Is China's Growth Counterfeit?

Two years ago, I was a study-abroad student traveling around mainland China. The cultural experience was phenomenal, but as a typical American infatuated by material items, I also remember the cheap counterfeit Ralph Lauren shirt I purchased for $4, or the fake Louis Vuitton bag I snatched for $24. These items are controversial, and a genuine harm to firms that produce the real deal, but they're not our worst problems from China these days.

Over the past year, Americans imported billions of dollars' worth of tainted goods from China, including counterfeit toothpaste labeled Colgate (NYSE:CL) and imitation pharmaceuticals made to look like Pfizer's (NYSE:PFE) Lipitor. The Chinese offer these bogus products at significantly discounted prices, selling them to entrepreneurs who then can make large profits by marketing them to local pharmacies. Even more frighteningly, these counterfeit manufacturing firms are so meticulous in creating identical pills that pharmacists often cannot tell the difference between fake and real medicine.

While this phenomenon has been going on for years, its recent surge has caught the media's attention. China seems to be focused on how fast, rather than how well, a product can be manufactured, and its economy seems to be taking the same approach. China has undoubtedly been on fire, with GDP growth clocking in at 11.9% in the second quarter this year. But I still wonder whether the growth fueling the economy is backed by quality.

True, some companies are affected by sales lost to Chinese imitations. But to me, the companies most hurt by China's low standards are those counting on the country to preserve a certain level of quality and uphold brand names.

Take Mattel (NYSE:MAT), for example. Late last week, the toy maker announced that it had found excessive levels of lead in some of its Fisher-Price unit's toys. In this case, the company is paying a much higher price than the $30 million it estimates the toy recall will cost. When parents give their child a toy, they need to feel confident in its safety. China has now put a dent in Mattel's reputation, which may have repercussions in Mattel's future financial results.

It seems impossible to avoid made-in-China goods, and our current trade deficit with the country displays our reliance on its manufacturing skills. But as the list of tainted items becomes longer, I can see more consumers avoiding items made there. After the pet-food scandal a few month back, I'm still very cautious when shopping for food for my dog. And I'll certainly never buy any of the products that made the list of affected brands.

President Bush has requested the creation of a panel to discuss whether the U.S. needs to apply stricter standards to imported products. But can our government really try to impose quality standards on items being produced halfway around the world?

Everyone seems to be talking about China and its investment opportunities these days. Me? I'm wondering how long the country's growth story will last. Outsourcing manufacturing to China clearly cuts costs for many companies, but I think these companies should start asking themselves whether the cheap labor is worth risking the success of their brand name.

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Fool contributor Kristin Graham does not own shares in any of the companies mentioned. The Fool's disclosure policy is the real deal.