CHINA: The Growing Dangers of China Trade

On a warm Friday afternoon in June, about 50,000 boxes of toothpaste got their last squeeze inside an industrial trash compactor in Homestead, Fla. They were yanked from the shelves of discount stores and bathroom cabinets after a nationwide recall warned that the toothpaste contained a chemical, diethylene glycol, that could lead to kidney failure. Francisco Botta, who distributed the toothpaste for his family's wholesale business in Miami, stocked his warehouse bathroom with the stuff. "I used it every day," he says. "I told everybody to stop."



Like so many other things that Americans buy these days without thinking, those tubes of Dr. Cool, Superdent and Everfresh Smile2 began their life in a factory in China --in this case, in Wuxi, a city of 4.5 million about 80 miles west of Shanghai. They were sold by Goldcredit International Enterprises, which is based in a gated community called Lakebank Elegant Garden, within sight of China's Taihu Lake. It makes not just toothpaste but also pencil sharpeners and balloons, hand sanitizer and toothbrushes. "What we exported is in line with the Chinese-government standards," Goldcredit business manager Shi Jun says about the toothpaste. Adds manager Hu Keyu: "The Chinese government already issued a statement. What more do you want from us?"



Would a nontoxic dentifrice be asking too much? On the 8,000-mile journey between Wuxi and Homestead, Goldcredit's products move, in effect, through time. When a product made in China enters the U.S., it arrives with a kind of unfettered capitalism that hasn't existed in America for a century--uninhibited by regulation, lawsuits or, until recently, public outrage. It's difficult even for a businessman who tries to follow the rules. "You go to China, you check the place out, check the quality of the products," Botta says. But after the recall--of a product labeled safe in China--he is wary. He saw a big candy factory while he was in Wuxi. "I wouldn't buy that," he says. But he'll continue importing school supplies and shower curtains.



It's the same calculation that millions of American consumers are making since the recent recalls of deadly pet food, lead-paint-tainted toy trains and shredding tires made in China. The U.S. imported 40% of its consumer goods from China last year. But there is no practical way to gauge, other than by reputation, whether a Chinese import is as safe as it is cheap. So should you worry more about the extension cords or the TV? Screen the kids' toys but not their shoes? Until China's capitalism develops its own set of rules and limits, is that our only option in a made-in-China world?



Every time a federal agency recalls a Chinese product--as the National Highway Traffic Safety Administration ordered June 26 with nearly 450,000 tires--consumers get jolted with concern but also relief that someone is paying attention. Yet the volume of imports from China is straining the capacity of U.S. regulators to watch them, and those goods are overwhelming China's efforts to reform the eight disparate agencies that regulate its consumer products.



More than 40% of recalls by the U.S. Consumer Product Safety Commission, including all the toys recalled this year and 79% of toys last year, involved products from China. The volume of consumer goods from China has nearly tripled since 1997, but the agency's budget has increased just 12%, to $62 million, over the past five years. "There's no question it's strapped," says Eric Rubel, a former general counsel to the commission.



The U.S. Food and Drug Administration (FDA) is also struggling to keep up. Shipments of FDA-regulated goods from China have jumped fourfold over the past decade, according to the Congressional Research Service. But the FDA has only 1,317 field investigators for 320 ports of entry. The agency inspects just 0.7% of all imports under its purview, half of what it did 10 years ago. We've dropped our guard.



Sure, it would be great if the FDA could stamp every import with its seal of approval the way the Department of Agriculture does: meat, poultry and eggs can't be imported without meeting its standards. But David Acheson, who was appointed the FDA's assistant commissioner for food protection after the recall of tainted pet food in March, says that kind of monitoring for 16 million shipments of everything from cough syrup to toothpaste would be "too complex and cumbersome."



So instead the FDA saves its fire for the high-risk goods that have caused health problems. That's what happened in early June with Chinese-made toothpaste. Following 100 deaths in Panama linked to cough syrup containing diethylene glycol (the ingredient had been mislabeled as glycerin, which is harmless), the FDA issued an import alert on all toothpaste made in China, tested the tubes it could find for the toxin and recalled the questionable batches. "Obviously it's not possible for us to test every product that is coming in to make sure it's meeting every standard we have," Acheson says. "It's got to be based on risk."



That's an efficient use of resources, but it makes the FDA a "tombstone" agency: nothing happens unless someone dies. "Consumers are the canary in the coal mine for this system," says Caroline Smith DeWaal of the Center for Science in the Public Interest. "That's not what a government program should do. It should anticipate and prevent problems."



Doing that, of course, would require improving China's food and product safety at the source. "We'd rather have the products manufactured safely in the first place," says acting Consumer Product Safety Commission chairman Nancy Nord. Despite our buying power, the U.S. government simply has very little leverage to impose new restrictions on Chinese goods, in part because it is lobbying China to open up its markets to U.S. goods. "This can't be the Federal Government's responsibility," says Pietra Rivoli, a professor at Georgetown's business school and author of the book The Travels of a T-Shirt in the Global Economy. Rivoli says U.S. companies that use Chinese factories ought to view the risk of importing a dangerous product just like any other business risk. "It's really the responsibility of the importing companies. How many of them want to take on the reputational risk of children dying?"



