C H I N E S E F O O D I M P O R T S I N T O T H E U SB Y K R I S T I N A H E R N A N D E Z , E S Q A N D A N D R E W T I L S O N

HOW FSMA WILL AFFECT

BACKGROUND

• Despite a growing trend to encourage and support local foods around the US, the US food supply continues to become increasingly dependent on imported foods. 15% of the total U.S. food supply is imported.

• China is the US’s third largest source of imported foods, behind Mexico and Canada.

• Chinese imports supply 70% of the US’s apple juice, 50% of their garlic, & 25% of their imported seafood.

• However, Chinese products are the most commonly rejected shipment at U.S. ports,

• The two most common reasons for these rejections are 1) foods containing illegal chemicals or additives, and 2) food (usually seafood), containing dangerous levels of veterinary drug residues.

• And, less than 1% of the US’s imported foods are inspected upon arrival at a US port – which begs the question, how many more imports from China would be detained if only FDA had inspected them?

BACKGROUND

• In 2007, in an effort to better facilitate trade with China, but also to protect U.S. consumers, FDA took special action to attempt bringing food exports from China into compliance with FDA food safety standards.

• Specifically, a memorandum of agreement was established between the U.S. Department of Health and Human Services (HHS) and China's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ); and between China’s State Food and Drug Administration and HHS.

• This memoranda had specific provisions that attempted to better assure products exported from China to the United States would meet U.S. standards for safety and manufacturing quality.

• The arrangement also allowed the FDA to maintain a physical presence in China and cooperate with Chinese officials to inspect Chinese food production facilities.

• Pursuant to this agreement, in 2008, FDA opened its China Office with posts in Beijing, Shanghai, and Guangzhou.

BACKGROUND

• The offices in China were FDA’s first foreign presence in a larger plan to better police imports to the United States.

• In 2009, a new food safety law was passed in China, creating a food safety committee and requiring, among other things, licensure for all food producers, caterers, and retailers. The law also calls for an emergency response plan and a mandatory recall requirement when food doesn’t meet standards.

• However, as of July 2010, only eight FDA employees were dispatched to China, including only two food inspectors for the three offices throughout the country.

BACKGROUND

• This small cohort of federal employees faced a daunting task of improving food safety in a country with nearly a million food production facilities, most of which are decentralized and small in size.

• While China does have industrial sized facilities, most production centers employ fewer than 10 people.

• The sheer number of food establishments in China, and China’s history of intentional food contamination made FDA’s task all the more challenging.

• With such few staff members (13 in total, including local hires), the FDA needed to rely on collaboration with Chinese officials to inspect as many facilities as possible. However, FDA employees have stated that forging such relationships has been challenging. The slow growth of cooperation is evidenced by the FDA’s inspection rate of Chinese facilities: only 14 a year.

ENTER FSMA

• In part because of recognition by Congress that food safety in the US could not continue to depend solely on FDA’s then-existing authority, FSMA was passed in January of 2011, with bi-partisan support.

• For companies that import food from China, FSMA will change the landscape far more than previous initiatives by FDA or other federal agencies.

• Although FSMA was signed into law on January 4, 2011, its impact on the food industry has yet to be felt fully because its implementation will occur in phases and FDA will need to implement regulations along the way. FSMA will take approximately 3 years to fully implement, possibly longer given funding issues. However, companies are already feeling the stress of both what they know is coming, and what they do not.

WHAT WILL FSMA MEAN FOR IMPORTERS

• As of early 2013, there are already certain provisions of FSMA that have come into effect and are already placing new demands and requirements on importers.

• Perhaps the most significant change for importers is that under FSMA, importers will now be required to have a risk-based preventative program to verify that the food products they are bringing into the US are safe according to US standards. Whereas before, this responsibility fell on the shoulders of FDA, it will not fall on those of the importer.

