Transparency a product of dairy crisis in China

By Thomas P.M. Barnett

China’s ongoing dairy crisis highlights the fundamental dynamic of globalization: high-trust markets linking up to low-trust environments. The results are predictable: tainted product scandals, followed by sweeping new regulations.

China just beefed up the rules governing its dairy industry, whose main players clearly sought a government cover-up. But with 50,000-plus Chinese kids sickened and foreign governments restricting China’s milk exports, the ruling Communist Party had no choice.

The culprits? An underground network that manufactured and sold an industrial chemical to milk producers to boost volume output.

You’d have to go back to the second half of the 19th century to find similar widespread product tainting in the U.S. dairy industry. But guess what? It happened under the same circumstances: rapid urbanization leading to booming domestic demand, a corresponding boom in production, and lagging regulation. With political corruption then plaguing our government, an angry populace finally triggered a progressive response, yielding the 1906 Food and Drug Act.

Inflection point

China follows this trajectory today, with the populism brewing in response to repeated product scandals, environmental disasters, and pervasive political corruption. The ruling party’s choice is the same each time an inflection point is reached: lead, follow or get out of the way of the resulting social anger.

China needs to move toward a comprehensive progressive agenda, similar to what America undertook during its own late-19th century rise. Thanks to globalization’s creeping embrace, that’s what low-trust environments are forced to do: play “up” to the standards of its best competition/partners in global supply chains.

But it’s not enough for American companies simply to wait out China’s mad dash through our long-passed Progressive Era. Globalization’s networks force Western companies to export their higher standards progressively “down” the chains that link our high-trust regulatory environments with these low-trust suppliers. Otherwise, our companies get caught up in the very same scandals, like Britain’s Cadbury candy company is today.

Western companies must take an aggressively proactive stance, lest their push for cheaper inputs damages corporate reputations — back home and abroad — that took decades to build. Waiting on global regulations takes too long and costs too much.

So just like the onerous Sarbanes-Oxley law established a new American minimum standard for banks with regard to “know your customer,” globalization collectively heads into a new era whose credo will be, “know your supply chain.” Soon it won’t be enough just to know with whom you’re dealing; you’ll want verification of every ingredient in every product.

You might assume that governments will lead the way in this global push, but it’s more likely to be global corporations looking for a competitive edge .

For years now, I’ve been a strategic consultant to Oak Ridge National Laboratory in eastern Tennessee, a Department of Energy-sponsored facility that’s done a lot of pioneering work in nanosensors. Recently, Oak Ridge was approached by one of the world’s largest food processors, a global corporation whose products pass through your hands — and bodies — on a regular basis.

Agribusiness network

This company has a stellar reputation in advanced economies across the world, but as its leaders look ahead, they don’t think that reputation alone will protect them as they increasingly in-source supplies from, process products in, and market their goods to lower-trust environments. This company wants to become the world’s first from-crop-field-to-grocery-store secure agribusiness network.

To that end, the company recently reorganized itself. No longer built around geographic markets, the corporation is now organized around its supply and process chains to maximize the security — and purity — of its operations.

X Thomas P.M. Barnett is a visiting scholar at the University of Tennessee’s Howard Baker Center and author of the forthcoming book “Great Powers: America and the World After Bush.”