US bid to help the 'Made in China' brand By Benjamin A Shobert
In the wake of melamine-laced milk, diethylene glycol in toothpaste and lead in
children's toys, the United States Food and Drug Administration's (FDA's) late
2008 opening of satellite offices in China comes as no surprise. Whether these
moves can be expected to increase the product safety of exports from China is
another matter, as is the degree of culpability that should be assigned wholly
to Chinese manufacturers.
Regardless of where the blame should properly rest, American consumers expect
these offices will result in some degree of improved quality control for goods
which find their way to retail shelves. However, the reality facing the FDA on
the ground
operating in China suggests consumers and politicians might want to lower their
expectations.
The US government has one contemporary experience with Beijing that has some
parallel with the FDA's recent foray into China: the Validated End User (VEU)
program put in place to monitor potential "dual-use" technologies in the
semiconductor field.
This program was designed to prevent the migration of sensitive semiconductor
technology from the US military-industrial complex to possible Chinese military
applications. This was accomplished through a certification by the US
Department of Commerce that the destination in China did not pose a threat to
US national security. But a late 2008 report from the US Government
Accountability Office (GAO) recommended the VEU program be suspended until "…
an amended or new agreement is reached to conduct onsite reviews".
From Washington's point of view, the VEU program does not work primarily
because the Chinese government has not empowered US agents to conduct
unannounced audits of those facilities where these technologies are employed.
As argued by Beijing, such unfettered access on the part of US government
actors amounts to a submission of its sovereignty to American interests. The
difference in perspectives has much to say about the two prevalent groups of
thought pulling in different directions on the incoming Barack Obama
administration.
Whether wrestling with the implications to sharing potential "dual-use"
technology, or arguing for an expanded role of the FDA within China, Washington
policy communities focused on US-China relations fall along predictable lines.
Those predisposed to trust China interpret its pursuit of a modern
military-industrial complex as understandable, non-threatening, and part of
China's regional maturing.
They believe the country has as much a right to limit the ability of outside
governments to audit manufacturing entities (both private and state-owned)
functioning within China as any other country can expect within its own
borders. Conversely, those who distrust the country believe Beijing's
unwillingness and lack of "openness" is itself a tacit admission that the
dual-use technologies are finding their ways into unacceptable arenas.
Unlike the VEU, those products covered by the FDA's oversight do not involve
national security. But for either program to work effectively, each requires
that US government officers be able to access Chinese manufacturing facilities
unannounced.
Rich Kuslan, a lawyer specializing in US-China business and law, said
"inspections mandated by a foreign power to another foreign power are
historic". The best comparisons are unfortunate ones and typically center
around negotiated armistices or the forced reduction of military capabilities.
In addition, China's history with foreign powers and matters of sovereign rule,
makes the country's leadership unusually sensitive to policies that seem to
again subject its country to arbitrary outside influence.
Even though a pronounced chasm exists between the actual US President George W
Bush and articulated Obama foreign policies, a change in presidents is unlikely
to influence the US government's sensitivity to China's concerns in this area.
Where Bush disengaged with international standards of accountability, Obama is
likely to engage positively.
But with respect to the FDA's activity in China, Obama must make some outward
sign which acknowledges the desire for action on the part of the American
consumer. Consequently, even though Obama comes to the question of China's
sovereignty with different sensitivities than did his predecessor, he is likely
to still advocate the FDA to move forward with its plans.
What both the Bush and Obama administrations share is the need for political
posturing in the face of tainted imports from Chinese manufacturers. Sending
eight American inspectors to China and opening of three FDA offices will have
little effect on the fundamental question of product quality. The sheer amount
of products coming from China which fall under the FDA's supervision overwhelm
the inspecting capacity of such limited American inspecting.
The fixation on China as the only contributor to the problems with product
safety is not entirely fair, and in this sense effort on the part of the FDA to
shift the focus primarily on China is bound to fail. As a consequence, even a
well-funded and Beijing-supported program for FDA inspectors in China cannot be
expected to fully resolve the problem.
Overlooked in much of the blame cast on China has been the responsibility of US
companies to manage their supply chain. Sound sourcing practices on the part of
importers within the US means actively auditing their suppliers, with an eye
towards their own culpability within the American legal and regulatory systems
in the case of product quality failures.