• The following are just some specific mandates that importers will now have to comply with:

EFFECTS OF FSMA ON IMPORTERS

1) FSMA mandates food facilities to do a biennial registration

• FSMA amended section 415 of the Federal Food, Drug, and Cosmetics Act (FD&C Act) [21 U.S.C. § 350d], which requires domestic and foreign facilities that manufacture, process, pack or hold food for human or animal consumption in the U.S. to register with FDA.

• The FSMA amendments to section 415 of the FD&C Act require new information that prior registration requirements did not include, and are focused on improving the agency's ability to respond to a food-related emergency quickly and efficiently. All facilities must register under the new FSMA, even if previously registered with FDA in compliance with prior laws.

BIENNIAL REGISTRATION

• FSMA requires food facilities to renew their registration between the months of October and December of even-numbered years. However, because FDA activated the program late, it will probably alter the due dates to allow for more time. FDA issued a Guidance Document to this effect. See Guidance for Industry: Questions and Answers Regarding Food Facility Registration (Fifth Edition)

• Under FSMA, all food facility registrations are now required to contain an assurance that FDA will be permitted to inspect the facility at the times and in the manner permitted by the FD&C Act. However, this mandate may be particularly difficult to enforce in China, given FDA’s history of difficulty in conducting inspections under the memorandum and business culture in China in general.

• If FDA is likely to run into trouble with inspections, importers and their agents are even more so, even though the ability to do random and scheduled inspections will be crucial to an importer’s ability to comply with other mandates under FSMA.

• This is where, particularly in China, importers will benefit from the use of culturally sensitive consultants who understand Chinese business customs and how to obtain certain results, such as access to facilities when inspections are necessary.

BIENNIAL REGISTRATION

• Because the FSMA will require that the same types of food facilities that were required to register with FDA under section 415 of the FD&C Act before FSMA be required to register and renew their registration biennially under FSMA, it will be important to define what is a facility.

• We know that facilities are domestic and foreign facilities that manufacture, process, pack, or hold food for human or animal consumption in the United States. However, Section 103(c) of FSMA directs FDA to conduct a rulemaking to “clarify the activities that are included as part of the definition of the term ‘facility’ under such section 415 [of the FD&C Act].” 

• Therefore, importers should remain aware of how and when the term “facilities” is more clearly defined by FDA

• Registrants must use Form 3537 to register, update, or renew a registration. Facilities may register and/or renew online.

HOW DID FSMA CHANGE THE PRIOR FACILITY REGISTRATION RULES

• Section 305 of the Bioterrorism Act, enacted in 2002, amended the Federal Food, Drug and Cosmetic Act (the “FD&C Act” or “the Act”) to impose a mandate requiring “any facility engaged in manufacturing, processing, packing, or holding ‘food’ for consumption in the United States” to register with FDA.  The requirement applies to all such facilities, whether in the U.S. or abroad, but excludes foreign facilities whose food products are significantly further manufactured or processed by a subsequent facility prior to export to the United States.  Facilities that are regulated exclusively, throughout the entire facility, by the U.S. Department of Agriculture’s Food Safety and Inspection Service (“FSIS”) (i.e., facilities that exclusively process “poultry products,” “meat food products,” or “egg products” and facilities that slaughter poultry, cattle, sheep, swine, equines, or goats) are also exempt.  Pursuant to the Act, the registrations may be submitted by the “owner, operator, or agent in charge of the facility” for domestic or foreign facilities.  However, registrations for foreign facilities must also name a U.S. agent for that facility.  The failure to timely register a facility constitutes a violation of the Act, and for foreign facilities, as explained below, the Act provides that food from such a facility that is imported, or offered for import into the U.S., is subject to refusal under Section 801 of the FD&C Act.

• The FDA Food Safety and Modernization Act (“FSMA”), signed into law by President Obama in January 2011, expanded the registration mandate implemented under the Bioterrorism Act, and introduced three additional significant changes that: (1) required all facilities subject to the registration requirements to submit registration renewals during the period from October through December of each even numbered year; (2) compelled all domestic and foreign facilities’ registration to include a statement of their agreement to allow FDA to inspect their facilities; and (3) subjected registered facilities to suspension provisions that authorize FDA to suspend a facility’s registration, thereby prohibiting imports or exports of food from the facility into the U.S. and prohibiting the introduction of food from the facility into interstate or intrastate commerce in the U.S., upon a determination that the facility created or had reason to know that food manufactured, processed, packed, received, or held by a facility has a reasonable probability of causing serious adverse health consequences or death to humans or animals.

