10 MARCH/APRIL 2008 AIB UPDATE

Global Challenges

World Markets

World MarketsImported and exported products. China is a large importer and exporter of food products, with the amount steadily growing each year. In 2005, the total of traded food products equaled $33.31 billion, with $10.71 billion of im-ported products and $22.60 billion of exported products. In 2006, those numbers increased to $40.45 billion total food product trades, with $13.40 billion imported and $27.05 bil-lion exported. China’s top export markets include Japan, the United States, Korea, Hong Kong, Russia, Germany, Holland and the United Kingdom.China’s top importing countries include Malaysia, Russia, the United States, Indonesia, Ar-gentina and a number of others.

The most significant categories of food goods that China exports are aquatic products, processed aquatic products, vegetables, canned food, juices and drinks and processed grain products. Imported food product categories include vegetable oil, aquatic products, cereals, sugar, dairy products and processed grain products.

InspectIons and VerIfIcatIons. China’s market for inspections and verifications is second in the world only be-hind the United States. There are at least 144 legal domestic and 12 overseas verification institutes, certification training agencies, and representative offices. By June 2007, more than 390,000 certificates were issued on system management and product quality, the largest number in the world. There are 2,600 professional certification laboratories in China used to test food quality and safety. 2 More than 170,000 ISO 9000 certificates have been issued; only 10,000 of those were by foreign agencies.

On November 2007, the U.S. Food and Drug Administra-tion (FDA) published a Food Protection Plan that outlined a

The quality of life and economic vitality of any nation can be measured, in part, by the safety of its food sup-ply. In today’s global market, worldwide acceptance

of a country’s exports can bolster confidence in all products generated by its manufacturing sector. Gaining global con-sumer confidence in a nation’s economy and food market is a monumental effort that takes many years and can be a daunt-ing task. However, it only takes a minimal number of negative incidents to damage a nation’s reputation worldwide.

Due to more amicable relations, expanded economic op-portunities and faster-than-ever transportation options, United States and Chinese markets are now connected like never before. This truly global market has produced a sizeable increase in the number of import and export transactions between the two countries. However, major recalls of unsafe toothpaste and pet food contaminated with adulterated wheat gluten from China have raised doubt among the U.S. population and tainted China’s reputation. In response to these events, the Chinese gov-ernment is taking strides to ensure the safety of their products and build an improved system of supervision and design for food safety by overcoming regulatory and structural challenges that have hindered change in the past.

a Huge food market. China is a vast marketplace. As reported in 2007, China had roughly 448,000 enterprises engaged in food production. Of these, 80 percent have fewer than 10 employees and account for only 9.3 percent of the market share.1 In 2006, Chinese food production totaled $395 billion, with $27 billion in estimated exports and $13.4 billion in estimated imports. However, $284 billion of that total came from “designated scale”* producers, which a mere 5.8 percent of Chinese food enterprises qualify as.

* Designated scale refers to private industrial enterprises with annual revenue of at least two million yuan ($278,000 USD), private commercial enterprises with annual revenue of at least five million yuan ($695,400 USD), and all state-owned industrial and commercial enterprises.

MARCH/APRIL 2008 AIB UPDATE 11

World Markets

World MarketsExamining China’s Food Safety Complexities

robust strategy to protect the nation’s food supply from both unintentional contamination and deliberate attack. This plan reveals that FDA is contemplating the addition of satellite offices in a number of countries. The agency also is consider-ing using private sector inspection companies in pinpointed countries, including China.3

complex admInIstratIVe structure. Alongside the overwhelmingly large inspection market is a complex admin-istrative structure. There are 16,030 food safety supervision regions in China. The government employs 25,300 full-time food safety inspectors, 74,500 local coordinators and 106,600 food safety reporters in its 31 provinces.

China’s central government is structured in a way that clearly identifies primary responsibilities, as related to food safety, for each department. The central government is called the China State Council, what we might compare in the United States to FDA. Within the State Council are five administrations, each with a unique assignment. 1. Administration of Agriculture — governs agricultural

production2. Administration of Quality, Supervision, Inspection and

Quarantine (AQSIQ) — governs quality and hygiene of food processing, as well as imports and exports of processed foods and agricultural products

3. Administration of Industry and Commerce — governs food distribution

4. Administration of Health — governs catering and food service

5. Food and Drug Administration — governs regulatory policy, approval and supervisionThere are two supplementary departments in place to

oversee and enforce the policies as established by the five State Council administrations. The Certification and Ac-creditation Administration of China (CAAC) coordinates

inspections of food companies, acting as a regulatory watch-dog. The China Certification and Accreditation Association (CCAA) issues disciplinary action and imposes penalties for noncompliance.

