U.S. businesses wonder how low, and high, China can go

DALLAS — Manufacturers have learned to wince when someone mentions "the China price," because it's often below the U.S. cost of production. Now there's a "China price" that's so high, it has consumers wincing.

Bradley Reynolds, vice president of Animal Science Products in Nacogdoches, Texas, said prices for vitamins and minerals doubled after Chinese producers captured a dominant share of the global market.

"What we can't do is have the Chinese dumping prices, putting everybody else out of business, and then, when they get the market, start raising prices themselves," he said.

Reynolds said his Chinese raw-material costs for catfish, pet and livestock feed supplements started the decade at eyebrow-raising low prices.

"You get to thinking, they have some power behind their motor. They don't have all the environmental laws, they have cheap labor, maybe they really can produce that cheaply," he said.

"Then it went from $4 a kilo to $8 a kilo," he said. "And catfish producers use a lot of our product."

Animal Science Products is suing the companies, alleging price-fixing in violation of U.S. antitrust laws. The Chinese haven't formally responded.

But the case may demonstrate the hazards of trying to manage a transition from communism to capitalism.

The U.S. government has filed more than 70 anti-dumping complaints against Chinese firms. To avoid still more complaints, the Chinese government has apparently brought some companies together to raise their world-beater prices, according to the Chinese business magazine Caijing.

That still looks like fixing prices. But if a government compels it, it could escape the reach of U.S. courts and the Justice Department.

Six years ago, a team of federal sleuths led by the antitrust division's Dallas office won guilty pleas and $1 billion in fines from European and Japanese vitamin makers that had formed a cartel to fix prices. Some of the executives went to jail.

Prosecuting Chinese manufacturers — and trying to define their relationship with the Chinese government — could involve "some fairly substantial foreign-policy implications," said C. Paul Rogers, a law professor at Southern Methodist University.

The Bush administration is already treading on eggshells with China over the low value of China's currency, intellectual-property piracy and a trade deficit that last year came to nearly $202 billion.

Senior administration officials raised the rhetoric on these topics earlier this month but they have stopped short of launching major enforcement actions sought by many in Congress.

Chinese antitrust law is still evolving. The communist government has worried many international firms by suggesting they would have to clear mergers with Chinese regulators, just as they now do with the U.S. Justice Department and the European Union.

China has also proposed anti-monopoly rules for Chinese companies, but the government still seems to pop up in pricing decisions in some circumstances, in part to avoid anti-dumping complaints.

William Isaacson, Reynolds' attorney, said that's not what's happened with vitamins and magnesite (a processed form of magnesium used as a cattle nutrient and in steel processing).

"The trade-association documents say these people got together to raise prices. No anti-dumping actions were being considered," he said. "Once they realized they were running the market and had driven the Japanese and Europeans out, they bragged about it."

Isaacson's research shows Chinese companies have a 60 percent share of the world market for vitamin C. Their unique process gives them production costs of $2.30 a kilogram (2.2 pounds), half that faced by other manufacturers.

After the Chinese vitamin C makers formed a trade association in 2001, their prices went from $2.50 a kilogram to $7 by December 2002. When the SARS virus spread from China in 2003, vitamin C prices jumped to $15 a kilogram then fell back again.

James Serota, a New York attorney representing the Northeast Pharmaceutical Group of Shenyang, China, would not comment about the case. In court motions, he has said defendant Northeast is owned by the Chinese government, suggesting a possible line of defense.

Led by the Animal Science Products suit, half a dozen cases have been filed in U.S. courts over the past year alleging price-fixing by the Chinese vitamin companies.

Reynolds said it might take years to get a resolution. "I'd rather have it not going on, because you never get back what they take," he said.