FOREIGN SUPPLIER VERIFICATION PROGRAM

• 2) FSMA requires importers to conduct risk-based foreign supplier verification activities to verify that imported food is not, among other things, adulterated and that is was produced in compliance with FDA’s preventative control requirements and produce safety standards, where applicable. This will take place through the new Foreign Supplier Verification Program (FSVP), created by FSMA.

• When the foreign supplier verification program’s requirements take effect, they will apply to all importers, unless there’s an exemption. The law defines “importer” as:(A) the United States owner or consignee of the article of food at the time of entry of such article into the United States; or(B) in the case when there is no United States owner or consignee as described in subparagraph (A), the United States agent or representative of a foreign owner or consignee of the article of food at the time of entry of such article into the United States.

• Certain importers will be exempt from compliance with the FSVP, namely, a facility whose owner, operator, or agent in charge is subject to, and in compliance with FDA’s seafood, juice, or low-acid canned food products requirements. The exemption relating to low-acid canned food applies only with respect to microbiological hazards. The statute also directs FDA to exempt, by notice in the Federal Register, food imported into the United States in small quantities for research and evaluation purposes or for personal consumption. The statute further directs FDA to issue implementing regulations and guidance on FSVPs.

FOREIGN SUPPLIER VERIFICATION PROGRAM

• I expect the foreign supplier verification program to focus mainly on high-risk foods and incorporate standards similar to GFSI’s, though it will probably go a bit further than GFSI.

• Craig W. Henry, PhD, director of enterprise risk services-business risk at Deloitte & Touche LLP, predicted that accredited third-party certifications and audits will become even more complicated under FSMA, because the FDA’s criteria “could be in tandem or potentially in conflict with the third-party audits that are available and used commercially today around the world.”

• Many large companies use GFSI as a baseline but also send their own auditors overseas to inspect facilities, especially when ingredients may be particularly vulnerable to problems and their brand reputations are at stake. “That’s very prevalent among large U.S. manufacturers,” Dr. Acheson explained. “In addition, the GFSI audit is only as good as the auditor. He or she may be having a bad day or, who knows, they may even have accepted a bribe.” The potential for corrupt auditors is particularly pronounced in China.

• “Auditor competences are critical to the success of our mission,” acknowledged Yves Ray, GFSI chairman and general manager for corporate quality at Paris-based Danone. “Food safety hazards may be introduced at any point along the food chain. One weak link can result in unsafe food harmful to consumer health and very costly,”

• Importers can verify the supplier complies with the FSVP requirements by monitoring records for shipments, lot-by-lot certifications of compliance, annual on-site-inspections, checking the hazard analysis, and risk based preventative control plans, and periodically testing and sampling shipments, but it will not be an easy task, especially in China.

CERTIFICATION

• 3) FSMA will also subject certain imported foods, deemed by the FDA to be high-risk, to import certification.

• "Certification" differs from the “foreign supplier verification program.” Foreign supplier verification is a general requirement applicable to all food importers, unless there’s an exemption. In contrast, certification is only required in those situations where FDA requires it. FDA must base its decision to require certification on the risk of the food, including taking into account certain factors specified in the FSMA.

• FDA is now working on determining how to define and identify high-risk foods.• In determining whether an import certificate is required, FDA can consider the known safety risks

associated with the food; the known food-safety risks associated with the country, territory, or region of origin of the food; or whether the food-safety programs, systems, and standards in the country of origin of the food are inadequate to ensure the article of food is as safe as a similar food that is produced in the United States.