Apart from the China State Council, there are thousands of non-governmental organizations (NGOs) and associations at the national, regional and local levels. Although a centralized regulatory framework for food safety is in place, enforcement at local or regional levels is very difficult, thanks, in part, to the country’s own geography.

Regulation of food safety can be difficult partly because of the physical separation between rudimentary enterprises largely located in the less-developed interior, far from the well-developed, mostly coastal regions and the State Council headquarters in Beijing. However, most of the difficulty is due to the use of subcontractors and the “trickle down ef-

fect.” Major food companies may hire several subcontractors to provide an ingredient or service, which in turn might hire their own subcontractors and so forth.

Before long, the main food company has lost control and is unsure of exactly where its raw materials originated. This is why traceability and record keeping are such valuable practices.

At the central government level, there are 1,800 national food safety standards. At the local level — the equivalent of the state level in the U.S. — there are 7,000 standards. Industry associations add to the number and impose another

By Kerry Beach

China’s market for inspections and verifications is second worldwide only to the U.S. The country has more than 150 agencies

operating within its borders.

12 MARCH/APRIL 2008 AIB UPDATE

2,500 industrial standards. Most significantly, there are an ad-ditional 140,000 enterprise standards that are enforced as specific company standards.

sIgnIfIcant regulatory eVents. In the past 13 years, there have been several significant regulatory actions China has taken to make improvements to food safety. In October 1995, the Food Hygiene Law of the People’s Republic of China (PRC) became effective. In August 2001, CAAC was established to coordinate food company inspections. The CAAC did not go into effect operationally until November 2003. In 2004, the government passed a Decision on Future Strengthening of Food Safety Supervision.

CCAA was set up in September 2005 to enhance self-discipline and promote industrial overhaul. That same year, China liberal-ized its certification and accreditation market in line with a World Trade Organization commitment. In September 2006, the China Certification and Accreditation Individual Self-Discipline Pact was made.

Most recently, in October 2007, China published a Strength-ened Food Safety Law, which was approved in principle by the government, in response to a number of serious food recalls. This is one of many steps China is taking to improve it food safety systems and repair its regulatory framework.

certIfIcatIon process. Until the mid-1990s reforms, China’s food safety was under-regulated and weakly enforced, with industrial authorities largely responsible for certification. In the mid-1990s, certification institutes separate from indus-trial authorities were formed as independent agencies. Today, certification is conducted by large state-owned agencies that are in charge of China Compulsory Certification and other national verification programs of management systems, product quality and commodity safety. Leading state-owned agencies include the China Quality Certification Center (CQC), the China Quality Mark Certification Group and the China Great Wall Quality Assurance Center.

Additionally, all Chinese products exported to Europe are

regulated by the European Union (EU) to be inspected by a third-party, the European Certifying Organization and are issued European Conformity Certificates. As previously mentioned, FDA currently is contemplating placing satellite offices in China, as well as mandating third-party inspections for companies ex-porting to the U.S.

In 2001, AQSIQ introduced its now widely recognized QS mark and logo. Up to then, China was flooded with many “seals of approval,” many of which were dubious. In response, the QS mark and logo was created, covering 16 categories of food, including the grain-based categories of biscuits and instant noodles. Food production companies must obtain a production license and ap-proval before displaying the logo, which is now widely recognized throughout China. There have been 71,000 licenses issued to date, accounting for 95 percent share in the 16 food categories. At the inception of the program in 2001, there was a 61 percent approval rate. In 2007, that rate rose to 95 percent approval.

problems of fraud and Illegal certIfIcatIon. Though the Chinese government is diligent in regulating food production, there have been challenges in establishing an industry-wide culture of food safety and ensuring that unlicensed products do not reach consumers. Nearly half of China’s food processors have improper licenses and at least 164,000 have no license at all. Compounding this problem is a seemingly low sense of social accountability in the country’s command and control regime.

In 2007, several disciplinary actions were taken in an effort to garner a national elective conformity to law in China. In January, the CAAC and CCAA shut down five illegal certifying

Audit Improvements

China is a vast marketplace. As reported in 2007, China had roughly 448,000 enterprises engaged in food production.

