Importers of Goods Manufactured in China

Can Expect Higher Quality Products

Because of The Product Quality Law

By Steven Pollack

April 23, 2006

Products manufactured in China have long been associated with poor quality.[1]  Importers of goods from China can expect, however,  a general improvement in the quality of merchandise because of the enactment of the Product Quality Law of the People’s Republic of China (PQL).  While this law promises a lot in terms of improving the quality of goods produced in China, importers should take a closer look at the specific mechanisms at how the law will achieve its goal.

The PQL protects the rights of users and consumers of Chinese produced goods.[2] While not specifically delineating between end consumers and intermediate purchasers like importers, it is generally thought to protect business purchasers in addition to consumers.[3]  The PQL does allow for contribution from the producer if the seller must compensate a consumer under this law.[4]  It would therefore make little sense if the intermediate seller could not act directly against the producer before the harm was done to the end consumer.  Other parts of the PQL mandate that the seller inspect the goods being sold so a seller cannot knowingly pass on defective goods of the producer.[5]  The seller can therefore seek compensation from the producer if, upon inspection he finds a defect, without waiting for an action by the consumer and then acting against the producer.

        One mechanism for improvement in quality is found in parts of the PQL reflecting the Confucian history of Chinese law.  Confucius taught that the law should be used as a guide for people to order their affairs.  The law thus acts to set expectations for ones own behavior and for others.

Under Confucian teaching people will naturally aspire to act honorably, so the laws should provide citizens a method of instruction rather than being used as a private cause of action.  Parts of the PQL promoting mediation and negotiation reflect this view of human nature and also foster a desire for ongoing relations.[6]  Other parts of the law add specificity as to what traits a quality product should have.[7]

Western importers may not have as much faith in the aspirations of people generally and will focus on the private causes of action enumerated in the PQL.   Direct access to courts is generally referred to in the west as rule of law.  While the rule of law may inspire some trust in conducting  distant commerce it suffers from many of the same failings in western courts.  Local bias, uneconomic return on litigation, and the ruin of ongoing relations make rule of law a blunt instrument for resolving disputes. 

Finally, the state oversight provisions found in the PQL may be the best compromise between the aspirational Confucian leanings of the east and the rule of law of the west.  The administrative oversight and criminal provisions of the PQL are based on the relation between the enterprise and the state.[8]  State control over industry is usually labeled by the west as socialist.  While socialist control over industry might be seen as a lack of faith in the guiding hand principle[9] of unfettered capitalism by some absolutists, a pragmatic look at western systems will show parallels with government oversight through agency regulation such as the Federal Trade Commission and actions by state attorney generals. 

Such oversight helps retain the relationships ruined through rule of law litigation, spreads out the cost and benefits of product quality enforcement, and strengthens the guiding principles of law as envisioned under Confucian teachings. 

Confucius and the Aspirational Value of Law

Confucius was a scholar and philosopher (551 B.C. – 479 B.C.) whose teachings have greatly influenced the ordering of Chinese society.[10]  This teaching provides a framework for the just resolution of conflict without resorting to the courts.[11]  From his time as a judge Confucius states “in hearing litigation, I am just like other judges.  What is necessary, however, is to cause the people to have no litigation.”[12]

So entrenched had the no litigation philosophy become in Chinese political thought that the amount of litigation has been used in the past as a metric for evaluating the capability of local officials.[13]   One story recounts a rise in litigation for the Dongjun district in the Xi Han Dynasty.[14]  The governor, Han Yanshou, perceived this as a personal failing in building the proper foundations of morality.[15]  Consequently he stayed home to scrutinize the failings leading to the increased litigation.[16]  The litigants then perceived their own failings and there were no more cases heard during Han Yanshou’s time.[17]

The people obviously had the sense to avoid litigation once the level had reached certain proportions so the problem was not the propensity for litigation by the people. The failing was therefore of Han Yanshou  in failing to create the institutional framework for the people to direct these conflicts in a harmonious way. 

