As consumers across the nation are struggling to cope with the burdens associated with Chinese drywall (financial or/and health), a question beginning to be asked with some consistency is, “What caused or allowed the Chinese drywall crisis to take place? . . . What are its origins?”  This two-part article will explore in brevity the backdrop of the issue, and the relationship between China and the U.S

Please Read Part I of this Article First

The SPS agreement imposes limits on regulatory standards relating to food, animal, and plant safety.[1] The TBT agreement similarly limits testing and certification issues.[2] These limits restrict adoption of appropriate health and safety standards because there is a legitimate fear that China and other countries would view such standards as barriers to trade.[3] The treatment of both the SPS and TBT agreements by the U.S., as well as by the private sector in international negotiations, sheds some light on the underpinnings of the burden that is shifted to U.S. consumers.

Since implementation of the SPS and TBT agreements, the SPS agreement has garnered the most attention.  One commentator put it this way:

“[W]hen looking through the Federal Register . . . references to the SPS agreement outnumber references to the TBT agreement by a ratio of roughly five to one.  One possible explanation for this phenomenon might be that in the United States, most top-down regulation occurs in the areas of food, animal, and plant health. Thus, most regulations covered under the TBT agreement remain within the province of voluntary, consensus-based standards often negotiated by industry members themselves.”[4]

With this backdrop, it is not difficult to observe that the U.S. approach to free-trade policy has historically sought to place its domestic businesses on an equal playing field with that of global competition.  Ensuring the safety and quality of imported consumer goods, on the other hand, has not been a recurring concern brought to the forefront of negotiations.

Now that thousands of U.S. consumers are facing financial strains and health related issues associated by the Consumer Product Safety Commission with Chinese drywall, legislators must take notice.  Imported goods from China have been flowing into the U.S. with such regularity and health and safety concerns have gone overlooked.  However, we have reached a point where it is necessary to take a step back; consumers, businesses, and government all must recognize the need for ensuring the integrity and safety of the American marketplace.

REFERENCES

[1] Agreement on Technical Barriers to Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Ann. 1A, Legal Instruments-Results of the Uruguay Round, 1868 U.N.T.S. 120 (1994) [hereinafter TBT Agreement].

[2] Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, Legal Instruments–Results of the Uruguay Round, 1867 U.N.T.S. 493 (1994) [hereinafter SPS Agreement].

[3] Rebecca Mowbray, Chinese Drywall Problems Have Spotlighted Flaws in the U.S. Legal System, The Times-Picayune, Oct. 4, 2009, available at http://www.nola.com/business/index.ssf/2009/10/chinese_drywall_problems_have.html.

[4] David Livshiz, Updating American Administrative Law: WTO, International Standards, Domestic Implementation and Public Participation, 24 Wis. Int’l L.J. 961(2007) (discussing the trend of TBT Agreements being left to industry stakeholders as opposed to Executive branch action).

As consumers across the nation are struggling to cope with the burdens associated with Chinese drywall (financial or/and health), a question beginning to be asked with some consistency is, “What caused or allowed the Chinese drywall crisis to take place? . . . What are its origins?”  This two-part article will explore in brevity the backdrop of the issue, and the relationship between China and the U.S

Globalization efforts and principles of free-trade bolstered world economies in the late 20^th century, particularly between the United States and China. The economic relationship between the two, however, evolved with an eye towards growth, expedience, and flexibility rather than domestic consumer protection.

Read an interesting article by Vicky Hu on Chinese economic reform here.

In the broadest sense, there are two issues presently confronting domestic consumers: A widespread lack of quality control and a lack of an effective remedial system when the culpable entity is a Chinese manufacturer.  Consumers who do not have an experienced attorney to represent them in complicated international matters face extraordinary obstacles.  For example, certain documents may be required to be translated into a specific dialect of the Chinese language when serving foreign defendants.

