Clearly, American consumers are very concerned. There’s been lots of individual talk of boycotts and consumers going to stores asking about whether items are made in China or not. In terms of the government reaction, so far the regulatory agencies–the American regulatory agencies, principally the Food and Drug Administration, Customs, Consumer Product Safety organization, the U.S. Department of Agriculture–are looking at their own standards. They’re all short of the sources. Frankly, they’re not doing as much as they could, but they’re all looking to do more. They also have been talking to their Chinese counterparts about what the Chinese can do to improve their own conformity with international standards. Now, this is not a problem unique to China. On a per dollar of imports basis, Mexican imports and Indian imports show just as many problems as Chinese imports do, but the difference is that our imports from China are many orders of magnitude larger in quantity than from India and Mexico–over somewhere between $250-$300 billion dollars in imported products this year. So, naturally, there is going to be a fair number of defective products.
Now why is China having these problems? On the food side, these are problems involving environmental difficulties, pollution, food additives. A lot of them come from the environment, which is just a huge problem in China. On the manufacturing side, there are multiple problems. One is that the manufacturing sector in China is highly fragmented. So you have tremendous numbers of producers, manufacturers, some of them quite small that don’t have the same internal inspection safety standards as a large company would have. You also have a highly defective regulatory system in China. People think of China as a dictatorship where Beijing can tell everyone what do in the provinces. It doesn’t work that way, in reality. In the provinces, the capabilities are very poor.
I think the last factor that is particularly difficult for China to address is transparency and accountability. In the United States, of course, we have product safety problems ourselves and we have free media and the media expose a lot of those product safety problems. In China, media are a) not free and b) are reluctant to go after manufacturers of defective products particularly if they think they might run into a party official who is involved or protecting the enterprise.
That said, I think the Chinese leadership is taking this issue quite seriously. I know the Prime Minister, Premier Wen Jiaboa, has been personally very outspoken and vocal on it. The Chinese have done a number of things to try to address the problem. They’ve shut down a number of manufacturers of defective products; they have posted on websites such manufacturers; they have forbidden the use of certain forbidden products such the diethylene glycol that found its way into toothpaste that was going abroad. They are increasing the number of inspections; they have put in place their first recall legislation; they understand that they have a problem both domestically for Chinese consumers and with the acceptability of brand China overseas. For a country whose economic livelihood is largely dependent on exports, they know that’s a problem that they have to take seriously.
The U.S. still has some leverage over China, because China clearly wants a deal. ... U.S. financial markets also seem to have been boosted by the prospects of a U.S.-China trade deal, so I think it could have a negative effect on both financial markets and economic activity in both countries if a deal is not struck