Consequences of melamine-laced milk for China, NZ, Japan and beyond

[Originally posted, with full hyperlinks, at]
For weeks I have been tracking this latest evolving food safety scandal, but reports and reactions vary markedly across the region. Media coverage is likely to remain disparate. But the saga should provide lessons for developing bilateral and regional infrastructure to “trade up” to a more harmonized regime, better securing consumer product safety in our FTA era.
At a news conference this Wednesday the Chinese Health Ministry announced melamine limits for dairy products, but declined to provide updated statistics on those so far harmed by tainted products. In September the figures given were 53000 children sickened, 13000 hospitalised, and at least three dead from kidney stones due to drinking products made from milk that suppliers or intermediaries had bolstered with this chemical to hide the fact it had been watered down. Yet the government demands notification if Chinese lawyers decide to represent victims.

Cui Weiping, a leading Chinese intellectual, posted a blog saying she wasn’t surprised at this latest food safety scandal. In 2005 a cousin had explain how local farmers were deliberately selling pesticide-laced rice to people far away in Shanghai, yet even Cui decided that officials would do nothing if this matter was reported to them.
The Chinese government has belatedly begun to clamp down on the dairy industry, arresting 27 people in Hebei Province since investigating Sanlu, the company at the centre of the scandal. Officials are blaming farmers and milk collecting stations (Yomiuri Shimbun, Oct 1, p 5). But a local farmer has pointed out that Sanlu was a monopsonist in his village, controlling the only milking station. Farmers were subjected to huge pressure when Sanlu reduced its buying price in response to government calls to reduce food price inflation. Another farmer insists that they lacked the skills to adulterate milk. Others point the finger instead at Sanlu as well, saying that it also developed and controlled all injections into the local dairy herd, yet now complains that the milk contains excessive antibiotics residues (“China’s Dairy Farmers Angered by Accusations”, International Herald Tribune, 4-5 October 2008, p 5; see also “China’s Dairy Farmers Feel The Squeeze”, The Straits Sunday Times, 21 September, p 16).
Although this is China, so we may never know, it does seem plausible that this large joint venture company is not being investigated all that vigorously. Certainly, top leaders have avoided much scrutiny; “whether because of traditional deference to Beijing or clever state media management, public anger is directed more at second- or third-tier officials at the local level”. Yet problems seem to have been covered up for months (“China Leaders Dodge Milk Fallout”, The Japan Times, 25 September 2008, p 4). Many have suggested that this was to avoid marring the Olympics over August. After all, on 16 July Gansu Province had told the Health Ministry about kidney stones in children who had all drunk the same brand of powdered milk, but the Ministry says it didn’t establish causation until 1 September. Fonterra, an offshoot of the New Zealand Dairy Board that owns 43 per cent of Sanlu, says it learned about problems on 2 August but tried unsuccessfully to get local officials to order a recall. Instead, Sanlu began a clandestine recall, until Fonterra informed the NZ government, which in turn informed Beijing on 8 September. This led to Chinese media reports about melamine on 10 September, a comprehensive recall on 11 September, and a first news conference by the Health Ministry on 13 September. Even then, the Communist Party only permitted investigation by the most trusted media (China’s Baby-Milk Scanda”, The Economist, 20 September).
Some robust criticism has come from Singapore – of all places, some might say – with complaints that: “just like the SARS outbreak [in 2003], the latest dairy product scare merely pointed to deeper problems – decades of under-investment in essential public services, an unaccountable political system and a lack of independent channels for problems on the ground to be heard” (Chua Chin Hon, “No More Excuses, China”, The Straits Times, 24 September 2008, p A16). On Friday 19 September, milk products from China were supposed to have been recalled from the Singaporean market – although the next day when reporters challenged one of many stores that still seemed to have them, the owner replied “We’re just displaying them. We’re not selling them”! (“China Milk Products Still on the Shelves”, The Straits Sunday Times, 21 September 2008, p 1)