Beginning in the 1980’s, GATT tariff negotiations came under fire from some exporting business interest groups due to concerns that regulatory policies might serve as a potential barrier to trade, in a non-tariff capacity.  These groups argued that the price of exports would increase, if compliance with competing regulations were to be scrupulously adhered to, thus resulting in unfair and discriminatory results to such exporters in the global arena.  As a result of these concerns, the Uruguay Round Agreements included two components aimed at reducing these regulatory barriers.

The Technical Barrier to Trade Agreement[1] and the Sanitary and Phytosanitary Measures Agreement[2] sought to eliminate regulatory policies that were not promoted in good faith, or were arbitrarily imposed to benefit local businesses.  It seems that the intention was to combat localized practices of squeezing out global competition that were disguised as regulatory policies.[3] Measures taken to facilitate domestic protectionism in the traditional sense (i.e., to protect domestic businesses) must be watered down from the outset as a result of these limitations.[4]

For a continued analysis of these measures the their implications, please read Part II.

REFERENCES:

[1] Agreement on Technical Barriers to Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Ann. 1A, Legal Instruments-Results of the Uruguay Round, 1868 U.N.T.S. 120 (1994) [hereinafter TBT Agreement].

[2] Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, Legal Instruments–Results of the Uruguay Round, 1867 U.N.T.S. 493 (1994) [hereinafter SPS Agreement].

[3] TBT Agreement,  pmbl.; SPS Agreement, pmbl.

[4] Watered down domestic protectionism in the traditional sense is not a bad thing, as it simply alludes to the fact that free-trade is facilitated in a more efficient manner.  The problem arises at a later point in the consumer protectionism context, where the TBT and SPS agreements are so limiting upon government that certain standards are left to industries.

In 2008, nearly 80% of all product recalls in the U.S. implicated imports from China. While we, as Americans, enjoy discount products via trade with China, it is probably fair to say that most adults understand the inevitable economic notion that lower prices translates into a degree of necessary quality degradation.  In other words, the lower the price of a particular good/product/service — the more likely that it is of a lower grade of quality than a more expensive “substitute good” or alternative product.

While quality sacrifice may be acceptable in order to save cash, the safety of products in our marketplace is a virtue that must be preserved with no equivocation.  The Chinese drywall incident that is causing immeasurable amounts of damages financially, emotionally, and medically should serve as a wake-up call to businesses that deal with Chinese manufacturers.

Where do consumers draw the line with discount products?

This principle mentioned above, one of a trade-off between quality and price, is generally acceptable to a degree.  Most consumers looking for a bargain are willing to pay a lower price with the understanding that the particular good may not be up to par in the following areas:

Common *Acceptable Traits of Discount Products

• Decreased product lifespan
• Lower quality of raw materials and components (so long as the lower quality is not a safety risk)
• Lesser degree of aesthetically pleasing features
• Fewer or a total absence of  “luxury” features
• Fewer tests verifying viability/effectiveness, etc.

*the term acceptable refers to issues that consumers are willing to accept, as an implicit burden associated with paying a lower cost.  The extent or degree of the above “acceptable traits,” however, have their limits.  In no situation, is it suggested, that consumers deem safety issues “acceptable” factors to sacrifice in order to obtain a good at a lower price.

A line is drawn where products go beyond the bounds of  containing trivial flaws, and enter into a category designated as none other than dangerous, hazardous, toxic, and potentially deadly.

*Unacceptable Traits of Discount Products

• Presence of toxic materials
• Presence of chemicals, compounds, materials, NOT meant to be contained within a product
• Unreasonable defects in assembly
• Faulty children products (i.e., toys, strollers, cribs and other devices deserve greater scrutiny)
• Any defect/trait that may cause a safety issue

*The term “unacceptable traits” of discount products denotes issues that have arisen in the past with regard to defective, dangerous products.  The lists provided in this article mirror common sense.