The PQL announces several methods of dispute resolution, as remedies, that create the institutional framework to avoid litigation.  One is that the purchaser of a defective product can negotiate or mediate their claim.  The law thus announces remedies that the participants already had at their disposal in the absence of the law. 

Article 47 states:

Where a civil dispute concerning product quality arises, the parties concerned may seek a settlement through negotiation or mediation. If the parties are unwilling to resort to negotiation or mediation, or negotiation or mediation proves to be unsuccessful, they may apply to an arbitration organization for arbitration as agreed upon between the parties, if the parties fail to reach an arbitration agreement or the arbitration agreement is a invalid one, they may bring a suit directly before a people's court.[18]

While it might seem strange to a westerner looking for the remedies available at law to find permissive remedies like negotiation and mediation, it does serve to remind the importer that there are viable options short of litigation.  The courts in the US likewise perceive the value of alternative dispute resolution over the use of courts to settle disputes. [19] Federal courts often mandate court annexed mediation conferences prior to trial[20] and family courts are beginning to also order family mediation as part of court proceedings.[21] 

Negotiation and mediation are therefore  increasingly seen as preferable to judicial intervention to resolve disputes by the courts of both the west and the government of the east.    Whether it is called Confucianism or rationing of scarce judicial resources, alternative dispute resolution should not be discarded as an ineffective way of conducting business at a distance.

The difference between the PQL and the courts of the west seems to be in timing of these alternative dispute resolution methods.  The wording of the PQL seems to indicate that negotiation and mediation must be considered prior to arbitration and that only after the failure of arbitration may parties bring an action to the court.   In the west, the philosophy that anyone may sue anyone for anything leaves the courts to sort out the meritorious cases from the frivolous.  The courts of the west have already expended resources by the time it becomes clear the issue is better suited for alternative dispute resolution.

The ordering of remedies in Article 47 also indicates a preference for resolution without court intervention.  Only Article 47 deals with private civil disputes.[22]  Article 47 lists the private remedies in an ascending order of intrusion into the independent relations of the parties.  Negotiation, a normal course of business conduct, is listed first.  Mediation involves a third party to bring the two parties to a mutually agreeable solution.  Arbitration is listed next as an alternative only when the parties are unwilling to negotiate or mediate. 

Arbitration is usually an informal court action where a remedy is imposed by a third party arbitrator, not on the basis of compromise.  The wording of article 47, however, leaves unclear if arbitration is seen as such a final order because failure of the parties to “reach an arbitration agreement” can lead to subsequent litigation.  A court action is the most intrusive with the order of the court binding on the parties.

The ordering of remedies in ascending order of intrusion into the independence of the parties also serves the Confucian method of teaching the law to avoid the law.  Both parties should conclude, from looking at the list of remedies, that it is prudent to resolve the conflict at the lowest level of state intervention.  This choice will also achieve the lowest cost of resolution.

Court intervention is costly for the participants but it is also costly for society as judicial resources do not produce real public benefits.  In addition to providing mechanisms for parties to resolve disputes, the PQL also contains guidelines useful for avoiding conflict in the first place. 

Articles 26 through 39 provide guidance for producers.[23]

Article 26 states the general philosophy:

Producers shall be liable for the quality of the products they produce. The products shall meet the following quality requirements:

(1) being free from unreasonable dangers threatening the safety of human life and property and conforming to the national standards or trade standards safeguarding the health or safety of human life and property where there are such standards
(2) possessing the properties and functions that they ought to possess, except for those with directions stating their functional defects
(3) conforming to the product standards marked on the products or the packages thereof. and to the state of quality indicated by way of product directions, samples, etc.

The subsequent articles get more specific and deal with product quality, improper marketing and marking, and required producer and seller policies towards products and quality control.  By adhering to these quality guidelines then the producer can avoid problems in the first place.  This is a central precept of Confucian teaching and it is probably not a coincidence that it figures prominently into the PQL.

Finally, however, Confucian teaching may have found its limitations with the globalized world.  Confucius lived in a time where producers and consumers lived in the same community.  Even as industrialization created larger producers, most commerce was still conducted regionally where the producer’s reputation was still affected by local perception.  Self-interest in the avoidance of conflict centered on reputation as well as litigation costs. 

