PACIFIC REPORT : What if China Can’t Play? : Trade: The toy industry is taking a leading role in the fight for Beijing to keep its most-favored-nation trade status.

Barbie, GI Joe and the Teenage Mutant Ninja Turtles are decidedly American creations. But between inspiration and the toy store are thousands of Chinese factory workers who assemble many of these kiddie favorites for American companies.

Because it wants to maintain access to those Chinese workers, the U. S. toy industry is taking a leading role in battling unionists and human rights activists who want the United States to eliminate China’s most-favored-nation trading status to punish the Beijing government for its human rights policies.

The industry, which relies on China for 30% of its supply, contends that Congress would create a no-win situation if it overturns President Bush’s recommended extension of China’s MFN status--which keeps tariffs on Chinese products as low as imports from most other U.S. trade partners.

“The short-term ramifications of eliminating MFN would be disastrous for the toy industry,” said John G. Taylor, a toy industry analyst at L. H. Alton & Co., a San Francisco-based investment firm. “Some companies anticipated a potential problem and have been reducing their reliance on China for sourcing the past two years. Others would have to make a quick and painful move.”

Certainly, China will feel the pain if Congress decides to use trade to strike at Beijing. Congressional hearings on bills that would either eliminate MFN or make extension conditional on China’s human rights record will be held this week and a vote on at least one of the measures is expected before Aug. 2.

Without MFN status, tariffs on Chinese-made goods would rise an average of 48%--making the price of Chinese products uncompetitive in the United States. Without access to the American market, as many as 1 million Chinese workers could lose their jobs, according to some estimates.

But the 800 U.S. firms that have production facilities in China would also face hardships if China’s MFN status is eliminated, according to the U.S.-China Business Council, a trade group composed of firms with financial interests in that Asian giant. U.S. firms have invested more than $4 billion in China, and much of that investment would drop in value if those companies are unable to export their products to the United States at low duty rates, the council says.

The toy industry has about $50 million invested in China. About 100 American toy companies import from China, and many of those firms own manufacturing facilities in southern China. In addition to losing a source of many low-cost toys, Americans who put the finishing touches on Chinese-made toys might lose jobs if China’s trading status is changed, the industry contends.

Some of the smaller American toy firms--those that rely on the Chinese for most of their product supply--would not be able to survive if China’s MFN status is eliminated, said David Miller, head of the Toy Manufacturers of America, an industry trade group. Miller recently headed a delegation to China seeking to encourage the country’s leaders to take action that would alleviate American concerns about government human rights policies.

Without MFN, American importers would have to pay 10% to 30% more for Chinese toys, Miller said. The added costs would be passed on to retailers, resulting in a 30% to 50% price hike at the retail level, he said.

Miller also contends that as many as 25,000 American jobs in the toy industry might disappear if China’s MFN status is eliminated. The workers who package Chinese goods or complete the assembly of toys partially manufactured in China are most at risk, he said. The layoffs could occur because some firms would have to cut costs to absorb the expense of moving their production out of China, he added.

Among those concerned about possible job loss in the United States is Barry Alperin, vice chairman of Hasbro, the Pawtucket, R.I.-based industry giant. Hasbro--it has some of its GI Joe figurines and Cabbage Patch dolls produced in China--employs about 8,000 in the United States.

“We would do everything we could to avoid (layoffs), but there could be some job loss here,” Alperin said. Hasbro would shift production to other low-wage, low-cost countries if China loses its current trade status, he added.

El Segundo-based Mattel Inc. is also poised to shift or reduce its Chinese production if necessary, said Joseph Gandolfo, president of operations at the company. Mattel’s joint venture operation with the Chinese government employs 5,000 to 6,000 in southern China, generating toys such as the Magic Nursery dolls and Barbie at about 25% of the cost of manufacturing those products in the United States, Gandolfo said. The company also has production facilities in Malaysia, Mexico, Italy and Spain.

But the industry’s plight has gained it little sympathy among those critical of American corporate involvement in China--including some trade unionists who want Americans to shun or “toycott” Chinese-made playthings. Some unionists allege that Chinese factories use forced prison labor. Others cite allegations of child labor in toy factories. U.S. toy companies say that they employ no Chinese children and that child labor is not sanctioned by the Chinese government.

Underlying the criticism of the toy industry is concern about the Beijing government’s continuing prosecution of dissidents arrested when it violently cracked down on pro-democracy demonstrators at Tian An Men Square in June, 1989.

Critics say U.S. toy companies have not adequately used their influence to press the Chinese government on human rights issues. Some human rights activists say the American government can help the Chinese people win greater political freedom by using the “MFN card” to apply economic pressure on the Beijing government.

Toy industry leaders take issue with that position. Echoing the stand of the U.S.-China Business Council, executives at many leading toy companies say Chinese government hard-liners would blame foreigners for China’s economic hardships--rather than the misguided policies of their own central planners--if MFN is eliminated.

“If you eliminate trade relations with China, you’re left with no leverage on the Chinese government,” said Richard Sallis, senior vice president of La Mirada-based Playmates Toys, which imports about half of its hot-selling Teenage Mutant Ninja Turtles figures from China and is taking a lead in the trade debate.

Sallis was part of a delegation of toy industry leaders that met with Chinese government leaders in Beijing late last month to discuss the trade controversy. Representatives of American shoe and clothing companies--industries that also have a major presence in China--took part in the discussions.

“It was not our role to tell them how to run their country,” said Miller of the toy industry trade group. “We asked them to take some kind of action that would help President Bush and their trading partners in the effort to preserve MFN. They said they would do what they could within the context of their definition of human rights.”

Miller said the officials made no specific promises. “We did not expect them to tell us what they were going to do,” he said. “They gave us a good hearing.”

Value of Toy Imports From China 1986: $237 million 1987: $509 million 1988: $765 million 1989: $1.317 billion 1990: $1.547 billion Source: U.S. Commerce Department