China's Ugly Export Secret: Prison Labor

A Business Week investigation discovers that goods for export are being made in the gulag

Two months ago, a Chinese shoe factory in Guangdong province urgently summoned a Hong Kong-based agent selling to U. S. shoe companies. The factory needed extra labor to fill his sandal order, so could he approve a new subcontractor right away? After a two-hour drive, the American was escorted into a complex of some 20 workshops producing shoes, flashlights, and hardware. Inside, he saw 150 men, all shaved bald, wearing blue cotton pajamas with numbers across the breast. "This isn't any factory," the American thought to himself. "I'm in a prison."

It is hard to imagine jailed Tiananmen activists slaving to assemble sneakers for sale in the U. S. But the truth is chilling. China's trade officials are crafting a secret policy to use labor from its camps and prisons to manufacture exports specifically for the U. S., Germany, and Japan. China is desperate for hard currency. The booming coastal provinces, where marketing and production skills are highest and joint ventures abound, are being promoted as the showcases for successful prison exports.

Many global companies are unknowing partners in deals with prison camps. But these days, the Chinese are becoming less reticent about actively seeking foreign partners. U. S. and European companies have been given tours of prison factories. Even more startling, some Japanese and Taiwanese are putting machinery and capital into prison production because of the cheap price tags on prison goods. "The international business community should be concerned that the Chinese are using forced labor," renowned Chinese dissident Fang Lizhi, now based in Princeton, N. J., told BUSINESS WEEK.

'EXPLOSIVE.' A six-month BUSINESS WEEK investigation, drawing upon confidential State Dept. documents and interviews with U. S. business executives, Hong Kong middlemen, and Western diplomats, reveals just how committed the Chinese are to gulag communism as part of their economic planning. In one State Dept. document, U. S. diplomats cited published official Chinese statements that put the prison-exports figure at $100 million each year. But given China's $10 billion trade surplus with the U. S. alone, the figure is probably much higher. These abuses are being scrutinized by the human rights group Asia Watch, which will soon release its findings. Chinese officials, for their part, deny using prison labor for exports and declined to discuss the subject.

These revelations come at a crucial moment in U. S.-Chinese relations. Tensions are growing in Washington as a result of China's enormous trade surplus, the third largest after Japan and Taiwan. The revelations will also bolster arguments to rescind China's most-favored-nation trade status, which comes up for review in June. It's a violation of U. S. law to import prison goods from abroad, though it's legal in many other countries. It is also a breach of human rights to incarcerate dissidents, not to mention to profit from their labor. "It's explosive," concedes an Administration official. "The Chinese aren't making things easy for us."

China's prison network is vast, with at least 10 million prisoners. In Guangdong province alone, there are 133 prisons. The Tiananmen crackdown helped to swell the ranks of those in the gulag.

Prisoners toil up to 15 hours a day and receive a pittance--if anything at all--making everything from the tips of shoelaces to computer circuit boards. Profits from unpaid prisoners go straight into state-factory coffers or the pockets of prison officials.

Take Jiangsu province. Security officials there boast of average annual growth of 18% in prison production from 1983 to 1987, with export earnings of $18 million in 1987, up 78% from a year earlier. Since then, the pressure has increased to use prisoners to build exports. "Encouraged by Deng Xiaoping, labor-reform camps became enterprises," says Harry Wu, who served 19 years in the Chinese gulag and is now a Hoover scholar at Stanford University. "All the labor-reform officials talk about is getting more foreign money."

LABYRINTHINE DEALS. While American prisoners make license plates and other goods for sale by state governments, China is crossing the line by using its prisoners for commercial gain overseas. Moreover, many forced laborers are political detainees. Most are not tried or even convicted. They are just sent away on vague "counterrevolutionary" charges with no hope of appeal or legal representation. Incarceration ends only when party officials consider their attitude "corrected." Even then, freedom is not guaranteed. It's common for a detainee to be "rehabilitated," only to be told that he may live outside the prison but must continue to work in the prison for the rest of his life. Prodded by Senator Jesse Helms (R-N. C.), the U. S. Customs Service has launched an investigation into the matter and is looking at imports by several major U. S. companies. But tracking goods from a Chinese prison camp to an American store shelf is no easy matter. Since the Chinese give double names to their prison enterprises--the Shaanxi Boiler Factory is also Provincial Prison No. 2--it becomes difficult just to identify a prison factory.