• The certifying official can be an agency or a representative of the government of the country from which the food originated, or an independent third party accredited to provide such certification or assurance. Sourcing products from countries with weak food-safety laws and inspection programs may prove to be difficult, and it is likely many products that currently enter freely into the U.S. will not be able to meet the rigorous demands that would qualify them for the certification program. Food companies should evaluate their supply chains to ensure any imported products will comply with the FSVP or import certification requirements before the new regulations take effect, or risk market disruptions.

VQIP

• 4) FSMA will also provide for a new Voluntary Qualified Importer Program (VQIP)

• Section 302 of the statute requires FDA to establish a voluntary, user-fee funded voluntary qualified importer program (VQIP) to expedite entry into the United States of imported food from eligible, qualified importers. To be eligible to participate in VQIP, an importer must offer food for importation from a facility that has a certification by an accredited third party. FDA will qualify eligible importers to participate in VQIP based on risk considerations. The new law directs FDA to issue guidance on participation in and compliance with VQIP. FDA has not yet issued guidance on this program.

INCREASED FOREIGN INSPECTIONS

•  5) Under FSMA, FDA will increase the number of foreign inspections

• FDA will increase the number of foreign inspections it does. FDA can deny entry to an import if a foreign facility refuses an FDA inspection, it can require certification for high-risk foods; and prior notice submissions will need to include, as an additional element, any country to which the food has been refused entry.

INCREASED RECORD KEEPING BURDEN

6) Under FSMA, importers will also have increased record keeping responsibilities

• Many companies believe they create and maintain the proper records and have a good document control system in place to support their food safety programs, but these may not be enough. “These companies need to go back and really understand how their standard operating procedure is being implemented and consistently executed across all their facilities. They need to understand that anything going back two years will be fair game.” said Dr. Craig W. Henry, PhD, director of enterprise risk services-business risk at Deloitte & Touche LLP

• Under FSMA Section 201, the FDA is required to significantly increase the frequency of its domestic and foreign inspections. “FDA inspectors are limited, and they can only spend so much time in plants during routine inspections. But by looking at records, they can identify areas for further investigation,”

• On-site inspections are burdensome, but inspecting records is less burdensome, therefore, the FDA may begin asking for extensive records – for example, not just the certificate of a third-party audit, but also the entire audit itself. “

• The key concept is “business continuity” of the entire supply chain—from field to restaurant or retail grocer. “The challenge for industry now is validating the integrity of the food safety systems being used to supply their upstream supply chain,” Dr. Henry said. Instead of relying on third parties to certify ingredients, companies will need to be more aggressive and invest more time and money, especially if the external supply chain is important to their brand. “They really need to make sure they know what’s going on and not assume all is well, especially with FDA inspections picking up,” he said.

• Under FSMA, importers will now need to maintain thorough documentation on their consignments, including ingredients and the manufacturing processes involved

• traceability of food products for humans and animals are now the responsibility of the importer

GENERAL CHANGES

• In conclusion, there are at least 5 general changes that importers can expect as FSMA is slowly implemented

1) All foreign facilities that manufacture, process, pack, or hold food for human or animal consumption in the United States must be registered and renew biennially according to FSMA, importers whose food had any contact with a facility that did not comply with these registration and renewal provisions could be detained.

2) FSMA requires importers to conduct risk-based foreign supplier verification activities to verify that imported food is not, among other things, adulterated and that is was produced in compliance with FDA’s preventative control requirements and produce safety standards, where applicable. This will take place through the new Foreign Supplier Verification Program (FSVP), created by FSMA.

3) FSMA will also subject certain foods, deemed by the FDA to be especially risky, to certification.

4) FSMA will also provide for a new Voluntary Qualified Importer Program that importers will have the option to either join, or not

5) Under FSMA, FDA will increase the number of foreign inspections 6) FSMA will impose an Increased record keeping burden for importers

SOME MORE SUBTLEBUT IMPORTANT CONSEQUENCES FOR IMPORTERS

• For U.S. companies, challenges presented by FSMA will involve verifying ingredients across the global supply chain and adhering to international standards such as GFSI and ISO 22000. Missteps along the way are likely to result in ingredients or finished products being detained and placed on FDA’s Import Alert List.

