The Hindu Business Line : Toys lead to US-China trade squabbles

As part of the American corporate lore companies have often withdrawn products that have failed to meet quality standards or have paid millions of dollars in compensation for ‘sins’ committed in the past. The fear of a litigious public is playing a major role in shaping today’s corporate behaviour. Maintaining the corporate image adds longer-term value and consumer advocacy groups guide the public. The emergence of the Internet has helped in churning out information about specific risks and what could have been pushed under the carpet. This has its advantages and, in some instances, risks. As has happened in the case of Thomas Toys.

The Thomas Toys Story

On June 13, 2007, RC2, a relatively small toy company , issued a voluntary recall of various Thomas & Friends toys sold through retailers since January 2005. As required in law, this was in consultation with the federal Consumer Product Safety Commission (CPSC), the agency entrusted with the enforcement of standards.

In all, 22 kinds of toys, totalling 1.5 million pieces, were recalled. Unfortunately for RC2, these were the items that had boosted its sales and profits in recent years. The toys had become hugely popular, bordering on a cult, and built a loyal following among toddlers and their parents.

The company decided upon the recall after it learnt that the red and yellow paint used on the toys contained lead. Lead is banned in the making of toys and is known to cause neurological disorders in children, particular ompairing their learning ability.

Although there were no reports of harm to any child the issue got mixed up in a cauldron of other matters fuelling the ‘hate China trade’ campaign.

‘Hate China Trade’

Since 2002, there has been in the US a fear of trade with China getting skewed especially with Beijing thought to be manipulating the exchange rate of the yuan to its advantage. However, China has not yielded to American pressures exerted directly or through such forums as the G-7 and the IMF. The latest attempt at the US-China Strategic Economic Dialogue (SED) held on May 22-23, showed no signs of change in China’s stance. Against this backdrop, the US public and the Congress, especially prominent Senators, have turned hostile and vowed to take retaliatory steps against China’s trade. Repeated attempts have been made to drag China before WTO (World Trade Organisation) panels portraying it as an unfair partner. Along side, there are campaigns against China’s environmental and safety standards.

Foul Play?

Indeed, a good part of the criticism is valid and China does need to do a lot to improve its standards. Sadly, the battle over standards has led to specific retaliatory measures. In March, China was faulted for supplying unsafe pet foods leading to death of pets.

In April, the Food Drug Administration banned wheat gluten imports from a Chinese company as it was said to be contaminated with melamine causing kidney failure in animals.

In May, there were reports of toothpaste supplied from China containing poisonous diethylene glycol. The issue was raised in the SED and China denied the allegation in a explanatory statement issued from Beijing.

There are continuing allegations of piracy and export of counterfeit products.

In fairness, China has been cooperating with the US authorities to improve standards. It signed a formal agreement in 2004 to exchange technical information about recalls. It permits American inspectors to visit and advise on improving safety and quality. Notwithstanding these efforts, the hate campaign has been relentless.

Sadly, Thomas Toys trains have been added to this melee. A report in The New York Times (“As More Toys Are Recalled, Trail Ends In China,” June 19) squealed that China manufactured every one of the 24 toys recalled durin g this year. It explained that the number of recalls had doubled in five years and risen to 467 in 2006. China, it went on to add, was responsible for 60 per cent of all product recalls.

This data should not be disturbing when viewed against aggregate figures. Toy imports from China rose from worth $12.4 billion in 2001 to $20.2 billion in 2005. The US has been the largest importer of its toys. In huge retail stores such as Wal-Mart or Target, it is rare to spot toys sourced from any other country. Thus, any recall, even at random, should hit Chinese toys only. If Thomas Toys have raised the hackles, the critical question is: who bears the responsibility when products are outsourced?

Who is really to blame?

Outsourcing of manufacturing is over 40 years old and the success of any multinational enterprise is tested by its ability to outsource bits and parts of its products spatially, assemble them at strategic locations and maintain an efficient supply chain. There are monographs and treatises galore on all aspects of outsourcing, in particular on assurance of safety and quality. Products of multinationals have truly become international. However, it is by now agreed that tort liability is that of the parent company that provides the technology, design, logo, brand name, and, at the end of the chain, marketing support. The Bhopal gas tragedy and other industrial disasters have established the law beyond doubt.

Studies have shown that processing exports may be broken down by who owns the plant and who controls the inputs . Multinationals in China tend to split factory ownership and input control ; the most common outcome is to have foreign factory ownership with Chinese control over input purchases. In the toy sector, nearly 80 per cent of exports are OEM (Original Equipment Manufacturer) products produced for foreign brands and sold at contract prices. Finally, assembled products are sold through retail chains in the US or elsewhere. Prof Pieter Bottelier of Johns Hopkins University and formerly World Bank Representative in Beijing said that 60 per cent of Chinese imports in the US are made at plants owned or run by American or other foreign companies and they should ensure quality standards.

Given this scenario, it should not be difficult to pin down the legal responsibility. Sadly, in many cases the arrangements are murky. There are social activists in the US and other countries who demand fair labour conditions and boycott companies engaging in ‘sweat shop’ practices. The secret arrangements tend to shift responsibility and protect foreign owners against these critics.

In a situation like that of Thomas Toys, it shifts the liability for supply of lead painted toys to China. It is significant that though there are many investigative reports in major newspapers on the Thomas Toys episode, it has not been possible for anyone of them to get a factual picture on who produced them, who inspected them, imported them and finally who detected the lead paint. It has however helped to paint China trade lead!

(The author, a former Finance Ministry official, has extensive experience in international trade and finance matters.)

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