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China's Troubled Food and Drug Trade

Author: Toni Johnson
October 17, 2008
This publication is now archived.

Introduction

From pet food and toothpaste to dialysis drugs and milk products, the Chinese government finds itself under growing scrutiny both domestically and internationally for how it regulates food and other consumer products. Following scandals involving both pet food and dairy products, some accused Chinese producers of deliberately adding the chemical melamine to products to thwart quality testing methods aimed at detecting protein levels in foods. The Chinese government defends its food safety record but has also made moves to improve regulatory oversight. On preventing tainted food from entering international markets, some experts note that Japan and Hong Kong do more than the United States does to inspect food imports from China. Other experts say multinational firms involved in exporting products from China must do more to ensure that the products they are moving are safe.

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Volume of Chinese Trade

A report from the Chinese government says food exports during 2006 grew by almost 13 percent over the previous year. Between 2002 and 2007, U.S. foodstuff imports from China grew more than 140 percent, and the country is now a major supplier of seafood, canned vegetables, fruit juices, honey, and a variety of processed foods to the United States. The report says 99 percent of all exported foodstuffs have been accepted by import monitors. The acceptance rate by European Union monitors in 2006 and the first half of 2007 was more than 99.8 percent-higher than the U.S. acceptance rate of 99.1 percent. Japan-which the Chinese government says inspected a greater percentage of food imports from China than from any other country-gave Chinese foodstuffs a higher pass rate (99.4 percent) than it gave imports from either the European Union or the United States. Chinese fruits and vegetables, which account for about 12 percent of global trade, have had a lower rate of acceptance for meeting pesticide residue standards, at about 93 percent, the government said. China has also emerged as the world's top supplier of active pharmaceutical ingredients used in the manufacture of brand-name and generic drugs globally.

Though China is developing rapidly, its food production system remains small and disaggregated. The country's agriculture system alone is composed of hundreds of millions of farms, many of which are extremely small. The country also bans far fewer pesticides than the United States and the European Union. Of the nearly one million food processing factories, 70 percent are food workshops with fewer than ten employees. The government says these small workshops pose a particular challenge to ensuring food quality and safety. China has at least ten agencies (China Daily) to regulate food and drug safety (the United States has twelve), but it also has myriad food safety laws (China Law Insight).

Beijing's Response to Bad Food and Drugs

A 2004 decision by China's State Council to strengthen food safety came after that year's baby formula scandal. The decision did increase penalties, but critics say the maximum fine of roughly $6,400 for an individual product or company did little to deter bad actors. In April 2008, the country's legislature unveiled a draft food safety law that includes new fines up to twenty times (Bloomberg) the profits of a company in non-criminal cases and the possibility of life in prison in criminal cases. The law was still being debated when reports began to surface in 2008 about children developing kidney problems from bad milk formula. The government has executed a number of people in criminal cases involving deadly food and drugs, perhaps the most notable of which was the 2007 execution of the country's top food and drug regulator (IHT). The government also has engaged in massive crackdowns (NYT), shutting down substandard or illegal shops, firing officials, and opening criminal investigations.

The 2008 milk incident prompted the Chinese government to issue new regulations about permissible levels of melamine in milk, pledge to hire more inspectors, and end inspection exemptions for companies. At the end of 2007 the government also issued new regulations to require any company manufacturing drug components to register with state drug regulators. Before the rule, chemical companies making components but not actual drugs were not considered part of the food and drug regulatory scheme. The rule came as part of a larger agreement between the United States and China on food safety signed at the end of 2007.

Policing the System

Though China's regulatory scheme is similar to that of United States where food agencies primarily set standards while enforcement is left to local and regional authorities, some local Chinese officials have economic incentives to look the other way. Writing on the country's environmental problems, CFR Senior Fellow Elizabeth C. Economy says local officials are "often in cahoots with factory managers," making them less willing to enforce centrally mandated standards. Carl Minzner, a specialist in Chinese law at St. Louis' Washington University Law School, says the country's top-down system poses problems throughout the regulatory regime. "Monitoring at the local level is very difficult," he says. Meanwhile, columnist Liu Wei writes in the Chinese government-run newspaper China Daily that some Chinese government officials attribute the food incidents to the overlapping functions of different government departments, which leaves people confused about which department they should complain to.

In the United States, food safety is also enforced through a variety of other means, including a punitive torts system, independent media, and vigorous civil society organizations. These institutions in China are not nearly as powerful, though some analysts see signs of change. Steven M. Dickinson, a partner in the international law firm Harris & Moure who has spent the last five years in China, says local media played an unprecedented role informing the public during the 2008 milk scandal. Some critics, however, say the milk incident could have been dealt with months earlier and blame the country's focus on the Olympics for stifling early warnings (YaleGlobal).

