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KAI RYSSDAL: Treasury Secretary Henry Paulson will lead a gang of high-level trade negotiators into Beijing tomorrow. It's the latest round of regularly scheduled talks in which the U.S. leans on China to let its currency rise. And China politely declines. Mr. Paulson and company want American goods to have an easier time competing against cheaper Chinese imports. But Marketplace's Scott Tong reports it's not all rosy for Chinese manufacturers either. And that could mean more iffy Chinese products for Americans.
SCOTT TONG: In the industrial city of Wenzhou in eastern China, one of the loneliest professions is that of the musician. Wenzhou native Xu Shun Shi says for most of his friends, it's all business all the time here. So hobbies? Forget about it.
XU SHUN SHI (translation): Because they're all pursuing their careers, they have no time for the orchestra, or for an opera, or a movie. No time!
Wenzhou businessmen are legendary in China for eking out profits for low-end manufactured goods. But the gig may be up. Take cigarette lighters. Wenzhou workers make 70 percent of the world's refillable ones. But China's currency has inched up 12 percent against the dollar the last two years. That makes these lighters pricier against the competition.
Li Zhongjian is founder of the Tung Fang Lighter company.
Li Zhongjian (translation): It's a watershed. With the yuan appreciating, a lot of small companies can't handle that. If you offer a price today and the yuan jumps tomorrow, your slim margin gets eaten up.
He can't raise his prices because of overcapacity -- too many lighters, not enough smokers. Li says a few years back 3,000 lighter makers thrived here. Now, a few dozen. It's not just the currency pinch. The cost of raw materials is sky high these days, and wages are creeping up, too. It's all cut profit margins by 10 percent last year. And for fiercely competitive, low-margin makers that translates into Darwinian shake-out.
STEVE DICKENSON: The first place I saw it was in Taiwan.
Corporate attorney Steve Dickenson has worked in Asia for 30 years.
DICKENSON: The wages went through the roof and the manufacturing had to go somewhere else. I also saw it happen in Japan. And I've seen it happen in Korea.
Today, that "somewhere else" includes even lower-cost places like Vietnam and Indonesia. Higher input costs also create another problem: pressure to cut corners.
Dickenson: If the price doesn't move up, then something else has got to give. And we can see where it's been giving. And the lead paint in the toys is exactly the kind of place where it gives.
Statistically, these product substitution cases are rare. But given the margin squeeze, Dickenson won't be surprised to read more anecdotes and scary China headlines in the next two years.
For Beijing, there is a good side to this. Leaders want to cool an economy running at an 11 percent clip. And in the long run, survival of the fittest makes the survivors, well, fitter.
The Wenzhou conglomerate Chint, for instance, now makes more widgets with more technology and with fewer people. It spits out an electric power gauge in two hours. Once upon a time it took seven days.
Wenzhou shoemaker Aokang is moving up the food chain by building a more upscale, profitable brand. It partners with the Italian brand Geox to make high-end shoes that go for $150 U.S.
Company executive Chou Wei:
Chou Wei (translation): The ultimate goal is to raise our prices. We can't keep selling low-cost goods. The global marketplace doesn't even want them.
Aokang is also creating customers at home and their pockets are increasingly getting deeper. Again, Steve Dickenson:
Dickenson: Higher wages means more capacity to spend, so that they can create a non-export-oriented, domestic economy where really quality products from the United States and Europe will be in demand. Could Hank Paulson have said it any better?
In Wenzhou, eastern China, I'm Scott Tong for Marketplace.
Staff Researcher Linda Lin contributed to this report.