Consumers who have been harmed in the Chinese drywall crisis currently being litigated may have understandably been unaware about the fact that U.S. based builders used defective drywall.  The pending litigation will provide insight to consumers across the country who are awaiting direction as to where and how they may seek a remedy.

Contacting an experienced attorney is advised, as any matter involving foreign defendants and emerging issues often are complex.

The legislative branch is the default means of attack for consumers in the “consumer protectionism war.”  In the context of imported consumer good product liability matters, it is the consumer who experiences firsthand the consequences of the good, and thus consumer interests – protectionism – will ultimately rest upon the shoulders of the legislature. 

One solution that has been proposed is to pass legislation that would require foreign manufacturers to post a bond, which would then be refunded if no liability issues arose.  This approach is problematic in that it is contrary to free-trade principles the Executive branch has promoted and there is a lacking means to set a suitable bond amount that would provide a remedy for consumers (especially where the goods are dispersed in such high volumes as they are from China).

A more reasonable legislative solution is on the horizon; a bill aimed at “[Ensuring] foreign manufacturers that profit from our marketplace [will be] held accountable when their products are defective.” The bill, The Foreign Manufacturers Legal Accountability Act of 2009, would require foreign manufacturers to agree to participate in litigation pursuant to U.S. jurisdiction.  Two methods of consumer protectionism are advocated in the accountability bill.  First, it would require manufacturers to designate an “agent” in one U.S. state where the company engages in business.  This agent would be the means of accepting service of process for either civil or regulatory issues. Left out of this framework is any mention of criminal law jurisdiction.  Second, and of particular importance, the bill would require manufacturers to consent to federal or state jurisdiction, where the applicable law would be that of the relevant jurisdiction.   The accountability bill would be a partial step in the right direction.  Check back with us often, as this blog will keep readers up-to-date on the status of legislative proposals as they develop.

The Chinese drywall crisis American consumers are facing  is a unique and complicated legal scenario, in that some defendants in the lawsuits that have been filed are Chinese entities.  The U.S. and Chinese legal systems vary drastically, as well as roles played by attorneys.

Where remedies between nation-states are at issue, a fundamental understanding of the functional legal systems and the roles attorneys play, specifically in the context of Chinese-U.S. relations, is necessary to understand premises behind the policies.  The Chinese justice system is arranged in a hierarchical manner; at the top of the system is the Ministry of Justice, overseer of the Department of Public Notaries and Lawyers, which in turn manages legal offices on a localized level.

All Chinese attorneys are employees of the government; there is no such thing as “private practice.”  The Department of State (DOS)  has publicly advised American attorneys that a non-traditional approach should be taken when engaging Chinese lawyers.  For example, Chinese attorneys do not play the philosophical advocate role, but instead have heightened obligations to the client and also the Chinese government. 

While some U.S. firms maintain an existence in China, it is merely a “representative” role that must be confined to economic or financial matters relating to investment in Chinese firms.  Interacting with other lawyers in the U.S./Chinese adversarial context calls for a degree of cultural adjustment.

Attorneys representing U.S. plaintiffs should approach communications with Chinese trade partners or attorneys with the premise in mind that loyalties to Chinese governmental interests come first, not the safety of American consumers.

Many American consumers are likely scratching their heads pondering the question, “how is it possible for a defective product from China to be so broadly distributed…and moreover, where and why did this oversight occur?

International import and export standards may play a role, and the purpose of this article is to examine  methods of how agreements are formed in an international business context.

The processes that exist for establishing international import/export standards includes the adoption of standards set by an internationally recognized organization, mutual recognition agreements (MRA’s), and equivalency determinations.  International organizations may approve certain standards that are in turn adopted by WTO members on an individual basis, meaning that they are applicable only to consenting states.