With mass production coupled with relatively cheap ocean freight and seamless internet connectivity, producers are no longer part of the same community as the purchaser. In one case involving the purchaser of a defective computer, defamation was held as a bar to the self-help of community denunciation.[24]  In Max Computer Station Inc. v. Wang Hong (1998), the defendant was found guilty of defamation for publicizing over the internet the ineffective response by the seller to his product quality issue.[25] 

The seller initially refused to fix the problem because of a warranty card defect.[26]  When the buyer made damaging posts on an internet bulletin board, the seller agreed to make the repairs if the buyer agreed to apologize for the negative comments.[27]  The buyer apologized by fax but the seller demanded a public apology on the bulletin board.[28]  When the buyer refused, and made additional negative postings, the seller eventually agreed to fix the problem without requiring the revision.[29]

The seller then sued for defamation and won.[30]  The buyer appealed to Beijing’s No 1 Intermediate People’s Court and the judgment was reduced but otherwise upheld because the buyer had only focused his internet postings on the failure of the seller to honor the warranty but had left out the part of the warranty card defect.[31]

This ruling, that defamation can be based on a failure to post both sides of the story, operates to limit the amount of community that can be achieved over the internet.  Where shaming in the public square was an inducement to gentlemanly behavior in Confucius’ time, the corollary today is the public bulletin board.  If buyers of defective products need to second guess their public proclamations for editorial balance regarding sellers of defective products then the community within which gentlemanly behavior is to be judged might not exist with today’s distant transactions.

Rule of Law

        While Confucian avoidance of litigation may work the majority of the time, there will still be instances of the recalcitrant producer who will not make good on bad quality.  Disputes may also arise where the quality is arguably not defective but just not as good as expected.  Western importers will expect access to Chinese courts if needed and the PQL promises private causes of action.

        Article 47 allows for a private cause of action in the People’s Court.[32]  It appears from the wording that the case may be brought only after the parties refused negotiation and mediation or attempted either and failed to reach agreement.[33]  While the parties might refuse negotiation and mediation, however, arbitration seems to be a jurisdictional prerequisite because only after a failure to agree in arbitration of an invalid order may the parties then litigate.[34]  Agreement implies that non-binding, rather than binding, arbitration is contemplated in this law.

        The private cause of action allowed in Article 47, however, should not give importers a false sense of security.  The same economic limitations to justice found in U.S. courts will also be found in litigating import cases.  Lawsuits take time and money and quickly become uneconomic for the amounts in controversy.   Most controversy in the United States either does not become a case or else drops out of litigation well before trial on the merits.[35] 

        The promise of a private cause of action under the rule of law aspect of the PQL may not turn out to be the necessary guarantor of trust that western investors think it is.  Even with access to the courts and a desire to litigate, the western importer may find justice difficult because of other issues.

        There is an issue regarding the independence of local Chinese courts.[36]  These courts are funded and supervised by the local government and often feel the pressure to favor the local defendant[37].  Alternatively the court might favor a strong foreign importer that brings hard foreign currency into the province.  This is not the kind of rule of law on the merits of a case which should create a level of trust for the overseas importer.

        It may turn out that local bias in the courts will only give way to impartiality as Chinese consumers are placed at risk to overseas producers.   The golden rule of doing to others as you would have them do to you may ultimately shape how courts adjudicate local product quality suits.   If foreign producers and courts deny relief to Chinese consumers because of unfair local courts then Chinese courts will learn the downside to their own bias.

In a case involving Toshiba, a Japanese producer of laptops, Chinese consumers are getting a taste of poor quality and ineffective producer response.[38]  Toshiba had sold about 200,000 laptops to Chinese consumers.[39]  These laptops turned out to have a defective disk drive that would corrupt data.[40]  A $1.05 Billion settlement was reached in a lawsuit in the United States regarding the same laptops and the same defect.[41]  This compensation for losses was not repeated, however, for the Chinese consumers. 