Taiwan also ordered a ban after melamine was found in a popular brand of coffee mix made with creamers from China (and also exported to Germany). Major retailers in Hong Kong, where at least two children have been diagnosed with kidney stones, voluntarily withdrew Chinese-made Nestle products after one tested positive (“Melamine in Coffee Mix Forces All-Out Taiwan Ban”, 23 September 2008, p A3). Cadbury recalled China-made chocolates in Taiwan, Hong Kong and Australia (“Cadbury Recalls China-made Sweets”, The Japan Times, 30 September 2008, p 4). The Philippines ordered testing of all infants hospitalized with kidney stones, Italy stepped up testing, Kenya banned all Chinese milk products, and altogether over a dozen countries introduced such bans or took other counter-measures (“China Leaders …”, idem). By 1 October, China’s food safety administration had found melamine in 31 further batches of milk powder, nine produced by Sanlu but bringing to 20 the total number of producers of contaminated products. And the Hong Kong food safety agency reported that its tests had found melamine also in a Japanese-brand (“Lotte Cream”) cheese cake made in China (“Food Scandal Expands at Dairies and in Hong Kong”, 2 October 2008, p 3).
It is fair to ask what was known by the Japanese government until September about possible problems with Chinese milk products, given Japan’s keen interest in food safety in China after the imported gyoza (dumplings) scandal. Yet that very media attention in Japan makes it unlikely that much was known, but covered up, by Japanese authorities unwilling for example to reignite food safety disputes during the Beijing Olympics. On the other hand, any détente seems to be well and truly over. Almost every day Japanese newspapers carry another story about more melamine found in a range of foods sourced from China. But this is partly a positive sign, reflecting belated but better testing. And so far there have been no reports of health problems in Japan, because most contaminated products are aimed more at adults and less regularly consumed than infant milk formula.
On 30 September, for example, Kyoto health officials reported tainted pastries made by an Osaka company (Marudai) from milk imported from the large Yili dairy company, sold to two nursing homes (“Tainted Food Found in Nursing Homes”, The Japan Times, p 2). They also found problems in goods carried by 9 other supermarkets and retailers, and therefore set up special information counters in the Town Hall and health centres (“Melamin Mondai Sodan Madoguchi Kaisetsu”, Kyoto Shimbun, p 27). A large trading company (Kanematsu) then reported that its egg tart cake had been found to contain smaller quantities of melamine (“Reito Kashi kara Meramin”, Kyoto Shimbun, 2 October 2008, p 29). Small quantities have also been found in takoyaki (octopus balls) imported through a Tokyo company (“Takoyaki kara Melamin Kenshutsu”, ibid, 8 October 2008, p 25). Another Osaka importer (MS International) has apologized for being ordered to recall one product, and announced a “voluntary” recall of four others. In the press conference, interestingly, the president claimed not only that the Shanghai manufacturer “had used milk products from NZ and Australian companies”, but also apparently that melamine had been found in Korea in milk powder exported by a New Zealand company (“Melamin Gashi – Kensa-chu 3-shohin mo Kaishu”, 5 October 2008, ibid, p 31).
Surprisingly, however, the Japanese media does not seem to be reporting that Sanlu itself is 43 per cent owned by a large New Zealand company. Let alone the role the New Zealand government played in spurring the Chinese authorities into clamping down on the problem, however belatedly. That role was exercised in the context of the new China-NZ FTA, even though it does not expressly provide for regulatory collaboration in such situations. This highlights an important issue as Australia and Japan negotiate their own FTA, and for other countries joining the FTA bandwagon as well, especially in potential broader groupings involving China.
First, these countries should build in express obligations for each government to notify the other as soon as they become aware of serious product safety problems, involving not only goods exported from the home country but also those produced by major investment vehicles in the other that are partly owned by home country firms. Secondly, to make this work better, each country must impose obligations on its own firms to notify its own government about serious accidents related to such products. In some countries there may already exist such obligations for certain goods, such as foodstuffs or automobiles, at least for the company’s own goods. But New Zealand (and Australia) have not yet followed the lead of the US, the EU (more efficiently since 2004), Japan (since 2006) and Canada (this year) regarding general consumer goods. Major exporters and investors overseas that are keen to protect their global reputations, like Fonterra, should be keen to promote this sort of example of what Berkeley Professor David Vogel famously described as ‘Trading Up’ (Harvard UP, 1995). And it should help bolster the overall utility and legitimacy of FTAs, especially in countries like Japan that retain powerful agricultural lobby groups liable to seize on problems with foods imported from anywhere to resist further agricultural trade liberalization – full stop.

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.