The China Chronicles

The infant milk scandal in China has exposed a major defect in the concept of free trade. It's downright dangerous to buy products from a nation whose economy is not based on Judeo-Christian morality.

The American private enterprise system depends on honesty as normal and accepted behavior. We don't have or want a policeman on every corner, or an army of government officials to inspect every bottle of baby formula or tube of toothpaste. We do have regulations and spot checks in the United States, but the majority of producers and sellers are restrained from criminality because they adhere to the Judeo-Christian ethic. In Communist China, on the other hand, there is no such restraint, and it is utterly impossible to regulate and inspect the thousands of small producers.

Chinese producers poisoned baby milk formula with melamine. This is now known to have killed four infants, sickened more than 50,000, and hospitalized 12,892 mostly newborns, and inflicted 158 with acute kidney failure.

Melamine, which is derived from coal, is an industrial chemical used in plastics, fertilizers, dyes, and glue. It is not supposed to be used in food. The purpose of this deadly contamination was to make milk products cheaper, and the poison has been found in other milk products such as ice cream, yogurt and chocolate.

The Chinese would add water to increase the volume of milk, and then add melamine to fraudulently inflate the protein readings when the watered-down milk was tested. The widespread addition of melamine into infant formula could not have been accidental. It was obviously deliberate. Melamine didn't fly out of the air into the milk or evolve from another substance.

Nine of the 22 dairies selling melamine-contaminated milk, enjoyed a special inspection-exempt status. This controversial status is based on the assumption that companies that passed quality tests for three years could then be trusted to regulate themselves. Some believe that China really has a two-tiered regulatory system designed to protect a handful of privileged, mostly state-owned companies. The Chinese economic system, which some mistakenly tout as emerging capitalism, is based on special advantages for government favorites.

Some of the media are telling us that the solution is to appropriate more money to the U.S. Food and Drug Administration. But if FDA had a budget a hundred times larger it could never inspect, regulate and assure the safety of Chinese products. China's milk chain starts with a farmer owning several cows, selling his milk to local dealers, who in turn sell to big companies, which combine the milk before reselling it. There is no way to trace problems if they occur.

We shouldn't pretend we can engage in free trade with a country that has no respect for the honesty that we expect in Judeo-Christian countries. It is dangerous to buy anything from China that goes into your mouth, and that includes milk, animal food, toothpaste, pharmaceuticals, and toys.

Update on Counterfeit Chips

Business Week Magazine has discovered the growing threat of potentially fatal equipment failure because of counterfeit computer components bought from the Chinese and used in our warplanes, ships and communication networks.

Senior Pentagon officials are publicly playing down the danger, but Business Week says government documents and interviews with insiders suggest the dangers. One large defense contractor traced military equipment malfunctions and failures to fake microchips, the tiny electronic circuits used in computers. Business Week discovered that two batches of computer chips were never actually shipped by their supposed manufacturer, and the manufacturer says the parts are counterfeit.

Potentially more alarming than fake microchips are hundreds of counterfeit routers made in China and sold to our Army, Navy, Air Force, and Marines over the last four years. These fakes could facilitate foreign espionage, as well as cause accidents. More than 400 fake routers have been seized so far. Counterfeit routers may even contain hidden "back doors" that enable network security to be bypassed and sensitive data accessed by hackers, thieves and spies.

Update on Competition from China

China is set to overtake the U.S. next year as the world's largest producer of manufactured goods. That's four years earlier than expected. This great leap forward is revealed in forecasts for the Financial Times by Global Insight, a U.S. economics consultancy.

Last year, the U.S. was still easily in the top slot and accounted for a fifth of the total, while China was second. As recently as last year, Global Insight economists predicted that the U.S. would retain the top position until 2013, but the U.S.is now expected to slide downward more quickly than had been expected.

China's poisoned milk products should teach Americans that Communist China doesn't play by the same trade and marketing rules that we expect. The biggest offender of the 22 Chinese dairies that put melamine poison in infant formula knew about the infant injuries for months before the Olympic Games opened in Beijing, but Chinese reporters were told not to report the news because that might disrupt the Games. It was not until September that the public was warned and a recall ordered.

Update on China's Money Power

China's financial reserves are growing rapidly. Chinese officials understand this power and occasionally refer to it in geopolitical terms. Xia Bin, finance chief at China's Development Research Center, last year called foreign reserves a "bargaining chip" to influence U.S. policy. Other officials have darkly used the term a "nuclear option." Such financial power will give Communist China a tremendous tool in the event of any crisis over the fate of Taiwan.

China's foreign exchange reserves today total $1.8 trillion, a quadrupling over the last four years. The International Monetary fund expects that figure to rise by another half trillion next year. About 3/4th of the $1.8 trillion is said to be U.S. dollars. China calls the exact number a "state secret."

It's not just foreign currency. China's holding of U.S. securities has also tripled, from $300 billion in 2004 to over $900 billion by last year. China is by far the biggest foreign holder of Fannie Mae and Freddie Mac securities. It's not clear if China will cash in on the bailout Congress voted.  Washington Times, 8-4-08