The President's Interagency Working Group on Import Safety's Initial Report: On the Right Track, but Can the Destination be Reached?

By MARK ALLENBAUGH

Tuesday, Sep. 18, 2007

Last Monday, September 10, the Interagency Working Group on Import Safety released its initial report to the President. The Report provides a "strategic framework for continual improvement in import safety."

In this column, which builds upon my column last month regarding safety issues raised by Chinese imports, I will analyze the Working Group's suggested strategies in terms of effectiveness, cost, clarity and practicality.

No Quick Solution to Improving the Safety of Imported Products

The "Seasons of Recalls" continues, and likely will for some time.

Recently, for example, Mattel announced its third product recall in the last few months, prompting yet another public apology by CEO Robert Eckert during a Senate investigation. Eckert promised to enforce stricter quality control and compliance, in order to combat the epidemic of recalls. But of course, that partial solution cannot provide a remedy to the problem of an already-suspect supply of products that are sitting on U.S. shelves, having already passed through quality control procedures.

To be sure, toys and related products for children are not the only examples of problem products still making their way onto store shelves. Toothpaste, tires, pet food and, most recently, decorative candles are just a few among the hundreds of different imported products that continue to cross our borders and eventually wind up in our homes.

Short of shutting down our borders to all imports and clearing off store shelves--which is logistically impossible, and would further strain our already burdened economy--there simply is no short-term, effective way to reverse the incredible inertia of the flow of imports of dubious safety into American stores.

Indeed, the amount of foreign imports into the U.S. continues to grow at an increasing pace, nearly doubling from $1.2 trillion in 2003 to a projected $2.2 trillion this year alone. The amount is forecasted to triple by 2015. And not surprisingly, China is poised to become the number one country of origin for imports (surpassing Canada) by next year.

From the moment a product is manufactured in China to the moment it finally reaches a store shelf in America, as long as six months may pass, and the product's journey may extend tens of thousands of miles over ocean, air and land. Given this long supply chain, we almost certainly have not seen the last of product recalls, with some products just now reaching our stores.

Thus, at the outset, it is imperative to realize that the effect of any fixes implemented now will not truly materialize until many, many months -- if not years -- from now.

From Detection to Prevention, Intervention and Response: The Six "Building Blocks" to Improve Import Safety

Despite the long lead-time prior to the implementation of any strategy having a noticeable effect, the Working Group's initial report is very promising, inasmuch as it provides a needed paradigm shift in import safety strategy. The primary shift is to move away from a "snapshot" model focused on interdiction and detection of problem products at our borders, to a more fluid "video" model, which encompasses the entire supply chain, and aims at prevention, intervention and response.

According to the Report, there are six key strategic building blocks necessary to shift the safety paradigm from detection to prevention, intervention, and response, with the key emphasis on prevention:

1. Advancing a Common Vision of Import Safety

The first building block is to advance a common vision of import safety among the various government industries involved in the importing process. Unfortunately, the Report does not clearly identify what this common vision should be. To say the vision is merely to consist of a common understanding of the importance of "import safety" is, of course, too broad to be meaningful.

Any common vision really should clearly delineate specific areas of responsibilities to be allocated among the various agencies and the private sector, and how these responsibilities are to be fulfilled all along the supply chain in terms of prevention, intervention and response. With so many proverbial cooks in the kitchen, it will be far too easy for the vision to quickly become lost and diluted if it is not clearly articulated.

2. Increasing Accountability, Enforcement, and Deterrence

Not surprisingly, the Report suggests increased enforcement of existing criminal and civil penalties. Already, both Houses of Congress have introduced several bills to increase penalties against importers whose products violate U.S. laws and regulations. Whether such additional legislation is necessary to better effectuate deterrence, however, is highly debatable.

The Report does, however, suggest another solution that can have a real, long-term and continuous effect toward advancing accountability and enforcement: "Greater reliance on prevention-focused mechanisms, such as third-party certification and testing schemes."

To varying degrees of success, several large retailers and importers already have teams of auditors to review and inspect their foreign suppliers, and also utilize foreign and domestic labs for product testing, but such reliance on true third-parties must extend to the smaller importers as well. Such third-parties can inspect factories for compliance with local and U.S. laws and regulations and provide objective product testing. In addition they can provide risk assessments regarding the conditions of factory machinery and infrastructure, as well as identifying possible reliable subcontractors with which the factory may work.