• The end result, some experts predict, will be the demise of many small- and mid-sized U.S. food companies that find themselves unable to implement the new law’s many requirements. However, with the help of food law experts that are interested in protecting small and medium sized US food importers, many of these problems can be mitigated

GIVEN THE NEED FOR INCREASED COMMUNICATION WITH AND COOPERATION FROM THOSE UP THE

SUPPLY CHAIN

• It is known that FSMA will require US importers to increase their communication with and cooperation from those they directly import from, but now, also, those up the supply chain • What follows are some suggestions for US

importers who will need to change the dynamic of their communication with their Chinese suppliers and those who their suppliers deal with as well

SUGGESTIONS FOR IMPORTERS OF CHINESE FOOD PRODUCTS

Because a large component of FSMA for importers is the FSVP and the resulting need to have information from upstream players in the supply chain, relying on cooperation from Chinese companies (suppliers and other up the supply chain that produce, process, or store food) by traditional means that work well in other countries (such as monitoring records for shipments, lot-by-lot certifications of compliance, annual on-site-inspections, checking the hazard analysis, and risk based preventative control plans, and periodically testing and sampling shipments) may not be a secure means of procuring the kind of assurances that US importers will need to be in compliance with FSMA.

AVOIDING SPECIFIC PROBLEMS IN CHINA

• Foreign managers are often tripped up by their lack of familiarity with China’s often unique business, cultural, and regulatory environments• In is important for US importers to realize that

Chinese companies, including food facilities, operate in an environment that, compared to the US, is progressively deregulated • US food importers would do well to leverage local

knowledge and resources in China, rather than rely only on US employees and resources.

• Do your research - comprehensive research and data collection rather than opportunistic impulse will benefit the US importers.

• Randomly choosing “cheap” agents and others to help you implement the FSVP will not bring you successful outcomes.

• Sourcing from China provides many cost effective products, but it should not be confused for a cheap business opportunity. Setting up the proper channels of employees and agents in China may be source of significant capital expenditure for US importers

• As the US importer begins to implement changes so as to come into compliance with FSMA, the US importer should provide written guidelines to their supplier in China with a common-sense roadmap for the two companies, ensuring that each step is backed by sound business reasoning.

Food importers should be aware that domestic political or industrialpolicies sometimes bar non-Chinese participants from certain industries.In addition, government policy is subject to constant change, so foreignplayers must be constantly aware of how new laws, regulations, orpolicies might impact the prospects of any given deal. Failure to do somay result in the waste of enormous effort and expense if regulators refuse to give the go-ahead.

The US importer must be careful also to comply with local regulations (which may differ from province to province) and also to recognize that national sentiment may play an increasingly important role in determining the success or failure of FSMA compliance programs inside China. According to Andrew Tilson, national sentiment about food safety may well favor US importers, as the Chinese are sensitive about the perception of foreigners regarding their food supply. However, this national sentiment should not be taken for granted.

Involving the Chinese supplier in the creation of compliance programs is also important, rather than merely imposing new requirements on them, however, it should be made clear to them that the need for compliance is required if they are to continue in a business relationship with the US importer.

Because the skills needed to implement an FSMA compliance program go beyond the skills needed to run a successful import from a Chinese supplier pre-FSMA, importers would do well to hire consultants or employees that can prepare and implement the plan. Given China’s general preference for nationals, US importers should consider hiring a Chinese national in China.

The right person should have uncompromised integrity,excellent communication skills, and be offered appropriate incentives and should ensure that the plan does not just stay on paper, but is implemented in fact.

Those working on the ground in China must be given exceptional trainings and communications time before the FSMA compliance plans take effect.

Unwillingness by US importers to invest enough capital into implement FSMA compliance may jeopardize its effectiveness.

Realize too that your Chinese partners on the ground in China will likely expect to have more influence in the process than would food suppliers in the US that are helping their buyer comply with FSMA.

Business relationships in China are usually more complex than in the US. They often involve tight-knit relationships with local and central governments, and a wide social network that might involve family members, distant relatives, and business partners of the company (similar to many business models in Latin America).