Melamine was found in milk for twenty-two different producers in China, nine of which were exempt from mandatory government testing through a program aimed at rewarding companies that had gotten high marks on quality inspections in the past. Testing may not have mattered since the government rated dairy producers among the safest in the country based on quality inspection tests. In 2007, after the pet food incident, Chinese officials told staff investigators for the U.S. House Energy Commerce subcommittee that melamine testing had not been conducted until May of that year but declared that it was not widely used in animal feeds and that the incident had been blown out of proportion (PDF).

Experts say quality testing is insufficient if the tests are not properly targeted. David G. Strunce of Scientific Protein Laboratories, based in the United States, which has a joint venture in China to make drug components, told a U.S. congressional committee in April 2008 that the substance found to be adulterating the drug component his company produced had been introduced upstream in the supply chain and that current manufacturing standards and testing were incapable of detecting or removing it (PDF).

Market Forces

Another big component of U.S. food safety is self-regulation by companies, which are mindful of the damage to business and public relations caused by a food safety incident. In most cases in the United States, food recalls are voluntary. In China, however, the stakes are different. Sanlu Group, at the heart of the 2008 milk scandal, refused to recall baby formula for at least a month after discovering problems. A 2008 report published in the Journal of Supply Chain Management on global food supply chains finds that despite rapid development it is hard to make money in China and that a common belief in China is that the "ultracompetitive business environment" means companies cannot survive without breaking the rules. Companies that do use good business practices are seen to be at an economic disadvantage, the report said. One way to improve safety would be for suppliers to adopt comprehensive supply-chain-management practices that allow tracking of food from production to the table in a transparent way.

The Chinese Premier Wen Jiabao said at a September 2008 World Economic Forum meeting that the country needs to work on improving business ethics as it develops. "In our modernization process, there is still room for improvement in production oversight and supervision," said Wen. "This issue has not been wholly resolved. But we will take speedy action to revitalize China's whole food industry."

In the case of the 2008 milk scandal, the government imposed price controls on foods after massive price inflation began threatening the country's stability but did not impose controls on some things needed to produce food, such as fertilizer and seeds. Producers therefore had to pay market prices in production but could not get a return on their investments. Throughout the supply chain there were incentives to water down milk and replace it with melamine, says Dickinson, the legal expert.

Some families have moved to sue the companies involved, though China's tort system only allows for direct economic damages. Such amounts are likely to be far smaller than the massive punitive damages allowed in the United States that often serve as a deterrent to companies. Market forces can still play a role in China. People's unwillingness to buy milk products over fear of which producers to trust has been a huge blow to the country's dairy industry.

Dangers in Trade

In high-profile cases, countries often impose temporary bans on imports discovered to be unsafe. Some bans are considered trade barriers that can lead to trade disputes. In 2008, more than two dozen countries banned milk and food imports from China after tainted milk products were found. Some of these products were distributed by well known Western companies, including Cadbury, Mars, and Nestle. Liability issues for international companies using Chinese supplies are a growing concern. Jerome A. Cohen, a CFR adjunct senior fellow, writes that the liability for New Zealand firm Fonterra, a major investor in the Sanlu Group, is unclear. Cohen says the case offers a lesson for other foreign investors. Experts are also quick to point out that China's food problems mirror those that other nations have experienced, including the United States. They add, however, that China's massive growth in trade and the realities of globalization makes the country an exceptional case, increasing the urgency for Beijing to tackle its food problems.

In the United States, consumer groups have called for greater scrutiny of food imports by the U.S. Food and Drug Administration (FDA). The FDA currently inspects only a small portion (PDF) of food and drug imports. An FDA official told Congress in 2008 that the agency was moving to improve safety measures (PDF), particularly against terrorist threats from those who might purposely adulterate food. The official added that the FDA is working with the Chinese government to increase inspections.

Of the inspections the FDA does conduct, food from India is more likely to fail than food from China. Illnesses from food in the United States more often originate domestically, U.S. congressional investigators said. The United States allows no imports of meat and poultry from China because U.S. law requires importers to meet the same standards as U.S. producers. The U.S. House Energy and Commerce subcommittee investigative report concluded that such a standard could not be imposed on all imported food but notes the import process can be made safer. The report also points to Japan and Hong Kong's import models as possible alternatives to the U.S. system. Japan, for example, inspects up to 16 percent of food from China and allows in food that originates only from a small number of certified farms and plants. But more stringent inspection regimes are not fool-proof. In 2008, hundreds of people in Japan fell ill from Chinese-made dumplings laced with pesticides, and Hong Kong found melamine-laden in milk products imported from the Chinese mainland.

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