Second, MRA’s allow for smaller groups of traders to negotiate leeway for certain regulatory organizations to accept the decisions of the traders, while stopping short of adopting the relevant standards as applicable to others.[1] This option is perhaps the most broad, as it can be used to negotiate standards that are relatively minor tweaks to existing practices, or on the other hand, drastically modify substantive regulations.[2]

Finally, “equivalency determinations”[3] involve a state acknowledging regulations and substantive standards of a trader as being equivalent to that of its own, thus providing for a mutual common-ground position, though in the absence of a formal agreement (though equivalency determinations may in fact develop into formalized agreements over a period of time).  Equivalency has been described by one author as a member state directly communicating to another the following dialogue: “While our standards are not identical in text or in detail, we believe and agree that they provide equivalent public health protection. Accordingly, if the officials of country A affirm that a product meets country A’s standards, we will permit its entry . . .”[4] These methods are not exclusive, but have been the basic channels of international regulatory negotiation.

These vehicles of negotiating international agreements among nations and industries should be increasingly analyzed as to their effectiveness in protecting the end consumer.  As the Chinese drywall trials are set to begin quite soon, legislators and policymakers in the executive branch alike should take note of proper procedures and methods of protecting American consumers and not solely the American economy.

[2] Richard A. Merrill, The Importance and Challenges of Mutual Recognition, 29 Seton Hall L. Rev. 736, 740-41, 751-54 (1998).

[3] Id. at 753.

[4] Id.

Unlike the legislature or domestic distributors, U.S. courts are not in a place to proactively promote consumer protection until it is faced with a particular matter.  That is not to say interpretation of legislation or treatment of matters properly before a court can not be useful in setting precedents or sending messages.  Unfortunately, when foreign defendants fail to respond to service of process requests, courts have limited options outside of a finding of contempt. To find an entity in contempt means little to an exporting businesses, already having demonstrated complacency toward the prospective litigation.

The bases for suing foreign defendants in U.S. courts in consumer product liability matters are numerous.  U.S. consumers and the lawyers they hire are much more acquainted with the U.S. system in general, but the primary concern is one of damages.  While litigation in China is more expeditious than in the U.S., consumers would likely recover much less. In the context of defective drywall as an illustration, a Chinese court might order a defendant to pay for reimbursement of the defective product rather than providing for consequential, incidental, or punitive damages.  As U.S. courts grapple with the complexities at play, the issue of consumer protection as a whole is outside the scope of what the U.S. court system can actually accomplish.  The director of the Public Citizen’s Global Trade Watch division asserts that, “[D]angerous products from overseas goes beyond the U.S. court system to the nation’s international trade agreements, which view health, safety, and environmental standards as trade barriers”  The U.S. court system can exercise its authority as best it can, but at the end of the day it will be the legislature and Executive branch that dictate the progression and development of consumer protection principles.

The global recession has raised allegations of “dumping,” which is the practice of charging a lower price for a good in a non-domestic market than the price charged in the manufacturer’s own.

Chinese subsidies to manufacturers, coupled with very low wages paid to factory workers,  have had two apparent consequences:

First: low quality goods have become a norm in the American marketplace.

Second: millions of American jobs have been lost as a result of the ensuing trade gap.  Such subsidies lead to dumping as well as unfair competitive advantages that harm U.S. business.

Clearly, as illustrated by the current Chiense drywall crisis, greater scrutiny is needed when U.S. suppliers contract with Chinese manufacturers.  In addition to this ideal industrial duty, the U.S. government ought to enforce protective policies.

To restrain subsidies that aim to bolster the People’s Republic of China’s economy would be both nonsensical and beyond the scope of U.S. authority, but it is pointed out as a factor to be taken into consideration when negotiating trade agreements or contracts with Chinese owned entities.  A measure with more feasibility – the obtainment of knowledge of a particular subsidy amount paid to an entity by its government.  Requiring the disclosure of subsidies would allow for a more useful characterization of the foreign business in question.

