Dear Fellow Investor,

Chinese exports to the U.S. have been causing quite a stir lately—their poor quality has been all over the news. It started with pet food and moved on to fish, toys and toothpaste. As an expert on China's economic development and someone who has witnessed this problem firsthand, I want to discuss what this situation means for trade between the U.S. and China.

Chinese food safety is a serious concern. When you're standing in the heart of modern Shanghai and looking up at impressive skyscrapers and meeting well-educated businesspeople, it's hard to believe that you have to remember not to drink the water. Whenever I visit China, I'm careful to drink bottled water and avoid eating uncooked food.

But this is not just my American bias—sophisticated Chinese consumers (whom I call "Chuppies") are increasingly becoming aware of this problem as well. Many Chuppies have changed their eating and drinking habits in order to prevent illness. In fact, my consumer trends analyst, Frances, who lives in China and provides valuable research for my China Strategy service, no longer eats Chinese sausage products. And most Chinese I know will only buy processed food from a few select companies with trusted brand names.

A Global Problem

It may seem like China is the problem with its contaminated shipments and poor quality standards, but that's not the case. The tainted food story involves a combination of lax food safety standards in China, unscrupulous Chinese suppliers and mediocre inspections by U.S. distributors.

Because there are so many people involved in the trade of tainted food, there is no one country or agency to blame when it comes to this problem. Everyone is dealing in massive quantities of goods, and it's only possible to inspect a small portion of what is coming into the U.S. And before we get too far ahead of ourselves, the U.S. isn't the poster child for safe exports, either.

About two weeks ago, Chinese inspectors seized a shipment of U.S.-made orange pulp and dried apricots. Why? Because the fruit showed high levels of bacteria, mold and sulfur dioxide. The orange pulp and apricots came from a plant in California and were quarantined in the eastern province of Shandong and the southern province of Shenzhen.

This isn't the first time tainted food found its way from the U.S. into China. Just last month, several U.S. shipments were destroyed on Chinese docks because they contained health supplements and raisins that didn't meet safety standards. So, as you can see, the problem goes both ways. The truth is that wherever there's trade, there exists the opportunity for faulty equipment, low-quality products or contaminated food.

The Real Impact

All of the media coverage surrounding the tainted shipments raises another question: What's the real economic impact? The answer is that the effects are mostly psychological. Because there has been so much attention surrounding Chinese food products recently, there is now a growing perception that imports from China are not safe. This is simply not true.

For starters, Chinese food and agricultural exports to the U.S. are relatively insignificant in the grand economic scheme of things. Chinese food exports only add up to about $2 billion a year. That's a measly 1% of the $200 billion in total Chinese exports to the United States.

Most Chinese exports are perfectly safe, like DVD players, laptop computers and iPods. If they weren't safe, you'd definitely notice because more than 60% of America's electronic goods are imported from China. In fact, the flat-screen computer monitor that you're looking at right now was probably made in China. For my complete list of ways you can profit from China's safe exports and economic growth, check out China Strategy today.

The small percentage of contaminated Chinese goods has created a global crisis of consumer confidence that China is taking very seriously. The Chinese government has finally decided to crack down on food contamination. In a dramatic step, China sentenced the former head of its Food and Drug Administration to death. The government also said that it's in the process of setting up a new recall system that will target dangerous and unapproved food products. All domestic and foreign food producers and distributors will be required to follow the system, which should be up and running by the end of the year. It won't be easy to restore consumer confidence, but this is a good start.

Here in the U.S., plaintiff lawyers are getting ready to sue American companies that distribute tainted Chinese products. These lawyers aren't going to bother suing Chinese companies half a world away that they can't collect from.

That's why, for both self-protection and ethical reasons, it's important for U.S. distributors to inspect the quality of their Chinese imports. U.S. distributors need to go over to China and check out the goods before distributing them here. Both sides need to toughen quality control, or else class action lawyers will have their hands full for many years to come.

Fortunately, none of the recommendations in my China Strategy portfolio are involved in Chinese food exports because we only invest in reputable, quality companies. Our plays have dominant market share in their industries, specialize in growing consumer trends, and benefit from a rising Chinese yuan. To get complete access to the stocks in my China Strategy portfolio, click here now.

So next time you reach for that newspaper or turn on the evening news, it's important to keep the contaminated imports issue in perspective.