Jerry Nickelsburg is an adjunct professor of economics at the Anderson School of Management at UCLA. This column appeared online Sept. 1 in Caixin, a website featuring financial news about China.
Upton Sinclair’s 1905 exposé on food safety in the United States, “The Jungle,” was instrumental in pressuring Congress to pass the Pure Food and Drug Act of 1906. Today Americans have come to expect the food processing and distribution system to deliver safe and sanitary food to their markets. In 2015, China finds itself in a similar position to early 20th century America, with its households having doubts about the quality and safety of the food they purchase. Wu Heng, perhaps China’s Sinclair, has documented 3,449 instances of tainted food since 2004 on his website “Throw It Out The Window.” That the Communist Party considers a safe agricultural system a high priority is illustrated by Xi Jinping’s statement, “Whether we can provide a satisfying solution on food safety to the people is an important test of our governance capacity.” Over the long term China, as with the United States, will be able to make significant inroads on this issue. However, such reforms take both time and resources. Heng, in an interview with the New York Times, suggested an intermediate step for Chinese consumers might well be a tilt towards the purchase of foreign-produced foods.
At this year’s Wilbur K. Woo Greater China Business Conference, I hosted a panel of experts on the segment of the Chinese food chain that originates in the United States. The panelists — Richard Wollack, founder and managing principal of Fulton Capital Advisors from the wine industry; Simon Shao, CEO of Green Pasture International, Inc., from forage and grain production; and Hua Liu, CEO of China Fisheries — all saw opportunities for a deepening of the supply chain from America’s fields, oceans and rivers to Chinese plates.
There are two reasons for this. First, the Chinese middle class is growing and is not only seeking a greater variety of foods, but can afford to buy them. Second, the public views purchases from the United States as having a higher probability of safety than from elsewhere. This raises some questions: Is this illusory and it is simply the imprimatur of “Made in USA” that is valued or are there economics that might drive a mutually beneficial Chinese and American integrated food system? The surprising outcome of this panel was that while the distinguished panelists were focused on the economics, it was that very economics that enhanced the security of the supply chain.
The first issue discussed by the panel was the business of supplying food to China, not because safety is less important, but because economics drives the equation. As Shao pointed out in his opening remarks, China has 7 percent of the world’s arable land, perhaps less than that if estimates of land not currently suitable for planting are taken into account, but 21 percent of the world’s population. Meanwhile, the United States has 13 percent of the world’s arable land and 5 percent of its population. One does not have to be an economist to know there is an opportunity for profitable exchange on both sides. Moreover as Wollack said, there is a Ricardian comparative advantage in such places as Napa and Sonoma, California, that produces an opportunity for premium wine exports to China. And what about the large population of China? At least some is supporting the processing of seafood caught in U.S. waters, processed in China and shipped back to the United States for sale, a business Hua has been pursuing out of Los Angeles. Thus, the food supply chain is inextricably tied to the increasingly favorable two-way trade between China and the United States.
Though the economics of trade in agricultural products is clear, food safety remains an overriding concern, one that could turn the economics sour. The three panelists, all from very different parts of the industry, viewed this as both serious and advantageous for their business. On both sides of the Pacific there is concern for the quality of the products. For example, Shao’s grains are grown under specific safe conditions, inspected and prepared for a long voyage to China, and then re-inspected at the dock upon arrival. Hua’s seafood is also inspected in the United States and in China, and when shipped back to the United States, inspected for a third time. Wollack’s wines, produced under rigorous U.S. conditions and bottled before shipping maintain the same supply chain integrity.
I found the panel discussion to be the most interesting part of the event, in that one might think two quite different regulatory systems could open the door to abuse or perhaps neglect. And yet, among our panelists, it has had the opposite effect, that of making them more diligent and increasing the value of their product to an ever more food-safety conscious Chinese consumer. These “boots on the ground” views of the investment, growing and harvesting, processing and distribution of food by both American and Chinese entrepreneurs has yet to take center stage when announcements of significant investments by Chinese companies in U.S. agriculture occur, and yet they ought to be an important part of the discussion.