Sales is all about trust, so I believe you're better off being upfront about the origin of the products. Consumers aren't dumb, and if there's even a whiff of deception you will end up spending time and money trying to set things right with your customers. Besides, you're going to offer order tracking, right?
As you said, you may be better off taking it on headfirst and defining it as a benefit, not a problem. Our store dropships wooden toys from China, alongside some locally-made product, and we have chosen China-sourced product that matches the North American/European brands very closely but at a much lower price. We position it as the way we are able to offer great products at a great price, and the direct-ship model even cuts down on the packaging and transportation waste associated with warehousing. It's a feature, not a bug.
Because our products are aimed at conscientious parents, we paid to have the goods independently tested for lead paint, etc. That's just one more layer of trust. We know that we will never win the customers who would otherwise pay full price for the "name brands", but by being direct and honest about our sourcing we earn business in the band beneath that. We still occasionally have a customer or two who miss the message and end up surprised when they click the tracking link in their shipping confirmation emails, so we offer hassle-free returns for 30 days for anyone who still has any misgivings. We've rolled a 5% return rate for the last three months, which is pretty typical across all retail.
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