Death by a Thousand Regulations: China's Policy of Legislative Attrition

Takehome:

• Over the last 4 years while living and studying in China, I have read, edited, analysed and written several thousand articles on Chinese legislation and regulation related to China's food, chemical, cosmetic and agrochemical sectors. I have spoken to hundreds of SMEs and multinational enterprises exporting or considering exporting to China and worked on China market access feasibility projects for hundreds of finished products and ingredients.The most important conclusion I have drawn is that attempting to interpret regulatory trends without the market context is very unwise.
• China's major regulations for its food sector make a lot more sense when interpreted in light of their impact on global trade, China's domestic market and its trade balance. This is particularly true of China's food sector over the last decade, which at a domestic level was ravaged by scandal and faced with a generation of China's globalized middle class determined to buy safe (read as imported) foods.
• The model I use to analyze and predict future movement (yup i can see the future:) in China's food sector is China's infant formula sector. In this sector China is "skirting" the boundaries of what is considered fair under WTO technical barriers to trade requirements, but will still remain the blueprint for Chinese policymakers moving forward.
• Historically speaking, by and large, all China's food safety issues in the IF and dairy sector were of its own making. Domestic technical capacity issues, poor product differentiation, poor animal husbandry, lack of R&d, poor pasture management and substandard product processing were all compounded by a lack of an efficient system of pre- and post- market checks and balances to adequately inspect domestic IF products.The quality and safety of European, Australian and New Zealand infant formula and dairy has never really been called into question.... Why impose such strict regulatory requirements on international IF enterprise? If it wasn't broke then why fix it ? I guess the old adage of follow the money holds particularly true here...
• I would question the long term implications of government's sanctioning Chinese enterprise to buy up large areas of land, milk processing facilities, farms and large stakes in domestic enterprise while simultaneously permitting their own SMEs exporting to China to suffer a slow death at the hands of China's regulations. We have seen numerous international infant formula and dairy SMEs squeezed from China's market in this way.....
• Plans are already in motion to implement the same strategy of regulatory selective pressures and aggressive international business expansion in China's wine and honey sectors. So we can expect a similar fate for many SMEs exporting wine and honey to China?
• If you look at China's food safety policy from a multi-sector perspective its pretty clear that regulations in tandem with aggressive international business expansion are the tools China is using to engineer favourable trade balance. It is telling how well "high risk" food sectors ( IF, FSMP, health foods, etc.) correlates with "high $$$" and how China will ensure its interests are protected in trade of high value finished products like IF, wine, honey etc.
• Regulation combined with the rapid digitalization of China's supply chains over the next several years will mean that the destabilizing pressures of daigou/haitou trade will recede and then disappear. Chinese domestic enterprise will have access to overseas raw materials, own or have large stakes in the brands of highest reputation, have an extremely convenient and user friendly digital marketplace, will use expedited logistics and customs clearance via CBEC, have extremely user friendly crossborder traceability systems in place that integrate with mobile apps and mobile payments systems. The daigou and haitao traders don't stand a chance.....
• Over the next several years China's food sector policymakers will have successfully dealt with China's most pressing issues of 1) the destabilizing influence of daigou/haitou trade 2) influx of foreign finished products 3) domestic food safety issues ....

Standing on the Shoulders of Giants: China Becomes a Global Player

China accession to the WTO was granted in 2001 and built on the foundations of the previous generation's great sacrifice during the industrial and agricultural revolutions and the great economic reforms and opening up of the 80s. The final acceptance of China's petition to join the WTO signified yet another great milestone in the country's meteoric rise to world superpower and paved the final steps for China to become the great nation it is today.

Quid Pro Quo ?

China's accession to the WTO (which was in 2001 viewed as somewhat of a gambit) has more than paid off for China. It has benefitted hugely from its ability to freely export the finished products of it unmatched industrial engine, allowing it to amass great wealth which it has invested wisely in education, research and development etc. China has developed an environment which is now spawning great innovators like Jack Ma who are ushering in yet another metamorphosis.

The China that emerges will be the world leader in digital supply chain integration, cashless payments, food safety, traceability and ultimately a very different China from the one that we now know. But has it gone about this fairly ?...Is it paying forward the benefits of WTO accession and bilateral trade or is it throwing about its financial weight and manipulating its regulatory framework unfairly?

Reverse Engineering and Innovation Lag: Copy, Learn, Improve......Innovate

China is now a legitimate global innovator but it wasn't always the case. While the west was pointing fingers and calling into question China's propensity to produce and dump low quality products and copies in global markets, reverse engineer western innovation and often simply ignore copyright laws, China kept its head down and stuck to a simple plan of mass producing cheap and cheerful copy products for a global market that couldn't get enough. Now China is changing tack and is attempting to integrate increased emphasis on internal consumption with its historical reliance on exportation and primary/secondary industries. It has grown rich beyond all expectations through excellent economics but will it afford its trade partners similar access to its markets ?

Avoid Becoming a Victim of Its Own Success: Chasing the Chinese Dream

In 2017 China is a vastly different place to the China of 2001 and the basic economic paradigm which catapulted it to the forefront of the global economy is becoming redundant. Its government faces new challenges to balance China's economic and social challenges while maintaining its impressive growth. One of China's biggest hurdles is ensuring it doesn't become a victim of its own success.

It's hard to argue with China's methods, it is an unprecedented success economically and has elevated the fortunes and living conditions of hundreds of millions of its people in an extremely short period of time. China's success is still somewhat of a double edged sword and with China's increased living standards, education and globalization comes greater expectations. The Chinese dream brings with it the expectations of better food, better cars, better phones, better homes and when the expectant are 300 million strong they represent a massive economic force in China that must be carefully handled so as not to undo all of China's hard work. While China perfected the ability to mass produce the cheap, this new middle class has grown to demand the finer things in life...

For China's next big step forward it must harness the spending power and expanding tastes of this expectant middle class demographic and it must do so while protecting the integrity of its domestic enterprise and overall trade balance . To do all of this China is finally casting aside all vestiges of the communist hammer and sickle mentality for a new and improved "capitalist trident" so it can implement China's 3 pronged food sector trade strategy...

The 3 pronged Strategy

• Domestic Regulatory Selective Pressures: Survival of the Fittest
• International Technical Barriers to Trade
• Aggressive International Expansionism

China has become extremely adept in developing anti-competitive and protectionist trade policies within the overall spirit of WTO technical barriers to trade and this is clearly reflected in recent regulations and their impact on international food enterprise. By targeting finished products rather than commodities under the banner of protection of the health of its populace China has masterfully sidestepped outright anti-competitive behavior. The idea of free bilateral trade is now less appealing to China as its middle class increasingly look towards the west for higher quality and safer products, which China still hasn't got the hang of producing yet. A Chinese market flooded by western products isn't as appealing as a global market flooded by Chinese products and this is a major pressure facing China at the moment .....

However like the board game monopoly China has a pretty simple solution to this issue which is basically "when in doubt buy it out". A simple Google of the search term " "China buys Australian Dairy" or "China Buys New Zealand Dairy" or any number of permutations relating to land, processing facilities, wine, vineyards etc. will reveal the extent of its international expansionism. In terms of the other two areas you can check out some of my previous articles like this one or any of the ones listed below to get an idea of how it's playing the regulatory side of this 3 pronged strategy.

Further Articles on the Topics by Paul O'Brien

China's Food Sector: A Big Boys Game or Room for the Little Guys?

China Infant Formula Market: Trade Data, Winners and Losers, CBEC Implications and Trends

China Food Safety: Regulation, Markets, Stakeholder Mapping and Horizon Scanning