Had Suzanne heard the news in recent months she'd probably think twice before serving Leonard Cohen tea and oranges that came all the way from China. With reports about recalled toys, pet food poisoning and the FDA ban on certain imports of seafood from China, there is no exotic romance in such tea and oranges anymore. No wonder American politicians and government officials step in to protect consumers against such safety dangers. As Hillary Clinton said "I don't want to eat bad food from China or have my children having toys that are going to get them sick." Nor do I.
The Chinese seem to be responding, promising to "severely" punish those involved in the latest product safety scandal, and after the execution last month of China's food and drug watchdog former head, "severely" may mean really severely. So far, the story seems familiar from previous domestic scandals. In this story there are typical three players: unscrupulous greedy corner-cutting manufacturers, injured innocent and misinformed consumers, and a government that steps in, implementing and enforcing measures to protect them. But when considering the international dimension this story seems to miss something. After all, if China's authorities do respond as they promise, they would seemingly be acting against their national self interest: protecting foreign consumers at the expense of domestic producers. Are the Chinese acting irrationally?
The answer is probably negative. One possibility is that they may be responding to prevent further escalation in an already tense trade relations with the US, but more important, I believe, is their fear of how the more informed consumers in foreign markets would respond if no serious measures are taken. The big concern is that if these consumers cannot distinguish between safe and unsafe Chinese-made products and between honest and dishonest Chinese manufacturers, they would abandon Chinese goods altogether.
This suggests that there are two additional types of players that are injured by the corner-cutting practices of some Chinese manufacturers: The first group consists of honest Chinese manufacturers; the second group are those relatively informed consumers who would refrain from buying Chinese products that they otherwise would value. Although the damage for those groups is mainly in foregone opportunities (and therefore less visible than the damage done to misinformed consumers who actually buy the unsafe products), in economic terms the magnitude of these damages can be quite high. Considering the importance of exports to China's growing economy, this makes a more rational basis for China's authorities to intervene.
The effects of safety regulation or lack thereof on the welfare of honest manufactures and informed consumers is often missing from the debates on regulation. In a recent paper I address these issues as they play out in the context of pharmaceuticals and highlight how regulation served the interests of both producers and consumers. The paper is entitled Pharmaceutical Lemons: Innovation and Regulation in the Drug Industry. If you're interested you can download it freely from here. Or you can learn more on Suzanne, Leonard Cohen, and their experience with tea and oranges here.
