The very weak argument of how a free market is supposed to protect the environment goes something like this: people know pollution is bad and therefore they pay top dollar for the companies that pollute the least. If people don't think pollution is bad, then they buy the cheapest stuff and deal with it. And somehow the free market is supposed to work like this.
Uh no. That isnt even in the ballpark.
The way this is supposed to work in the free market is that if someone is polluting your water, your soil, or your air, you are supposed to be able to sue them, prove the damage, enjoin them from continuing, and collect damages for what was already done. This would prevent companies from externalising their costs in this way. When unable to externalise their costs, the real cost of production has to be paid, and included in the price of the product, and companies have a strong incentive NOT to pollute because they will be liable for the damge.
This free market method was not business-friendly enough, and so it has been superceded by statutory law and the EPA you are so fond of. The purpose of the EPA is NOT to protect the environment, as anyone who has paid much attention to it should realise. The purpose is to immunize polluters and allow them to externalise costs. The way it works is the EPA says a certain amount of pollution is acceptable, and as long as the company follows their rules, no one can sue them for the damage they do!
If the chinese are doing as you say (and it doesnt sound that far off to me, though I doubt either of us really know first-hand) that policy is self-defeating on its own. The best thing to do is avoid the temptation to respond in kind, and focus on keeping a proper free market here. In the long run they will only make themselves poorer, and us richer, and a few years down the road they will have no choice but to deal with the problems they are creating for themselves. It's sad for the common citizen in china, yes, but it isnt our governments job, or competency, to protect them.