        The justification used by Toshiba in refusing compensation to Chinese consumers was that China does not have the same kind of consumer protection laws as does the United States.[42]  Only after a firestorm of negative press did Toshiba agree to release a patch free of charge to Chinese consumers but still offered no compensation for lost data.[43]  Now that China’s ox is being gored by a foreign supplier of defective goods the local courts could begin to understand the value of fair adjudication of poor Chinese quality that harms others. 

Because the Chinese legal system is a civil code, however, there is no reliance on precedent.[44]  This may mean that a Chinese court may still adjudicate on a case by case basis, ignoring broader policy considerations.  But one would hope the golden rule would counsel Chinese judges to avoid looking at the litigant’s nationality or residence and instead look at the merits of the case.

        It is important to remember that local bias is not only a Chinese phenomenon.  Removal of state court actions to federal court is often done in the United States to avoid local bias and prejudice potentially intrinsic in state court proceedings.[45]  Large corporate defendants often labor to get their cases out of state court and into the more neutral federal system.  Likewise, plaintiffs in class action suits would not try so hard to shop for plaintiff friendly forums if the U.S. legal system were not subject to the same forms of bias found in the Chinese system.

Regulatory Oversight

        Confucianism, like the guiding hand of Adam Smith[46], is an ideal that may not produce the envisioned societal benefits based on aspiration or self-interest in a world disconnected by transactional proximity.   Distant transactions lessen the impact on reputation that local transactions provide. 

The high cost of litigation and the potential for local bias are additional hurdles to justice by rule of law in almost any legal system.  So what is left to produce the desired increase in Chinese product quality?  Increased regulatory oversight.

        Articles 1 through 25 of the PQL deal with government supervision over the products produced in China.[47]  No seller or producer may opt out of regulatory supervision.[48]  Anyone complaining to the proper regulatory oversight body shall do so with their identity kept secret.[49]  Additionally, the whistleblower can earn a reward based on penalties assessed under the penalty provision in Chapter V.[50]

        A capitalist reaction to the imposition of state control over the production by Chinese companies might be to claim Socialist interference with the free market.  Upon reflection one would have to admit, however, that the United States system of capitalist free enterprise has never been totally free of state interference.  The Federal Trade Commission regulates marketing claims, the state attorney generals prosecute fraud and unfair competition, and various regulatory agencies enforce volumes of congressional mandates to business.

        Of course there are those free market proponents who would say that this too amounts to socialist interference but most would agree that the current state of regulation is an evolving balance between free enterprise and the rights of consumers to be free from dangerous goods, fraudulent practices, and poor quality merchandise.  So too is China looking to balance the same rights and expectations.

        Regulatory oversight is a welcome addition to Confucian aspiration and private causes of action because it provides what these others influences may be lacking.  Where Confucian social harmony might not influence transactions conducted at a distance, the social policy of good product quality can be imposed by government oversight.  Imposing the social policy through increased oversight also reinforces Confucian principles because it sets the expectations of the marketplace so that producers will not put out poor quality in the first place.  Knowing the standards that must be met to avoid regulatory oversight is the educational principle embodied in the law that Confucius promoted.

        Where the high transaction costs and uncertainty of private litigation will operate as a barrier to increased product quality, regulatory oversight is an appropriate government response to market failure to produce a social good.  Regulatory oversight spreads the cost of enforcement for a social good, increased product quality, to the society that benefits from it.

Conclusion

        The same strengths and weaknesses inherent in the legal and regulatory scheme surrounding product quality found in the west are found in China as well.  No one system of promoting ethical practices, creating private causes of action, or providing regulatory oversight will effectively police any system but when brought together the social goal of increased product quality can be achieved.

        Where the Chinese system is different from the system of the United States is in promoting, and sometimes mandating, alternative dispute resolution prior to entering litigation.  The U.S. system is inferior in this respect because entering a case and surviving a motion to dismiss is an expensive proposition for both parties.  Mandated alternative dispute resolution prior to filing a case would better serve justice and the needs of the parties in the United States as it does in China under the PQL.

        Importers of goods from China will benefit from the importance the Chinese government places on improving the quality perception of their country’s production through the enactment of the PQL.