A Tidal Wave Of Chinese Goods

For China, 'tis the season to be jolly. Just ask Laura Paull of Vernon Hills, Ill., a suburb north of Chicago. Of the three gifts in her shopping cart at Toys `R' Us, two are made in China. "I just assumed they were made in the U.S.," she says, frowning at the Chinese-produced $49.99 Turbo Blaster Raceway and a $1.99 Matchbox truck she's buying for her 8-year-old son. "I'm surprised," says the 39-year-old substitute teacher.

She shouldn't be. U.S. imports of Chinese-made goods have been escalating sharply. Not only is China exporting the usual toys, athletic shoes, and clothes, but it's also shipping products that command higher prices such as tools, auto parts, electronic gear, microwave ovens, and even personal computers. Because U.S. demand is so great and Chinese ports so jammed, big importers such as Wal-Mart, Toys `R' Us, and The Gap are relying on air shipments to get the goods to market fast enough. "The retailers are flying it in like crazy," says Paul Fitzpatrick, senior vice-president of Tower Group International, a unit of McGraw-Hill Inc.

THE PRICE IS RIGHT. The surge of Chinese goods to the U.S. doesn't make everyone happy, however. The problem is that even though America's exports to China also are growing at a healthy 12.5% clip, that's not nearly enough to counterbalance what China expert Nicholas Lardy calls a "staggering" flood of imports from the mainland. As a result, the U.S. trade deficit with China will widen 27.7%, to a record $29 billion this year (chart), second behind only Japan. Part of the explanation is that China is stacking the deck against imports.

But another key reason is the pickup in the U.S. economy. Uith consumer spending on the rise, buyers from the largest U.S. retailers are seeking the cheapest goods available and finding them in China. For example, Wal-Mart Stores, which imported $1 billion in direct shipments from China and Hong Kong at wholesale prices in 1993, is increasing those purchases by 25% this year, according to Jeffrey Fiedler, an AFL-CIO executive who tracks the company's shipments from Asia. Wal-Mart declined to discuss its China purchasing. Kmart Corp., also a major importer, says it has not seen any shifts in its China purchases. Most U.S. buyers in Hong Kong, however, agree that the price is right in China.

The export push is destined to continue past the holidays because China is a magnet pulling manufacturing in and displacing exports from other countries. Now that the Clinton Administration has delinked progress on human rights from China's most-favored-nation trade status, manufacturers from not only Hong Kong and Taiwan but also the U.S. and Japan are shifting more factories to China. "People have stopped talking about diversifying their sources to countries like Thailand and Indonesia," says William K. Fung, managing director of Li & Fung (Trading) Ltd., which will sell $100 million worth mf Chinese garments, toys, and handbags to the U.S. this year.

Take Nike Inc. China now accounts for about 30% of all Nike manufacturing worldwide, up "a couple percentage points" from last year, says Charles D. Brown, Nike's general manager for China. Growth-Link Overseas Co., an exclusive manufacturer for Nike in China, has just expanded its production lines from 12 to 20. It says it now makes 1 million pairs of athletic shoes a month at its factories in Fujian province. Nike is also set to expand production in China with another manufacturer in Fujian, industry sources say.

Aside from labor-intensive goods, China is also beginning to make more sophisticated products. "There has been a structural change in Chinese exports," says Huan Guocang, an economist at J.P. Morgan in Hong Kong. He notes the increased export of diesel engines, electrical machinery, and industrial hardware. Moreover, Chinese enterprises are tackling the lower end of the consumer electronics chain: At an Odd-Job Trading discount store in New York, for example, shoppers can find mini-stereo systems that are made in China by MXC Crown Ltd. at a bargain-basement price of $99.99.

DON'T FORGET JOBS. Foreign companies are contributing to the increasing sophistication of China's exports. AT&T is manufacturing corded and cordless telephones in Guangdong province for export to the U.S., and California's AST Research Inc. is selling Chinese-assembled PCs. As a result, the Chinese are developing strength in some surprising high-tech niches. A Sony Corp. joint venture in Shanghai is exporting optical components to makers of compact-disc players, and Astec (BSR) PLC, a Hong Kong company, is shipping power supplies for PCs from China.

In the U.S., China's mounting trade prowess is attracting an unusual array of critics, ranging from labor and human rights activists to newly ascendant Republicans. Organized labor such as the AFL-CIO is worried about the impact on American jobs.

The criticism from Republicans will come from a different direction. This January, when the new Republican-led Congress takes over, insiders expect Senator Jesse A. Helms (R-N.C.), the likely head of the Senate Foreign Relations Committee, and Senator Frank H. Murkowski (R-Alaska), who will probably head the Asian subcommittee, to use the trade issue to attack the Chinese Communist leadership. Both are longtime backers of archrival Taiwan. The Clinton Administration is worried that the Republicans will shift the U.S. trade focus to China, away from Japan, which still enjoys a larger trade surplus with the U.S.

Perhaps the most crucial decisions will occur in shopping aisles. In the Toys `R' Us in Vernon Hills, Sally Powers, a mother of three, is buying for one of her children the Original Cootie made by Milton Bradley Co. She is pleased by the $3.99 price tag but also surprised to find it is made in China. "Having something made in the USA creates jobs and it helps the economy," she says. But those concerns don't stop her from making her purchase.

So it seems that millions of Americans will enjoy bargain prices on gifts made in China. That may be just the beginning of a much broader China export boom.

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