The WTO Agreement denounces dumping, but does not specifically proscribe it.*   The WTO does, however, allow members to take initiatives against dumping.  Specifically, The Anti-Dumping Agreement allows for the imposition of extra import duties in an attempt to level prices and preserve the integrity of domestic competitors.   The DOC indeed took such action in 2009 by imposing duties for imported “oil country tubular goods” from 37 Chinese companies.  The dumping practices by Chinese entities are but one illustration of the unforeseen consequences resulting from free-trade negotiations lacking detailed foresight.

*Peter Van den Bossche, The Law and Policy of the World Trade Organization 42 (Cambridge University Press, 2005) “Dumping, i.e. bringing a product onto the market of another country at a price less than the normal value of that product is condemned but not prohibited in WTO law.”

Over the course of the previous century, the United States and China have been engaging in an economic relationship premised upon free-trade and cost-effectiveness.  The almighty dollar has had dire consequences upon the American economy and the American consumer.

“In today’s global environment whoever manufactures products better, cheaper and faster, wins.”

Consumers in the U.S. are not alone when it comes to China; in response to Indian authorities’ questioning of the quality of goods imported into India in a recent instance, China’s consul-general Mao Sewei admitted:

“[The] goods imported to India were of very poor quality . . . even people in China do not buy goods of such poor quality . . .”

There has been an undeniable migration of manufacturing from the U.S. to other countries in the past decade.  Author Jim Pinto summarizes the situation…

“[I]n the U.S. today, big factories are despised and penalized with high taxes, strict zoning regulations and infinite bureaucracy.  ‘Not In My Backyard’ attitudes are driving manufacturing offshore [whereas] . . . China and many other countries seem to be inviting industry with open arms and deferred taxes.”

As the U.S. economy has grown since the 1940’s, manufacturing’s portion of the employment base decreased from 32% in 1947 to just 11.5 % in 2002.  Droves of U.S. manufacturers, such as Rockwell, Emerson, and GE are shifting production plants to global locations in China, not just because of cheaper labor, but also due in part to rules that Chinese counterparts do not face.  These rules, viewed as factors that diminish profit, are liberties that Americans expect in jobs.  Examples include worker’s compensation, an increased expectation of benefits, and family healthcare coverage.  Author and economic expert Oded Shenkar states;

“If you still make anything labor intensive [in the U.S.], get out now rather than bleed to death. Shaving 5% here and there won’t work. You need an entirely new business model to compete.*

[*See Oded Shenkar, The Chinese : The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Wharton School Publishing; 1 ed. Feb. 10, 2006).]

The ever-growing number of homeowners in the U.S. realizing they have Chinese drywall contaminated homes has prompted an influx in cases where homeowners are reporting instances of uncooperative insurance companies.  An expert from a hearing headed by the National Association of Insurance Commissioners Catastrophe Insurance (NAIC) stated that the denial of claims may be an incorrect practice. (Source: News Inferno)

The issue seems to be one of exclusions – what is or isn’t covered under an applicable insurance policy contract?  Of course, the answer depends on the contract in question and will vary from consumer to consumer, circumstance to circumstance.  The issue being exclusions, however, has been raised by some companies as being applicable to Chinese drywall by way of labeling the presence of it as “pollution” – courts however, require for the exclusion to apply it must be narrowly construed to “traditional environmental damage.” How then, can Chinese drywall be considered to be excepted by a “pollution exclusion theory” when the term “traditional environmental damage” seems to suggest something occurring either naturally and/or externally, bearing some relationship to the “environment.”

Additional exclusionary grounds relied upon by insurers include a category known as “latent defect and inherent vice exclusions.”  Such exclusions are meant to address damage the property causes to itself.  The reason why this doesn’t make logical sense is due to the fact that Chinese drywall damages are not merely limited to the drywall itself but rather has been exemplified to produce far reaching effects (i.e., foul odors, respiratory issues, and in this context, corrosion to metals in the home like HVAC units).