China-U.S. Trade Law

Editor's Note:  Sally Qin, the author of this article, is a law student at the University of Minnesota who was a summer associate at Baker & Hostetler LLP during the summer, 2010.

The Current State Of Consumer Product Safety Relations

The United States Consumer Product Safety Commission (“CPSC”) has adopted several measures in 2010 to increase scrutiny of imported goods and impose higher penalties for products that fail U.S. safety standards. The principal impetus for these measures has been suspect imports from China.

Backed by stronger funding and new inter-agency cooperation, the CPSC seeks better protection for American consumers primarily through more vigorous enforcement of U.S. safety laws. As Robin Harvey and Lourdes Perrino observed in a prior article on this blog , since the signing of a Memorandum of Understanding between the CPSC and Customs and Border Protection (“CBP”) in April 2010 (“MOU 2010”), the CPSC has been posting inspectors at U.S. ports to enforce consumer product safety regulations. When goods are detained and rejected at the border, destruction, rather than re-exportation, now becomes the default mechanism for U.S. Customs.

MOU 2010 followed CPSC’s release of a final interpretive rule in March 2010 to address civil penalties in the Consumer Product Safety Improvements Act (“CPSIA”). Under the CPSIA, the maximum penalty for each knowing violation of the statute increases from $8,000 to $100,000, with maximum penalities for any related series of violations increasing from $1,825,000 to $15,000,000. CPSC interprets “violator,” those subject to these penalties, to be “any person,” including sellers, distributors, manufacturers or any legally responsible party who committed a knowing violation of the statute. The CPSC does not have to prove actual knowledge of the violation to make the violation “knowing” and impose penalties: “constructive knowledge” is enough.  (Constructive knowledge is the inference that, by law, some party is aware of the circumstances, if only he were to exercise reasonable care and diligence.)

The changes in penalties for violations of consumer product safety laws arose in a political atmosphere charged with complaints about Chinese products. Although the law will not discriminate among the products of different countries, the overall heightened scrutiny will be felt most by Chinese manufacturers and exporters. It is now altogether possible that Chinese manufacturers, failing to exercise due diligence, could experience bankruptcy in the seizure and destruction of their goods and the assessment of penalties in the millions of dollars. It would not then be surprising were the Chinese Government to complain of protectionism and retaliate, triggering another round of profound misunderstanding in the bilateral trade relationship.

Memoranda Of Misunderstanding: What Might Have Been

MOU 2010 between the CPSC and CBP came some six years after another consumer product safety Memorandum of Understanding (“MOU 2004”), between China and the United States. Had MOU 2004 fulfilled any of its promise, MOU 2010 might not have been necessary. Certainly it might have taken a different form. The emphasis on enforcement has followed a period of failure in promoting promised cooperation. Both MOU have raised reasonable doubt about the meaning of “understanding.”
 

The CPSC and its Chinese counterpart, the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (“AQSIQ”) signed a Memorandum of Understanding in 2004 that lists the measures both parties could take to ensure the health and safety of consumers. Although these measures do not exclude increased national enforcement, emphasis in the MOU is on cooperation.

MOU 2004 contains a list setting out the scope of the products concerned, and establishes an information exchange mechanism for China and the United States. The MOU pledges to “address safety problems of consumer products through consultation.” Both China and the United States agreed to consider the inspection results obtained by laboratories each one was to authorize and to participate in training laboratory and inspection personnel for each other.

Had MOU 2004 been followed faithfully, the recent dynamics of bilateral consumer product safety issues likely would have been very different. The CPSC and AQSIQ could have made public a common list of recognized laboratories, encouraging manufacturers in both countries to participate in inspection and testing from these domestic laboratories. They could have organized systematic training of laboratory and inspection personnel to address emerging product safety issues. They could have moved toward common standards and expectations for consumer safety.

Conscientious implementation of MOU 2004 should have reduced bilateral mistrust and improved consumer safety in both countries. A Chinese manufacturer with doubts about whether its product would satisfy U.S. consumer product safety standards would have sought assistance from AQSIQ to request the CPSC to send inspectors to conduct on-site inspections and testing in China. MOU 2004 would have made such on-site inspections in China by American personnel at AQSIQ’s expense. The Chinese manufacturer could have shipped products to the United States confidently, without fear of detention, denial or destruction of the goods, and without fear of a harsh financial penalty. (MOU 2004 provides, “4, The participants are to address safety problems of consumer products covered in this MOU which are manufactured in the country of one Participant and sold in the country of another Participant through consultation.”) CPSC, for its part, would have been better positioned to carry out its statutory purpose, preventing substandard products from entering the United States and transferring inspection expense to the Chinese. There would have been less call for inspectors at U.S. ports because more inspections would have taken place, offshore, by CPSC inspectors.