Two families of product quality problems have come out of China: those that can
be anticipated and audited against, and those that are genuinely original and
unexpected. A good example of the latter was the now infamous Aqua Dots which,
when swallowed, the body converted to a date-rape drug. Perhaps some
forward-thinking biochemist could have foreseen this possibility when
evaluating the family of materials that went into the finished product, but
delving beyond the sensational aspect to the story, it seems unlikely either
the manufacturer or the importer had cause to expect such a problem might
occur.
But other problems can be anticipated by the importers (or what the FDA calls
"sponsors"), namely the use of chemicals which in some cases were once
acceptable in the US but are now illegal. From a manufacturing engineer's
perspective, many of the oversights which the FDA is being tasked to prevent
can be anticipated: melamine to artificially boost protein levels, diethylene
glycol to cheaply sweeten toothpaste, and lead in paint to improve coverage and
sheen. Evaluated purely on the basis of product safety, a child's metal toy has
two potential product safety issues: parts can come off and become choking
hazards, or lead can be used in the paint. To prevent these problems is not
only the responsibility of the Chinese manufacturer, but also of the companies
who buy from them.
This issue has three possible resolutions. First, the US government can
continue to attempt and formulate a policy response that either explicitly uses
tariffs or regulatory bodies to impose penalties on Chinese companies which
export faulty products. Eight FDA officials in China will do little, especially
if un-supported by Beijing, to prevent product from getting to the US, at which
point product recalls only serve to feed political problems. At some point, it
is very likely the US government's response to another product safety recall,
especially involving a food or drug safety matter could be disproportionate to
the problem and seriously escalate tensions between the two countries.
Second, US consumers could become increasingly severe in their rejection of
Chinese made goods. Simply put, US purchasers could curtail their purchases of
goods from China. Because the quality recalls have spanned so many different
types of products, the short-term response from American consumers could be
widely indiscriminate and might well have a more severe influence on Chinese
exports than a recession would.
Any number of consumer safety advocates are already suggesting the "wisdom" of
such choices, and the raw emotional power of a mother who believes they may
have given tainted milk to their child is a powerful reference when making
future purchasing decisions. This realization should shape the third, and
likely most effective, response, which would involve a self-policing effort
focused on product safety on the part of the government in Beijing.
For the past decade, conventional wisdom has had it that China will follow the
same rough trajectory of war-ravaged Japan and Korea: beginning with low-cost
manufacturing, the countries first rebuilt their industrial sectors, then began
exporting low-value products that more developed economies did not want, then
moved their way up the supply chain until their national champions could stand
at ease with any competitor, regardless of geography or heritage.
This process was marked by several key transitions, at which point the national
brand could easily have become one-dimensional, reflecting a static position on
the part of the country's manufacturers. Japan's automotive sector facing the
"rice-burner" stereotype and proving it could compete with European luxury
brands was one such game-changer. And now China stands at a similar point:
Beijing must have a robust national brand that stands for more than cheap
products if it is to continue growing.
As a consequence of this, China's leadership needs to take a much more
aggressive position on product quality than it has, as just one example, on
intellectual property. Beijing needs to flex its domestic political muscles
with the same ferocity and focus as it did in the run-up to the 2008 Summer
Olympic Games.
Its leaders must realize that what is at stake is not only the immediate
position of the Chinese national brand, but the longer-term ability of the
country to act as a trusted partner in high-technology ventures. It would be a
profound mistake for Beijing to believe that current American attitudes about
Chinese-made toys will not shape US perspectives on Chinese-made passenger
aircraft. As large as the domestic Chinese market could become, its immediate
needs can only be met by successfully exporting to American and European
markets.
The FDA's decision to open up offices in China is symbolically important: it
signals to Beijing that US politicians need something they can point their
constituents towards when asked what they have done to improve product safety.
But both China and the US know that while the FDA's actions have symbolic
power, it comes with little in the way of enforcement capabilities, and as a
result, it is unlikely to catch future problems.
At best, it can respond to ones that have already occurred and attempt to
explain them. What China most needs now is not an oversight effort led by its
export partners, but an internal reform by its own government which elevates
this issue and makes it a matter of national pride. This would employ the
much-lauded Chinese national spirit in the most productive and beneficial of
fashions.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market.
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