Christmastime in Europe often sees newspapers peppered with stories about spoils of the season shipped from China. The MP3 players, soft toys and decorations coming by boat from the East rather than by sleigh from the North are a powerful image of globalization.
If other, more sensational reports are to be believed, the ships also bring huge potential dangers to foreign shores in the form of defective goods. As a key supplier of children's toys and electrical goods, China also has the distinction of supplying most of the ones that malfunction.
"Toy safety is an emotive issue," said Clive Shelton, a UK-based product safety consultant to toy suppliers and industry bodies. "Nearly all toys are made in China and it's only the bad ones that get the press. This is particularly the case at Christmas as more inspectors are around."
China's 8,000 toy manufacturers exported US$4 billion worth of products between January and April 2006, according to the China Toy Association. The US$15.2 billion in toy exports made in 2005 accounted for 70% of the global market. Nearly three quarters of these products end up in the US and the EU.
From January 2005 through September 2006, toys and electrical goods made up over half the dangerous consumer products reported to and publicized by RAPEX, the EU body to which importers and retailers must pass information. In the same period, 48.4% of total notifications involved Chinese-made products. China is said to be responsible for a similar proportion of product recalls in the US.
Shelton is cautionary about RAPEX, pointing out that a notification is not a recall. And while safety standards are harmonized across the EU, enforcement is not. Some countries demand recalls for flaws that others do not.
Raising the bar
John Meltzer, a London-based partner at Lovells who leads the law firm's product liability team, said the rise in notifications in Europe stems from tougher product safety legislation, notably the revised General Product Safety Directive (GPSD), which came into effect in 2004.
"There is now an obligation to report and perhaps recall unfit products," he said. "Companies in the supply chain must notify and work with the authorities if safety problems come to light."
Under European regulations, a product is deemed safe only if it presents little or no risk at all. The US Consumer Product Safety Commission (CPSC) specifies a failure to comply with the standard or an unreasonable risk of injury as grounds for notification and potentially recall.
In the toy sector, large companies such as Mattel put people on the ground in China to do oversight. But when a company doesn't have a tight grip on the supply chain or relies on agents, it's harder to ensure compliance. "The agents just want to get the goods out," said Shelton.
"Sometimes they find that a product is being made elsewhere for less money. But the new place may not take as much care with the products."
Importers and retailers of consumer goods appreciate the potential consequences of this kind of activity – children choking on loose toy parts or fires started by faulty electrical wiring. But Chinese manufactures don't.
Meltzer, who traveled to China in November to brief companies on product liability, believes this is about to change.
"In the past, Chinese manufacturers have not had any direct liability for breaches of EU safety laws, but this is changing, particularly as they establish branches in Europe and sell products under their own brands," he said.
On top of potential regulatory action for failure to comply, the GPSD allows those who have bought defective products to take legal action against any company in the supply chain. The standard contract law gives companies grounds to recover costs – which may arise from a consumer claim or a recall – by suing the manufacturer.
In what Meltzer sees as an increasingly litigious environment, assets such as buildings, bank deposits, or even third-party debts held by Chinese companies in the EU or US can be seized when enforcing product safety judgements.
And the PR damage can be worse.
"These companies are developing reputations outside of China, all part of the strategy to develop international brands," Meltzer said. "Big firms cannot afford not to be aware of their obligations in Europe. For this they need effective quality control and risk management systems."
Even at home the companies may no longer be immune to prosecution. Keen to see domestic firms clean up their act and climb the product value chain, the Chinese government is showing an interest in product liability and the quality control systems and insurance policies that controlling risk entails.
In the last couple of years, China's State General Administration for Quality Supervision and Inspection and Quarantine (AQSIQ) has signed cooperation agreements with the EU Directorate-General for Health and the CPSC. Further progress was made at meetings in Brussels in December.
But, as Julie Vallese, director of information and public affairs at the CSPC, observed, change can't happen overnight.
"It's going to take a long time for Chinese manufacturers to understand everything they need to comply with."