U. S. companies often place orders with Hong Kong buying agents for goods made in China. These agents make deals with an official Chinese shipper, who then contacts a Chinese supplier. The Chinese supplier farms out parts of the deal to subcontractors--and prisons usually come up with the lowest bid. Since other Chinese factories are also making goods identical to those of the prison factory, it's hard for a buyer to determine which goods came from where. Documentation given to a U. S. company from the Chinese shipper never shows how a prison participates in the process.

Joseph E. Seagram & Sons Inc., for example, unwittingly used prison labor in assembling boxes. Last year, the company began a joint venture in Shanghai to produce wine coolers for the Chinese market. The venture then hired an independent Chinese contractor to assemble cardboard containers for the coolers. But it was not until an American Bar Assn. delegation toured Shanghai No. 1 Prison in late March that the company learned who was really doing the work. A member of the group spotted a five-foot-high stack of unassembled Seagram boxes in a wing for political prisoners. "Without our knowledge, subcontracting was done at the prison the ABA visited," says Seagram spokesman Robert Kasmire. "When Seagram found out about it, we ended that relationship."

'REVOLTED.' William D. Paterson, director for Adidas South Korea, was the company's technical engineer in China when he was invited a year ago to look at shoe production in a Guangzhou prison. "The Chinese showed me thousands of shoes headed for the U. S. market," he says. He spotted an infant-size running shoe "carrying a major label." Paterson declined the offer to produce shoes there.

A month after the Tiananmen Square massacre, Volvo executives received a letter from Charles H. J. Chi, director of Chinter Ltd. in Brussels, who said he represented the Chinese prisoner-reform bureau. Chi offered to supply "a large number of criminals with labor skills" as "very cheap labor" if Volvo built a new factory in China. "I was revolted," says Hans Renstrom, Volvo's director of international communications. "It smacked of slave labor." Chinese diplomats in Brussels say they have no knowledge of Chi. Efforts to contact Chi, both by phone and in person, failed.

At least three Japanese companies are doing business with a prison factory. Last year, Nihon Tokushu Denki Kogyo, Fukushin, and Honshu signed a contract with the Wanjia Labor Camp in China's northeast city of Harbin, according to the Harbin Daily. A Fukushin official confirmed that this was a deal to make vinyl slippers for the Japanese market. Nihon Tokushu supplied manufacturing equipment through Fukushin, a trading house. The prison supplies the slippers to Fukushin, which distributes them through Honshu, a footwear marketer. Fukushin uses the proceeds to pay Nihon Tokushu for the equipment. Once that is paid for, Fukushin starts paying the Chinese in hard currency for the slippers.

HARVEST OF SHAME. Japanese banks are also lending money for Chinese prison development. One deal cited in the Asia Watch report involves the New Life Weaving Factory, a thriving prison operation in Jiangsu. New Life's cumulative foreign-exchange earnings from 1983 to 1988 were $28 million, making it a top provincial textile company. In 1988, New Life and the American Baotong China Branch signed a $3.5 million contract, with a $2 million low-interest Japanese loan. American Baotong supplied advanced weaving machines in exchange for knitted cloth made in prison factories. BUSINESS WEEK tried unsuccessfully to locate American Baotong for comment.

French cognac distributor Remy et Associes confirmed that from 1982 to 1985 some grapes used in its Dynasty wine were harvested by prison workers. The wine is produced through a joint venture between the company's subsidiary and the city of Tianjin. The company supplied much of the venture's equipment. Since 1986, no grapes have come from prison farms "as far as we know," a Remy official maintained. But he also says that the company has made no specific demands to prevent it. The Tianjin authorities have primary responsibility SIPA for the winery and vineyards, he says.

China is a big exporter of TVs and radios to Europe, and there is evidence that parts may be produced by prisoners. A State Dept. document revealed that Chinese teenage "detainees" are assembling circuit boards for TVs and cassette players for Nan Hong Co. in Guangzhou. U. S. diplomats say a Taiwanese executive received offers to use jailed prostitutes, ages 15 to 22, as cheap labor in his shoe factory. Other Americans visited a Guangdong prison with a large workshop built by Taiwanese.

Many U. S. importers of Chinese goods aren't even aware a problem exists. Executives in K mart Corp.'s import section, which buys toys and other goods from China, had not heard about prison labor, a K mart official said. The only way to be sure Chinese prisoners aren't making U. S. products is to inspect all suppliers, down to the subcontractors. Without such vigilance, foreign companies could hasten the growth of China's most deplorable economic sector.

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