Stock prices aren't all that's poorly made in China

The well-reported gyrations in China's stock market have many Americans wondering whether China itself is heading for a fall. In his newly updated and exceptionally readable "Poorly Made in China: An Insider's Account of the China Production Game," Paul Midler says it's not just China's stock prices that were too good to be true.

Midler, a veteran American middleman in China's manufacturing sector, centers his tale on Johnson Carter, an American importer of off-brand health and beauty products, which becomes locked in an abusive relationship with its supposedly low-cost supplier, King Chemical.

While claiming to be making nothing on Johnson Carter's growing orders, King stealthily -- and with no care for contracts or safety -- changes Johnson Carter's formulas, bottles and labels to increase its own margins.

Quality fades, while King copies and sells Johnson Carter's products out the back door. In the end, King builds a new factory on the sly. With its orders now a small part of King's business, Johnson Carter loses its pricing leverage.

In between, other foreigners come and go -- from diamond merchants to wastepaper recyclers. All fall foul of a Chinese system that is as good at manipulating its customers as it is quick to copy their products.

At one level, Midler's story is about business deals gone wrong. At another, it's about a clash of cultures between an America that believes in contracts, and a China that appreciates the artistic value of a fine counterfeit.

But at bottom, it's about a dysfunctional relationship between China and the United States itself. Midler doesn't have much hope that China, with its lack of legal protection for ideas and the media, is likely to start excelling at creativity and fulfilling contracts.

Nor does he accept easy prescriptions for improving the quality of China's products. Paying Chinese manufacturers more will just increase their profits. And China isn't getting better as it gets richer; in Midler's experience, the reverse is true.

That's because what Chinese manufacturers like King are copying isn't just a product. It's a market position. In the West, Chinese products are cheap, but in much of the rest of the world, they're expensive. Here, China sells on price. But elsewhere, it sells on design.

In working with U.S. firms, Chinese manufacturers are actually putting themselves in the middle of the global supply chain. For the United States, they manufacture nearly at cost to learn market trends, knowledge they can sell in the rest of the world, where U.S. ideas aren't protected.

From one point of view, in Midler's telling, Chinese manufacturers are shortsightedly exploiting their U.S. customers. But from another, the Chinese firms are playing global chess, while the U.S. ones, focused on China, are playing checkers.

Manufacturing is more important to China than its stock market, in which popular participation is narrow. But both are buoyed by cheap government money, and both stocks and companies rise and fall on how closely connected they are to the Communist elite.

And it's on this political point that Midler ends. American presidents of both parties have hoped that as China opened economically, it would reform politically. This hope became American strategy. But like China's prices, this vision of the power of engagement was too good to be true.

Midler believes trade grew so fast that it reduced China's incentive to adopt the reforms the United States rightly believes it needs. At the same time, it reduced U.S. power to promote change. Today, Midler doesn't want less trade -- just more American leadership.

But on its own, American engagement, in his cutting conclusion, wasn't a strategy. In fact, it was "the one thing related to China that was truly poorly made."

Ted R. Bromund is a senior research fellow in The Heritage Foundation's Thatcher Center for Freedom.