Large global corporations have, for the most part, assumed that responsibility. Nike, the athletic-apparel company, sources 78 million shoes from contract manufacturers in China and requires them, in writing, to meet Nike's standards, says spokesman Alan Marks. When the company recently decided to reduce its environmental impact by using a water-based adhesive in its shoes, Nike added layers of checks to make sure its contractors followed the new specs. Nike's product specialists developed a list of banned substances; there is systematic monitoring in the factory and quality control of the finished products. In some industries, like electronics, manufacturers pay outside-testing outfits such as Underwriters Laboratories (UL) to fill that role. UL has been testing products like extension cords from Chinese companies for the U.S. market for almost 30 years.



This kind of monitoring isn't cheap--just check the price on a pair of Nikes--and it isn't infallible. "No factory is perfect all the time," Marks says. If even a giant like Nike can't expect full compliance, what can consumers expect from smaller importers who can't afford full-time monitoring in China? Or from the discount stores that buy in bulk, sometimes without even a manufacturer's name on the products they sell? "Too many people don't have a clear understanding of what they are buying," says Benoit Rossignol, head of Shanghai-based Shiyao Investment Ltd., which advises companies doing business in China. "You have a responsibility for your end users."



Or you answer to the tort lawyers. In many states, every link in the chain that brings an unreasonably dangerous product to the U.S. is potentially liable for the damage it causes. "It's not a defense to say, I was just a distributor," says Jonathan Bunge, a partner at the law firm Kirkland & Ellis in Chicago. Foreign Tire Sales, the company that imported the recalled tires from Hangzhou Zhongce Rubber, is named in a lawsuit over a fatal crash involving the tires.



No U.S. company goes to China to play watchdog, but that role is getting more important--and much more difficult--as the U.S. depends increasingly on China for what it eats. Manufacturing powered China's economic revolution, and the Chinese government is pushing hard for farming to follow suit. The Communist Party wants to keep the countryside from falling too far behind the booming coastal cities. One answer is the farm sector, which generated $31 billion worth of exports last year, up from $13 billion in 1994.



As its global food exports ramp up, China is raising food-safety standards, but enforcement is another issue. China has a population of 200 million small farmers--an astounding number--and they "want to increase quantity, not quality, so they use more chemical fertilizer and pesticide," says Hu Dinghuan, a professor at the Chinese Academy of Agricultural Sciences in Beijing. "The government says the worst pesticides are banned, but actually farmers can still buy them, and they do use them."



Smart companies like the French retailer Carrefour reach back to the farmer in his field. "We select the best suppliers and train them to our standards--which pesticides they can use, how much to use and so on," says Nadege Claudel, Carrefour's quality and food-safety manager for China. For produce sold under its in-house brand, Carrefour has replicated its European tracking system, which labels every vegetable with a number that follows it from harvest to shelf--and adds 20% to the price.



Claudel's two years in China have turned her into an optimist. The pomelos she sources from Fujian, once sold only domestically, are now sold in Europe. "I really believe that things are getting better," she says. China's Agriculture Ministry is working with retailers to build a tracking system so that supermarkets can determine responsibility for contaminated food. But more than 80% of China's vegetables are sold in open markets, where accountability is as perishable as the tomatoes.



The real test of China's progress won't be whether it can produce more rules or testing labs, lawsuits or tracking systems. It's whether Chinese consumers will demand--and receive--the same assurance of safety that Western consumers do. David Zweig, a scholar at the Hong Kong University of Science and Technology, compares China's brand of capitalism to the Wild West. It's an apt analogy. In late 19th century America, snake-oil salesmen were stock characters of the western frontier. They became notorious for their dangerous, counterfeit cure-alls, and there were no laws to stop them. By 1906, Americans had had enough bad medicine, and Congress passed the Pure Food and Drug Act, which led to the creation of the FDA.



Bureaucracy, corruption and lack of a free press are huge obstacles to a similar change in China, but there are some encouraging signs. In 2004 the deaths of 13 babies who were fed adulterated milk powder touched off a national furor. The state-run broadcaster CCTV airs a popular weekly program on food-safety scandals. China's leaders, says Zweig, "know that Chinese people have this sense that they deserve better." The World's Factory After a series of product recalls, from pet food to tires, American regulators are paying more attention to the goods exported to the U.S. from China, which have surged over the past decade to more than $200 billion.

How the U.S. stacks up against China's other big trading partners:

WHO BUYS CHINESE GOODS: The U.S. Accounts for one-fifth of all Chinese exports. China's top export destinations, 2006 All figures in billions The Netherlands $30.8 Germany $40.3 Britain $24.2 France $13.9 Spain $11.5 Italy $15.9 U.A.E. $11.4 India $14.6 Singapore $23.2 Malaysia $13.5 Australia $13.6 Hong Kong $155.4 Taiwan $20.7 Japan $91.7 South Korea $44.5 Russia $15.8 Note: China figures do not include Hong Kong

• 110 Trade Justice
• 181 Food and Agriculture
• 184 Labor
• 185 Corruption
• 188 Consumerism & Commercialism
• 204 Manufacturing