Crisis of Confidence in Chinese Food Exports: its Causes, Effects, and a Practical Solution for Providing Customer Assurance

Date: Jul 30, 2007

For over four months there has been a crisis of confidence with respect to the safety and quality of Chinese food exports to the United States, and to a lesser extent throughout the world. This crisis continues unabated with no sign of letting up over the near term.

The crisis began with the discovery of adulterated wheat gluten from China that was used as an ingredient in pet food that caused a large number of dog and cat illnesses and deaths. This story received widespread media attention in the U.S., and caused the media to begin to focus sharply on any story involving what might even be considered otherwise "routine" safety/quality/regulatory issues that would have otherwise gone unnoticed: ethylene glycol used in toothpaste, salmonella in spice ingredients, and trace levels of unapproved (by the U.S.) drugs in fish.

What then caused the crisis? A confluence of two, and perhaps three, phenomena. First, there are in China today many small operators of food ingredient businesses that are known to pay little attention to regulatory requirements, wish to cut costs to the bone by using inferior or even dangerous additives, and who carry out such activities without the prospect of real adverse financial consequences being visited among them. The second is the fact that the U.S. media is as fully capable as any in the world of over-sensationalizing a story, and focuses upon only a small part of it. For example, the media either did not research or otherwise ignored the facts that there has been no recent upswing in Chinese defective products as compared with prior years, nor upon the facts that overall, Chinese exports are not much more likely to be defective or in violation of the law than those of the developed countries. Toys, tires, and other products have also received widespread publicity in the U.S., with CNN reporting that "60%" of all toy recalls in the recent past have involved Chinese-manufactured products. Considering that China provides about 90% of U.S. toy imports, you would expect 90% of the recalls would involve Chinese shipments. I will speculate on a third-phenomenon: that this situation provides a ready-made excuse for China-bashing by a U.S. public that is fearful of China's sudden and explosive economic rise.

What are the effects: United States Senators are publicly criticizing Chinese exports: See remarks of Senator Sherrod Brown of Ohio alleging that Chinese apple juice concentrate exports are chemically doctored and are not 100% apple juice. Daily headlines report criticism of the U.S. Food and Drug Administration (FDA) for not living up to its obligations. New legislation has been introduced in both houses of Congress that would impose draconian, time-consuming certification (of the Chinese regulatory system) requirements. Some U.S. companies are labeling their finished products as being "China-Free." A leading consumer activist in the U.S. cites polling data that says that 80% of Americans think that "made in China" means "may be contaminated." And, of course, the most drastic impact has been upon trade. Many orders have been cancelled for Chinese goods. Many others will not get placed.

What can be done to remedy this situation? After initial silence and then denials, the Chinese government has acknowledged there are problems and have heavily publicized recent actions in closing down some small businesses. And there has been a steady recent drumbeat of stories from China that state that the U.S. press reaction has been overblown. There have been assurances that in the future Chinese exports will be "certified" by the government. A new recall system for domestic goods is also promised.

Unfortunately, these steps will not be reassuring to U.S. consumers and, more importantly, to the potential customers of Chinese suppliers. Noting that there are "fake products and fake news" and equating the two will not provide reassurance. Nor is the problem regulatory in nature. Despite U.S. reports to the contrary, China in many ways has a good, strong system of regulation that mirrors in many ways those of developed countries. China could do more in the way of inspections and enforcement, as could any country, but it is not feasible to have continuous inspection of every product. The U.S. does not do this, nor does any other country.

What will work to restore trade, and ultimately consumer confidence? The market. Good, old-fashioned market practices where the buyer will insist upon competent proof that a product is reliable, and will have recourse to collect damages from the seller. All Chinese exporters, large and small, because size alone will no longer sell a product in this market, are going to have to undertake a thorough review of the products and method of production to insure that it meets the detailed and myriad requirements of the country of destination. And this review will have to be undertaken by an independent third party of sufficient reputation in the food industry globally. The third party undertaking this work has to have expertise in the legal and regulatory systems, and enough experience that it knows what to look for and what questions to ask. It is not enough to say that spinach, for example, is a lawful food ingredient. What needs to be reviewed is the manner in which the spinach is processed, whether it is free from unlawful pesticide residues, and free of pathogenic microorganisms. To be truly effective, this review must include the component of a laboratory analysis of a sample of the Chinese producer's product, again by an independent testing laboratory with a good global reputation. We have gone beyond the point where U.S. customers will accept laboratory results from Chinese laboratories, or even Chinese government certifications. And even if the testing lab is one well-known to the global food industry, the results are only as good so long as the sample it tests is truly representative of production. To insure this, the overall audit of the product would best include an agreement by the Chinese processor to allow an un-announced and random inspection of its facility and the drawing of a random production sample.

If audit reports including the above points are utilized, Chinese producers should be able to regain lost markets.

For additional information, please contact anyone at Keller and Heckman's Shanghai Office.