3. Focus on Risks Over the Life Cycle of an Imported Product.

This third building block would aim to better develop a company's and its auditors' ability "to identify and manage the greatest risk at critical points along the import life cycle" by utilizing "[p]rinciples of hazard analysis and risk management" that long have been key components of traditional manufacturing. This building block appears to further clarify the second building block's emphasis on the need for the increased use of third-party auditors and inspectors.

In order to maximize the goals of prevention, intervention, and response, the most critical point along the import life cycle must occur at the factories themselves. Once a product has been loaded onto containers, it will be several weeks until the product reaches U.S. shores and then an importer's warehouse.

Certainly, another critical point is the importer's warehouse. Yet more and more importers rely on "3PLs" or third-party logistics providers (traditionally known as public warehouses), which often do not provide inspection of product of any kind and simply act as an order fulfillment and distribution point. As a result, the factory inspection may well be the only inspection that occurs, so it should be a searching one.

In sum, to maximize risk assessment and management, just about all the effort must take place at the foreign factory. Once a bad product has been packed into a container, the reality is that it likely will make it onto store shelves without having to undergo further inspection or other review.

4. - 6. Building Interoperable Systems; Fostering a Culture of Collaboration; Promoting Technological Innovation and New Science

These final three building blocks are very closely related to each other. Together, these sections discuss nascent reporting systems such as an electronic interface between federal agencies implemented by the Security and Accountability for Every (SAFE) Port Act of 2006 "to monitor or control the movement of imported products in domestic commerce," and the means by which this information can more easily be shared by with government agencies and the private sector.

While these last building blocks can provide better means of detection, intervention and response once bad products have already entered the system, on their face they do little to advance the key component to import safety: prevention.

The Missing Strategy: Compliance and Ethics Programs

The Working Group will be holding public hearings on Monday, October 1, in Washington, D.C. After the hearings, the Group will issue a final report to the President in mid-November, based, in part, on the feedback it receives from the public hearings.

In general, the Group is right to move away from a detection-based model toward import safety to one focused on prevention, intervention and response. However, the current strategies the Group has endorsed, as outlined above, either are too general to serve these aims, or do not necessarily advance a prevention-focused import safety model.

With the number of U.S. importers having grown from 732,000 in 2003 to 862,000 in 2007 (an increase of nearly 18%), prevention can only be achieved through heavy reliance on the import industry. Specifically, prevention must occur through the relationship between the importers and their foreign factories.

Unfortunately, the key component that appears missing in the Working Group's strategy is any program regarding training and encouraging importers to implement compliance and ethics programs. The government has the chance to help importers get their factories to implement these programs of their own, but it may be missing that chance if the Group's recommendations are not expanded to encompass this area.

Compliance and ethics programs were born out of the U.S. Government's recognition, many years ago, that intra-organizational systems designed to detect, resolve, and - especially -- prevent violations of laws and regulations could go a long way to doing just that. Now that we have systems to prevent violations of laws and regulations whether in regard to shoddy product or fraudulent financial statements, the key is to make them optimally effective in foreign factories, with prevention a crucial focus. In short, we must export our best compliance and ethics practices.

Certainly, third-party audits and certifications can help in effective prevention. . However, in many respects, such audits still only provide a "snapshot" of a factory's status on the day of the audit or certification. Constant monitoring also can be costly and easily circumvented. A true "video" model, providing an ongoing culture of ethics and compliance within a factory, would foster relationships between importers and their suppliers, such that the purposes underlying the audits, certifications and monitoring activity would become part and parcel of the daily management activities of the factories.

Hopefully, this key strategy will become the major focal point of the Working Group's final report. Certainly, it should be a strong focus of the feedback the public offers the Group at the upcoming hearing.


Mark H. Allenbaugh is a partner with the law firm of Allenbaugh Samini LLP with offices in Newport Beach, California, and Guangzhou, China, and also serves as CEO for MAG Manufacturing. He is a former Staff Attorney for the U.S. Sentencing Commission and has taught Business and Professional Ethics at the George Washington University. The views expressed herein are his own and do not necessarily reflect the views of any of the named organizations. He can be reached at mallenbaugh@alsalaw.com.

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