Global Challenges

In China they think of doing business with people. It’s nearly impossible

to advance in the Chinese food industry unless you ‘know people.’

MARCH/APRIL 2008 AIB UPDATE 13

institutes, including: • GreenMarketCertificationandAdministrationCommission

of China• ChinaQualitySafetySupervisionandAdministrationCerti-

fication Center• ChinaQualityCertificationStandardAssociation• ChinaProductQualityCertificationCenter• GreenEnvironmentalProtectionIndustryCertificationCom-

mission of China

That same year, in May, the National Committee for Oral Health (NCOH) was shut down. For 18 years, it was supported by companies seeking its certification, including Procter & Gamble and Lotte Chewing Gum. Perhaps the most surprising and drastic action was delivered in July 2007 when Zheng Xiaoyu, head of China’s Food and Drug Administration, was executed as punishment for taking bribes and allowing approval of a drug that caused several deaths among patients. These punitive actions gained global attention and represented China’s serious commit-ment to protecting and assuring its food and drug supply, as well as penalizing fraudulent activity.

food safety key consIderatIons. In recent years, the government has made significant strides to prove that it is sincere in its efforts to create and enforce a superior infrastructure of food safety.

China is open to foreign food safety and consumer goods inspection companies, but official certifications are government-controlled and government employees conduct inspections. How-ever, ISO and Global Food Safety Initiative (GFSI) certifications typically are required for global trade, along with other schemes and programs both public and private. The AIB Good Manu-facturing Process inspection also is establishing itself in China because of its international reputation and acceptance.

There are a few key features of the Chinese way of life that have an overriding importance on its food industry. First, China has a pledged commitment to market and culture. This is evident in the recent measures taken to rebuild confidence in its food products. Second, the nation is committed to its employees. China does not outsource, as some other nations do. The country is loyal to employing Chinese citizens to inspect and enforce its regulations.

Finally, guanxi is paramount. This term for Chinese-style networking involves building long-term relationships and connections based on mutual trust and reciprocity. In the U.S., we think in terms of doing business between companies; in China they think of doing business with people. It’s nearly impossible to advance in the Chinese food industry unless you “know people.”

aIb’s response. AIB International is committed to protecting the safety of the global food supply chain and delivering high value technical and educational programs. We are investing in China’s food industry and supply chain to the United States and other developing markets worldwide.

Global Challenges

Prior to the recent product concerns, AIB has been building a trusted reputa-tion in the Chinese food industry. We have had a business presence in that country since the 1990s, and are performing audits at a rapidly increasing rate. In November 2007, we presented seminars on food safety in Beijing and Shanghai with enroll-ment numbers totaling 40 and 97, respectively.

In 2007, AIB also opened an office in China to help promote the integrated systems of GMPs, food safety (HACCP) and quality. This office supports the audit business we already conduct in China and promotes AIB’s inspection and education programs throughout the country. Our goal is to hire and train our own Chi-nese employees on the principles of food safety and AIB methods. We desire to be a relevant part of the inspection and validation scheme in China to provide confidence for our customers.

conclusIons. China is the same size land mass as the United States, with nearly four times the population. Many parts of the country still are underdeveloped. This developing country has an ever-evolving food industry, but the Chinese government has shown a sincere commitment to improvement. Since 1995, China has been building a regulatory framework of enforcement, similar to the regulatory changes the U.S. made in the 1950s and ’60s with the introduction of the Food, Drug and Cosmetics Act and the GMPs.

In 2005, China was approved to join the World Trade Or-ganization, which has compelled it to enforce its food safety standards. We should realize that the internal strides the country is taking to improve food safety and quality eventually will effect improvements on its exported foods.

Regardless of the changes China is making to its regulatory inspection and certification framework, U.S. companies need to realize that third-party inspection is essential. Due diligence is a critical element in the food industry, because you can’t rely on a foreign government to do your work. As an importer, you are responsible for your own food safety. AIB

The author is Publication Coordinator, AIB International.

References:1. White Paper on Food Quality and Safety. China Daily. Xinhua.

August 18, 2007. http://www.chinadaily.com/bizcina/2007-08/18/content_6032837.htm.

2. Quality Matters. China Business Weekly. Volume 22 No. 331. September 10-16, 2007. www.businessweekly.cn.

3. Food Protection Plan: An Integrated Strategy for Protecting the Nation’s Food Supply. US Food and Drug Administra-tion. November 2007. www.fda.gov/oc/initiatives/advance/food/plan.html.