The newest wave of shoddy products from China reminds me of the old Jack in the Box debacle. Back in 1993, the fast food restaurant chain Jack in the Box suffered a huge financial loss after hundreds of people got sick and several children died from eating undercooked hamburger meat that was contaminated with E. Coli (see here). Recently, a brand of Chinese-made dumplings that are popular with children have sickened at least a dozen people in Japan. It was later discovered that the dumplings were contaminated with pesticides (see here). And, on a related issue, there is growing concern now about the safety of the abortion pill, RU-486, which is manufactured by the same Chinese company that produced anti-leukemia drugs that paralyzed approximately 200 cancer patients in China (see here). How long can China continue to produce products that harm the foreign and domestic public before people start taking their business elsewhere?
Jack in the Box eventually recovered from the E.Coli debacle after instituting industry standard-setting food handling and cooking techniques. We keep hearing about investigations being launched in China after each of these shoddy product scandals but what really comes as a result of these investigations? The investigations are meant to rehabilitate the image of China's products but does rooting out corruption even at the highest levels of their government accomplish this goal? Executing the person in charge of China's version of the FDA for taking bribes worth 6.4 million RMB from companies he was supposed to be regulating is dramatic and it might pacify some of the naysayers for awhile but it's not a solution. This kind of spectacle reminds me of the old westerns where the corrupt town mayor decides to hang a couple of nobodies in a desperate attempt to calm the angry public when the injustices become too many. It's all smoke and mirrors, and in the wake of more shoddy products we should be asking if anything is really being done to regulate the China-made products?
Besides making public spectacles, China is also attempting to legislate some regulations to combat shoddy products. There is a difference though between drafting regulations and actually legislating them, and then there is an even bigger difference between legislating them and enforcing them. We're always hearing of China's problems with enforcing the laws, and I believe China is getting better at enforcing its laws, but can China institute legislation to stop shoddy products and begin enforcing those regulations before the bottom drops out of their export-led growth? Maybe, and maybe not.
Some people have been making the argument that a Chinese manufacturer has little choice but to make a shoddy product when the foreign buyer insists on paying as little as possible. In other words, you get what you pay for! A post over at the Time's China Blog points out that the Chinese company that was manufacturing the anti-leukemia drugs was making less than you make on a bottle of water-- I guess that means they were making very little profit-- but I fail to see how this justifies harming the public? So what if they aren't making enough money? Tough shit! That's business! And a business that isn't make any money is a failure and should close shop. But that is not what's happening here. The company that manufactured the drugs that paralyzed hundreds of people is a state owned company and it's hard for me to imagine that it's actually running at a lose when it is by definition being subsidized. But why shouldn't this company cut corners when there are no repercussions?
Dan Harris over at the China Law Blog also posted a "you get what you pay for" argument. His argument was not necessarily about paying more to state owned manufacturers to get a better product but it made a similar point that paying a little more might get the buyer some more protection. He made the very solid point that paying more for such things as due diligence, good contracts, and quality control monitoring will greatly increase the likelihood of good product from China. I particularly like this portion of his post:
If you are underpaying your Chinese supplier, you will get bad product. It is that simple. By underpaying, I mean that if you are paying your supplier 1000 Yuan to make copper piping that requires 1000 Yuan in copper, you will get bad piping. Guaranteed. Your pipes will not have 1000 Yuan worth of copper in them. They just won't. Paying 2000 Yuan for the piping will not guarantee you get 1000 Yuan of copper in them, but it certainly does improve your odds. Does anyone disagree with me on this?
I don't disagree, but what happens if the Chinese manufacturer simply decides to rip you off because he has no reason not to? When Jack in the Box poisoned hundreds of kids and killed a few, they were hit with just as many lawsuits and they lost hundreds of millions of dollars. If the Chinese rewrote their tort laws to mirror the US tort system, then I think the Chinese manufacturers would be less likely to put a shoddy product into the stream of commerce. A manufacturer in China would think twice about paralyzing a few hundred people if he could be held liable for punitive damages in the hundreds of millions of yuan. And while they're at it, they should make it possible for foreigners that have been harmed by Chinese product to sue the manufacturer in a Chinese court for the same kind of damages.
But there is a problem, how many of these manufacturers are state owned? How many of them are run by members of the Communist Party? The Chinese government has very little incentive to create a tort system that could potentially hold them liable for sums of money that would actually mean anything to anyone. Because there is no way to hold anyone truly liable for their actions, it seems like there is no way to stop the officials from taking bribes and the manufacturers from cutting corners. Outside of standing over the manufacturer's shoulder and monitoring their every action, a foreign investor has no guarantees that their China-made product won't harm the public. Eventually, the cost of labor and the price of babysitting the manufacturer will become too much in comparison to other exploitable countries like Mexico, Vietnam, and India, and the foreign investors will abandon China.