Failure by US companies in China is often the result of the US company’s inability to navigate the cultural gulf between East and West. And yet, investing in resources to better navigate this gulf is often not a priority for US companies doing business in China.

Reasons for M&A failure between US and Chinese companies can help inform food importers of potential pitfalls as they work to create and implement FSMA compliance tools that will help them effectively comply with the regulations and still use their Chinese suppliers.

According to a study published in the Harvard Business Review, the most common causes for failure of M&As (in descending order) are:

1) Incompatible cultures2) Synergies non-existent or overestimated3) Inability to implement change in new organization4) Clash of management styles/egos5) Inability to manage target organization

US importers that source from China would do well to keep these potential problems in mind as they try to implement FSMA compliance. FSMA compliance will not require an M&A, but it will require the US company and the Chinese company become more integrated one into the other – so many of the same pitfalls are possible

Note: Global survey of 132 senior executives (2002) - 45% from Europe, 24% Asia Pacific, 17% USA, 13% rest of worldSource: Harvard Business Review, Literature research, Booz & Company

DIFFERENCES BETWEEN EAST & WEST

Sourcing and PurchasingWestern Approach: Transparency and Open Bidding

Eastern Approach: Quan-Xi is important

Authority DelegationWestern Approach: Prefer decentralizedEastern Approach: Prefer centralized, usually in 1 or 2 people

Data Integrity, Record Keeping and RecordingWestern Approach: Prefer Facts and Figures

Eastern Approach: Inadequate

Performance EvaluationWestern Approach: Performance Based

Eastern Approach: Seniority and Relationship Based

CommunicationWestern Approach: Open and Two-Way, Confrontation Common, Clarity is ValuedEastern Approach: Instruction Based, Confrontation Avoided, Harmony is Valued, Top-down

TWO POTENTIALLY HELPFUL SOLUTIONS

One option, is to consider paying on the ground, local Chinese employees or contractors to serve as the eyes and ears of the importer in China. However, these officials could easily be paid off by those they are inspecting, therefore, the US company may want to consider paying fair local wage and provide extra training on ethical business standards to these Chinese employees/contractors. This is an additional expense, but one which may turn out to be less than the expense of non-compliance. As FSMA is gradually implemented, a market will develop of Chinese who can help with nuances to making FSMA work in China. Contacting Americans who have business relations in China is a good way to learn about these resources.

Another possible strategy is to encourage competition between suppliers by looking to Chinese suppliers that work with factories employing more of a shared responsibility model, a newer development. Chinese managerial practices are very much influenced by the fact that the businesses are owned by the state and guided by government officials. This results in a bureaucratic organization structure that does not respond well to changes in the environment While factory managers, as people, are expected to achieve the yearly plan, on lower levels the notion of a vague collective responsibility prevails. Within the formal bureaucratic structure the relationships among people are rather informal. Recently, attempts have been made through the "factory responsibility system" to delegate more authority to lower levels. In fact, factories are allowed to make profits, though these profits are specially taxed.

IMPLEMENTATION STRATEGY1. COMMUNICATION

• Clear Direction and Expectations• Translated into Chinese• Delivered by Representative with Strongest• Relationship to Supplier• Confirmed Understanding of Expectations

2. TACTICAL APPROACH

2. Tactical Approach

• Start with Head of Chinese Company and Adhere to Their Already Existing Hierarchy• Understand Dynamics of Supplier and Mindset• Maintain “Guan Xi” Relationship• Compliance is Not Negotiable• Follow Up with Regular Inspections

3. INSPECTIONS

• Maintain a Local Presence• Fair Local Wage• Ethics Compliance Training• Education Based Transfer of Knowledge Process-

Why?• Tie Compliance to Financial Incentives• Regular and Transparent• Document Results and Share Feedback and

Suggestions

Kristina Hernandez, Esq

Food Law Attorney

kristy0703@gmail.com

Andrew Tilson

International Business Professional

dtumiami@gmail.com

TO CONTACT US