursement. And these shenanigans go on in the inspection industry all the time. China’s law that pork imports must be free of a hormone called ractopamine has spurned a whole cottage industry in which fake ractopamine-free certificates are mocked up after the ractopamine-full pork is imported.
The only way you can be sure that your food is not coming from China is to buy fresh fruit, vegetables, meat, poultry, and fish from local sources, like farmers’ markets.
If you want to avoid unsafe Chinese imports, avoid dietary and herbal supplements. Get your vitamins from fruit and vegetables. And if you must take supplements, you’ve got to do diligent research on the efficacy of the companies in question and their quality control methods.
Politicians bash China because it’s politically expedient. The pollsters tell them it wins votes. It plays on our fears and anger. And it distracts our attention away from the real issues in domestic policy that need to be addressed.
“US students, who once led the world,” according to Newsweek, “currently rank 21st in the world in science and 25th in math.” This kind of talk gets louder around the time when the results are posted from the big global evaluations on education, such as the Programme for International Student Assessment (PISA) and the Third International Mathematics and Science Study (TIMSS). But let’s consider a few facts. Tom Loveless, a senior fellow at the Brown Center on Education Policy at the Brookings Institution, who is an expert on PISA and TIMSS, reminds us that we need to put these test results in perspective. First, China is a very large, poor, rural country that cannot possibly administer this kind of assessment nationwide, so only discrete parts of China participate. Shanghai participates. Beijing participates. Yes, Shanghai scored first place on the PISA, but that tells us nothing about how China as a whole would do. That’s like having Manhattan compete on the PISA and claim the results represent America as a whole. Loveless writes that “Shanghai’s municipal website reports that 83.8% of high school graduates enter college. The national figure is 24%. The American figure is about 66%.” Second, the notion that America is in free fall from a perch as number one in the world for math and science is also a myth.
To build the next Google or GE or invent a cure for cancer, you need good math and science fundamentals, but you also need much more. The ability to think creatively, the ability to buck authority – not kowtow to it – and the ability to inspire others in helping to implement your vision. These are traits vital to an innovation economy that are not reflected on the PISA test but, arguably, are more important than whether kids ace their math and science scores.
China is one of the toughest places to do business in the world. It’s highly complex. And fraught with risk. Attempts to mitigate that risk are usually met with stiff resistance. Authorities prevent you from proper inspections. Business owners bar their doors. But remember: in any commercial interaction, the buyer holds tremendous leverage. With costs coming closer and closer to parity between China and the United States – plus the added risk of unsafe business practice that comes with China sourcing – the case for making something in America is strong. So companies have a choice. Be prepared to push hard in insisting that you forward-deploy your resources up the entire length of China’s supply chain. You need to inspect your contractors, your subcontractors, and your sub-sub-subs. To truly mitigate risks, you actually need to rationalize your own supply chain, eradicating middlemen that add risk but little value. Like Mattel, even if you own factories in China but still employ outside vendors, you’re at risk.
If you want to start a business or grow your current one, just look at the trends where China is expanding. You don’t need to source products in China to do business there. Sell them something. To be sure, some Chinese industries are closed or highly restricted to foreign investment and exports. Don’t plan on opening up your own bank or oil field anytime soon. But most industries are open for business. All that is required is your persistence and creativity.
American consumers actually do demand that their food is safe and that, when they buy food, they’re not going to be putting poison on the dinner table. The FDA must do a much better job to protect American families, and so must the top leaders of our federal government and Congress. We have no business sourcing anything in such a dangerous market as China if we can’t do a much, much better job of making sure that what we import is safe.
In many ways, our economic competition in the coming century is not with China at all, as the conventional wisdom holds, but with Europe. China’s lower-value, assembly-driven operations largely complement American advanced manufacturing. Europe’s exports of food, high tech, and services are much more directly in competition with America than with China.
It’s misleading statistics that are the basis for so much political and journalistic rhetoric − how the moderator in a presidential debate can say that Apple products are manufactured in China, when they’re only put together there; how broadcast news reports can claim that millions of jobs are being lost to China because of a greatly exaggerated and misleading trade imbalance; how institutions like the IMF can claim China will overtake the United States economically in just a few years. These claims are all based on bad data.
We tend to remember as far back as the last media cycle as we lurch from tweet to tweet. It’s worth remembering that a deep undercurrent of fear and self-doubt runs through the American psyche. We saw this in the 1980s when Japan’s economy was expanding. Americans believed Japan would rule the world economically. And many serious academics agreed. Before that, in the 1970s, America feared rising Middle East Gulf States like Saudi Arabia, which were investing their oil riches in US assets. And, before that, there was the fear of a rising Soviet empire, encapsulated in the Sputnik moment.
It’s easy to assume that because Japan moved up from low value to advanced manufacturing, China can too. But Japan and China are radically different. Japan in the 1960s was a society ruled by law, with a business culture that painstakingly mastered technology and organizational excellence from the bottom up.
China, on the other hand, flailing in a system with no rule of law and still healing from the national trauma of Mao’s mass murder, aims to get rich quick by trying to leapfrog development through any means necessary – counterfeiting, making products for western brands, reverse-engineering. But the fact remains that to build something reliably, you need transparent, well-run companies with trained workers in a context of enforceable laws and effective regulators. Merely having the spec for a stealth bomber or bullet train doesn’t mean you can build and operate it safely.