Memoranda Of Misunderstanding: What Happened Instead

Since the signing of MOU 2004, there have been only three CPSC-AQSIQ Safety Summits. At all three, documents were signed containing only vague language expressing the intention to communicate further on product safety issues. These official documents contain no specific methodology to carry out any of the underlying purposes of the MOU.
 

There have been frequent talks between the CPSC and AQSIQ since they entered MOU 2004, but they have led to no improvements in the screening of Chinese goods for U.S. Customs clearance. Instead, both countries have become more defensive about the quality of products and inspection regimes. AQSIQ complains privately that the CPSC does not trust Chinese producers and officials, which means that the confidence-building prescribed in MOU 2004 has failed.

Credit is owed the CPSC, which has tried hard to educate Chinese manufacturers on laws and regulations in the United States through, for example, releasing multiple articles and video clips available in both English and Chinese on its website.  However, how well these messages have been received in China remains in doubt. Chinese invitations for American inspections sometimes follow the eruption of disputes, but Chinese producers have never anticipated (or admitted to) a potential problem that would benefit from a preemptive inspection. There is still no link to the CPSC’s website on AQSIQ’s, and while AQSIQ keeps a record of international communications on its website, MOU 2004 is not available online for Chinese stakeholders to reference.

MOU 2004 was to have internationalized both the CPSC and AQSIQ, making both of them more aware and sensitive to the standards and requirements of other countries. Both agencies are, of course, inherently domestic, concerned for the safety of products as they impact their own domestic populations. However, whereas the CPSC gives great attention to imports, AQSIQ still is perceived in China to be an agency addressing predominantly domestic product safety issues. Not until recently, has AQSIQ been recognized in MOFCOM’s traditional terrain, helping to resolve trade-related disputes.

What Could Yet Happen

Chinese manufacturers need to sell in the U.S. market. Safety issues are becoming an ever more important obstacle. Benefiting from MOU 2004, AQSIQ and Chinese manufacturers could take a more proactive role in protecting their interests and the interests of American consumers. Instead of having goods intercepted in American ports, they could be inviting CPSC inspectors to conduct the same testing in China. As much as AQSIQ might feel a budgetary constraint on shifting such costs away from the United States and onto China, the net savings for Chinese manufactures could be substantial and the manufacturers could be taxed by China to pay the bills for on-site inspections.
 

MOU 2004 does not provide for this cost-shifting, and requests for inspections must come from a participating government agency, not a manufacturer. Provisions of this kind, however, have not been examined or developed since the MOU was signed in 2004, to the lasting detriment of everyone concerned.

The CPSC posts online proposed new regulations and product safety standards at least two months before a final version becomes effective, and invites public comment. On many occasions, the final regulation or standard reflects modifications based on the public comments. AQSIQ could take advantage of this open-window period and communicate with CPSC to work together on reasonable and cost-efficient regulations that would ensure the safety of U.S. consumers while making the regulations feasible for Chinese manufacturers. Such interventions, plainly contemplated by U.S. law and encouraged by intentions of MOU 2004, could move the safety issue in trade relations away from confrontation and toward cooperation.

MOU 2004 was intended to ensure more efficient and secure product safety for consumers in both China and the United States. It is a great misfortune that the outcome of MOU 2004 appears to be MOU 2010, an understanding between U.S. agencies effectively supplanting an understanding between two countries. To benefit both consumers and manufacturers in both countries, private and public sectors must work together, using MOU 2004 as a platform, pursuing not more official documents of little content, but more mutual cooperation, standardization, and reciprocal inspections. The opportunity of MOU 2004 was squandered for six years for lack of imagination and mutual commitment. MOU 2010 should be more of a warning than a conclusion, that failure in enterprises such as MOU 2004 can lead to mutual suspicion and wildly greater cost.

China, in its failure to implement MOU 2004 effectively, must share the blame for MOU 2010. Instead of fighting MOU 2010, however, China could ask the United States to return to the principles of MOU 2004. It might cost China in cash to pay American inspectors, but the payoff in good will and in long-term savings for Chinese manufacturers would easily compensate.