China Scrambling to Restore Product Integrity

Stung by a litany of problems with products made in China, Beijing -- and Washington -- can't afford to let quality woes fester.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

August 1, 2007

With its brand name on the line, China will zero in on product safety to stem concerns about its faulty exports. Look for Beijing to crack down on bad actors, toughen regulations, increase inspections and even reach out to Uncle Sam for help.

China knows it must act swiftly to fix problems, or risk threatening its status as a leading supplier of food and other goods. But it won't be easy. Corruption, pollution and product piracy problems are deeply entrenched.

"Corruption is pervasive," says Arthur Waldron, Lauder professor of international relations at the University of Pennsylvania. "Furthermore, there's no complete legal code governing these things, and even if there were, the police and court systems are not intended to be objective. They're intended to serve the party and therefore, these corrupt officials."

Moreover, the volume of exports of food, drugs and consumer products has also grown so rapidly in recent years that the ability of inspectors to catch tainted or defective shipments hasn't been able to keep pace. Charles W. Freeman III, former assistant U.S. trade representative for China affairs and currently the managing director of China Alliance, says, "This is much bigger than just imports. It goes right to the heart of problems with the Chinese economic miracle. This is what happens to an economy that opens up after it's been closed off."

Washington also hears a wake-up call in mounting reports about contaminated food and other dangerous products from overseas. Regulators will receive more tools for policing imported goods. Congress will increase funding in fiscal 2008, which begins Oct. 1, for the Food and Drug Administration (FDA), the U.S. Department of Agriculture (USDA) and the Consumer Product Safety Commission. Increases will be used to hire additional inspectors so larger volumes of goods can be checked. The FDA now inspects less than 1% of all food imports. Lawmakers will also authorize the FDA and USDA to order food recalls, which they can't do now, and to mandate stricter reporting and labeling.

Other systemic changes are in the works. An interagency Cabinet-level working group, under the chairmanship of Health and Human Services Secretary Mike Leavitt, is studying ways to improve the nation's ability to deal with tainted products. The group will report its findings to President Bush in September.

Expect Washington and Beijing to cooperate on quality issues. It's in the interests of both to maintain calm trade waters. U.S. food and product safety agencies will provide technical assistance to their Chinese counterparts. They'll also quietly exchange information and engage in "urgent consultations" as needed. Among product categories being closely watched are toys, electrical items, fireworks and food.

U.S. companies in China will scramble to thwart liability concerns. Although most already have good product quality procedures in place, managers are reviewing them and double-checking their local suppliers. Firms will seek more transparency in their supply chains, guarding against suppliers from cutting corners to maximize profits. U.S. businesses see this as a growing problem in China.

In the longer term, China's quality woes may provide a silver lining. When confronted with the SARS crisis in 2003, Beijing's quick response curbed the disease and also led to reforms that corralled other diseases. Moving quickly to fix quality issues now could lead to legal reforms, including long-sought intellectual property protections, down the road.

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