Thursday, June 28, 2007

China's Brand and the Product Liability Lawsuits to Come

Correspondent Cheryl A. recently alerted me to an issue which may well affect China-U.S. trade: defective products and tainted food.
here are two links to the Wall Street Journal (subscription required), but the stories are available from many other sources.

Accident Raises Safety Concerns On Chinese Tires

China Shuts 180 Food Plants Amid Food-Safety Concerns

The two big questions are: Is this merely an anomaly, or the tip of an iceberg of defective, dangerous products? and, Can China fix its quality control problems, or are they endemic to its political/economic structure?

The Chinese government's first response was to impound some dried fruit from the U.S. and proclaim it dangerously tainted.

In other words, "See, you make tainted products, too! So lay off already!"

This face-saving gesture went over like a lead balloon, so their next step was to shut a few dozen plants (out of tens of thousands) for a few days. This is the public-relations equivalent of a bulldozer crushing a few thousand pirated DVDs while the cameras roll. Meanwhile a few kilometers away the piraters are making new copies by the millions.

Given the vast quantities of foodstuffs such as farmed seafood now being imported from China, the possibility exists that the next tainted-food deaths will not be pets but humans. As various news agencies have reported, humans in other countries have died from consuming Chinese-made drugs which were adulterated with cheap (and poisonous) fillers.

As for seafood, consider this recent article from the San Francisco Chronicle: Domestic farmed fish go under the microscope :

"Most of (the seafood) we eat that's farmed is coming from China. We have little idea of what's happening in China," said Peet. Food and Water Watch reports that the United States imports 80 percent of the seafood we consume, most of it from Latin America and Asia. The aquaculture practices in many of these countries damage the environment, and many enterprises use additives and antibiotics banned in the United States.
Are you still willing to put a Chinese-made tire on your car or truck? I didn't think so. How about when you read about somebody getting sick from some imported seafood which happened to be grown in China? Will you start asking where that jumbo shrimp came from?

China has no lock on unregulated industries, of course; there's no way to know what might be in the food which is imported into this country because inspections and testing are virtually non-existent. Exactly how are you going to insure the quality of every jumbo shrimp and tomato?

It boils down to trust. In this sense, every nation is a "brand." Back in 1965, Japanese products consisted of cheap toys and transistor radios which were widely mocked as "cheap" and poor in quality. Fifteen years later, the Japanese were challenging American and European auto manufacturers with vehicles a leap ahead in quality and durability. (The Volkswagen Beetle's demise can be correlated to the emergence of the Toyota Corolla and Datsun cars.)

It's been fifteen years since China emerged as a manufacturing power, and what they're producing is defective tires, bikes, etc. Various financial pundits with no knowledge of China are fond of saying it will follow the same path to fanatic quality control trod by the Japanese and Koreans (why? Because they're Asians), but this thesis doesn't take into account the following conditions in China which were not present in Japan or Korea:

1. China is deeply and pervasively corrupt at all levels. If you deny this, you simply don't know any Chinese citizens well enough to hear the truth. Your kid doesn't do well on an entrance exam? Some "help" can be arranged. Your factory is dumping toxic pollutants into the air? You can "arrange" to close for a few days and then start running it at night, when the toxic plume isn't visible.

The stories are as varied as they are endless. Thus the idea that the quality of anything can be regulated by a trustworthy, uncorruptible agency within China is simply impractical.

2. The dynamism of the economy and its entrepreneurs makes quality control difficult. Entrepreneurs in China often change businesses and locales quickly; thus a fish farm which is closed for over-using antibiotics will close and the owner will enter another business. The bike manufacturer will close if the market dries up and start making soemthing else. While this dynamism is great for employment and growth, it makes external quality control basically impossible.

The global corporations can of course control quality in their own factories, but much of the industry in China is localized production of parts and goods made by small businesses. Where did that tainted pet food come from? It took a major investigation of the convoluted, poorly documented supply chain to find out.

3. Quality is not Job One. Those of you who have a religious faith for the "endless growth of China" story will balk, but again, you need to talk to actual real live people, Big Noses (Caucasians) and Chinese, about actual business practices in China. Sure, if you tour a computer parts factory owned and operated by Taiwanese (yes, I have), it all looks great. If you work for a global corporation in a clean little cubicle and frequent watering holes in fancy Shanghai hotels, it probably all looks great to you, too.

But what about the silk suit manufacturer down the road, who sold the French guy based on a high-quality silk product and then delivered 50,000 lower-quality suits? Or the pharmaceutical plant which closed over in the business park because their product packaging was quickly pirated and filled with sugar pills, thus destroying its brand?

These are real stories, and they're not from 15 years ago.

4. The idea that U.S. agencies can monitor, document and test for quality is a non-starter. Which of the thousands of containers coming from overseas are you going to inspect? How many bottles of medications are you going to laboriously test to make sure it actually contains what the label says it should? It's impossible.

It comes down to trust. At some point, let's be original and call it a tipping point, a country's "brand" will fall into distrust. And as any company knows, once the public has lost trust in your brand, it is very difficult to get it back.

Could China's "brand" become irrevocably tarnished? It may depend on how many lawsuits get filed and how much publicity is generated--for instance, Wal-Mart prevails in suit over defective bikes made in China.

It's no surprise that Wal-Mart would win; they'll probably always win. But if enough suits get filed, they may lose anyway--by losing their customers. I asked fellow blogger and attorney Fred Roper for his take on product liability, and his comments are insightful:

My knowledge regarding products liability cases is pretty limited. The rule is: if a merchant sells a product to a user or consumer that is unreasonably dangerous and causes harm then that merchant is liable for the injuries to that user or consumer. Because of the nature of the distribution chain, a plaintiff and sue anyone or everyone in the chain of distribution. The reason for this is that the merchant is presumed to be in a better position to know the potential dangers that the product poses for an unsuspecting consumer. Therefore, the defense of "comparative" or "contributory negligence" is not normally available to defendants in these kinds of cases.

If the merchant knew that such a danger was posed to the ultimate user or consumer and fails to warn or protect the consumer from harm, punitive damages can be assessed.

That is what happened in the famous McDonald's coffee case. A memo was discovered that showed that McDonald's knew that their coffee, at 180 degrees Fahrenheit, would cause 3rd-degree burns.

For more on the McDonald's case see this link:


5. McDonald's admitted that it has known about the risk of serious burns from its scalding hot coffee for more than 10 years -- the risk was brought to its attention through numerous other claims and suits, to no avail;)

If you will notice, business lobbies are trying to limit damages that consumers can receive when they prove intentional malfeasance on the part of the defendant business. As you are pointing out, there is not enough inspections to protect consumers from dangerous products from China, and with the courts now getting emasculated by damage limits on lawsuits, there is much less incentive for private businesses to inspect their products as well. It was always difficult enough to prove that they knew their product posed a danger; but now even if you prove it then the potential damages may not be enough to make them want to change their practices.

Okay, so actually proving negligence on the part of Chinese manufacturers or U.S. distributors and retailers is going to be near-impossible. But the publicity generated by these cases may slowly cause American consumers to start asking where this tire or bicycle was made, and ask where this jumbo shrimp was grown. If they start making decisions based on where these products came from, trade between the U.S. and China could take a direction few expect.

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