Are contaminated products our future WMD's

Implications: Importing contaminated food and personal care products can be as lethal as the the effects of any terrorists WMD.  Consumers and investors should be more concerned.  Here's why.

Analysis: Given the amount of products imported and the absence of adequate controls on the quality and content of food, personal, and health care products, determining the size of the problem may come down to counting how many people get sick. In short, unless there is a catastrophe were hundred or thousands of people are harmed, its will be nearly impossible to successfully implement adequate quality standards or enforce rigorous product testing.

One reason is the complexity of the problem. Unlike US domestic manufacturing where new entrants are highly visible and subject to established safety protocols as they bring products to market; much of China’s emerging manufacturing infrastructure is small and highly fragmented. This makes it nearly invisible to regulators which focus more on large companies.

Another reason is many retailers, wholesalers, and offshore producers see US manufactured product as too regulated, which has increased costs and cut into profit margins. They want to keep Chinese manufactured goods cheap. That isn’t to say they want to sell contaminated goods, but the process to ensure safety means more than just standards and regulations. It means a bureaucracy and skilled workers which translates into higher labor costs. It also means visibility to the government and that could raise prices as it makes new companies more costly to start up.

China’s deep concern about the problem was illustrated by the severity of the sentence handed down by its courts to senior officials found responsible for allowing contaminated goods to be exported. But as severe as a ‘death sentence’ is, it is less of a deterrent than it is an admission that China has neither the capability nor the political will to ensure dangerous foods and other personal care products won’t be exported in the future.

The same may be said of the US government where import regulations are either not enforced or unenforceable at the nation’s ports of entry. Often blamed on the lack of funding, the fact is there is no political mandate requiring strict enforcement of customs regulations at either our docks or airports. This means it is more likely, not less that consumers will be the victims of contaminated products imported from overseas manufacturers.

Unfortunately for consumers and investors alike, both business and the government’s response to the contamination problem appears more one of spin control, rather than prevention. The contamination problem isn’t going away and it’s only a matter of time until there is a widespread outbreak of an illness than can be traced to dangerous products imported from overseas. The cost to retailers and manufacturers in settlements alone could amount to hundreds of millions, if not billions of dollars, to say nothing of the cost of litigation in both US and Chinese courts.

Then there is the contingent liability from harmful products that may well take years to either impair or kill users. What part of this cost would be covered by product liability insurance is problematic. Most likely, businesses would not be able to recover from insurers, leaving investors to bare the costs.

What will it take to remedy the problem? It depends on how many people get sick! Probably, nothing short of a health care catastrophe which means the loss of several hundred to several thousand lives. Much like airline safety, it usually takes a major accident with significant loss of life to get either airline companies or the government to materially upgraded hardware or install new systems. The same is true for the prevention of contaminated and life threatening products imported from China. Meanwhile, investors should recognize they may own companies with a lot of contingent liabilities off-balance sheet.