A baby who drank tainted milk powders receives a type-B ultrasonic examination in a hospital in Wuhan, Hubei Province, China.
A baby who drank tainted milk powders receives a type-B ultrasonic examination in a hospital in Wuhan, Hubei Province, China. - 
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KAI RYSSDAL: In Beijing today the government announced three babies have died due to tainted infant formula. More than 6,000 have suffered kidney damage. It's a story that for now seems far from North America. But with Chinese factories feeling the pressure of the global economic slowdown, it could be a sign of things to come. Marketplace's Scott Tong reports from the heart of industrial China -- Guangdong Province.

Scott Tong: Chinese investigators probed 109 milk companies and found 20 percent sold products with melamine. Today it also emerged that tainted dairy powder may have been exported from China -- not to the U.S. but to poor countries like Myanmar, Bangladesh and Burundi. The leading theory is someone in the milk chain took out the expensive protein and stuck in a cheap chemical instead. Product substitution -- the same thing happened last year with Chinese pet food and toxic toys. In every case it's a cost cutter, a response to economic pressures.

DAVID DAYTON: Increase those pressures and certainly you're going to have increased negative results.

David Dayton runs Silk Road International, a manufacturing consultancy.

He says Chinese factories are getting squeezed by rising labor costs, and by dwindling orders from the U.S. and Europe. So these manufacturers are tempted to cheat.

DAYTON: To say that there will be corners cut, there'll be quality fade -- the quality of products fading more quickly in a lot of areas -- I think is pretty safe to say.

The margin squeeze shows up at workshops all over southern China. The Win Tai Foo printing company churns out magazines and packaging for multinationals. Manager Ren Ming says a Darwinian shakeout is underway.

Ren Ming [translation]: Factories and consumers are clashing over profit margins. And those factories that can't survive will go bankrupt. Our entire industry is having its deck reshuffled.

If factories bend the rules, their multinational customers are supposed to catch the flaws. But David Dayton says it doesn't always work that way. The quality control inspectors often show up at a plant and say:

Dayton: "Our goal is to come in and have a successful inspection. So we're going to tell you before we come in, which factory we want to see, and we're going to tell you what information we do and don't want. And we're going to come in, spend a half hour, check the boxes and go home."

Dayton says the system being the way it is, he won't be surprised if more substandard products end up on American shelves.

In Guangzhou, southern China, I'm Scott Tong for Marketplace.

Follow Scott Tong at @tongscott