The ongoing revelations that products made in China and imported to the U.S. do not meet health and safety standards taken for granted in this country will force the Chinese government and businesses to make fundamental reforms that they have not been willing to do up to now. Consumers in importing countries have choices, and they will force suppliers to reject Chinese products if they do not meet accepted standards.
Trade is based on trust; it doesn’t matter if that trade is with a person down the street, in another part of the country or in a country half the world away. That trust is based on personal experience from previous trades or by adhering to generally recognized standards. Once trust is broken, reestablishing trust is time consuming and costly.
Trust in international trading arrangements operates at two levels, government to government and company to company. With China’s Communist government, it can be hard to tell when government control and responsibility end and companies begin. Specific concerns about the quality of products like toothpaste or food products are often viewed by the Chinese government as an attack on the country rather than a commercial issue.
The Chinese government often responds to product quality concerns by U.S. importers by calling into question the quality of U.S. export products. The recent complaints about U.S. soybeans are the standard response of the Chinese government. Even if the issues raised by the Chinese government were found to be true, it would have zero impact on purchasers of Mattel toys who are returning products because of lead paint concerns. To reestablish trust, the Chinese government must directly face quality issues rather than try to change the subject.
When the Chinese government does respond it usually appoints a high level government group to tighten regulations. The recent appointment of a 19 member taskforce of government officials headed by Vice Premier Wu Yi to address food and product safety issues will help call attention to the issues, but systemic problems in an economy of 1.3 billion people will not be solved by 19 government officials. More executions like that of Zheng Xiaoyu, the former director of the Chinese State Food and Drug Administration, for taking bribes and approving fake medicines my make headlines, but fundamental reforms will require time and effort. The government has committed to checking every food export shipment beginning in September. The U.S. imported $2.1 billion of food products from China in 2006, with fruits, vegetables and tree nuts the largest category at $850 million.
Government actions will garner media attention, but the real trust rebuilding will occur at the company-to-company level. It is important to remember that most of the $288 billion of goods imported from China do meet the product standards set by buyers. Despite that reality, every company in China that supplies products to U.S. companies and everyplace else in the world will come under increased scrutiny. The fact that a reputable company like Mattel that carefully monitors supply chains and is committed to product safety can have problems in China is an indication that it can happen to anyone. The problem appears to have started with a Chinese painting subcontractor using paint from an unapproved source. Managing the complete supply chain will take on new importance.
The increased scrutiny will force the government bureaucracy and companies to be more open and transparent. Developed country companies with brand reputations to protect and facing potential lawsuits over issues like lead in paint will demand more control and accountability. Their customers and shareholders will not be impressed by government commissions, executions of government officials or Chinese complaints about imported products.
Chinese suppliers will not be the only companies under increased scrutiny. Suppliers in other developing countries that do not have long track records of meeting quality standards will also be in the spot light. If a company wants to find suppliers outside China, it will need to build trust with new companies in other countries. Consumers in importing countries will pay the costs for closer monitoring of supply chains.
The supply chain debate has recently broadened to include how products are produced. This has been an issue in developed countries for decades and is becoming more important in developing countries. From labor standards to energy consumption to environmental quality, consumers are pulling up standards in developing countries. This is exactly the opposite of the “race to the bottom” fears of some opponents of globalization of supply chains. A recent report from Wal-Mart gives an indication of the size of the task. In 2006 Wal-Mart audited 8,873 supplier factories worldwide for labor and environmental practices, up 15 percent from 2005. Unannounced audits accounted for 26 percent of total audits.
Protectionist opponents of more open trade will continue to paint the circumstances in China as reasons not to trade, but the real story is how the responses to the failures in China will lead to safer products and better production conditions in all developing countries. Consumers exerting their power in the marketplace are an effective force for increased economic efficiencies, improved product quality and changes in production processes.
If developing countries like China want to continue to move toward manufacturing higher valued products, they will need to adjust to the standards set by their consumers. Trust can be rebuilt, but it will take repeated success stories on product quality to offset the current failures.