Soon after I became Editorial Director of World Trade magazine, some four years ago, I learned one of the Cosmic Truths about the global supply chain. As readers of these pages well know, the last decade has seen a profound, relatively sudden transformation of traditional commercial, manufacturing and logistics patterns. So what, I asked a well respected consultant in my debut article for this magazine, is the key to doing business in a ‘flat’ world?

Her answer reminded me a lot about Warren Buffet’s reputed first principle of investing: “Rule 1, don’t lose capital; Rule 2, don’t forget Rule 1!” Without hesitation she responded that, contrary to popular belief, “the last factor to consider, after everything else, is labor cost.”

Unlikely advice a while back, when the talk of trade was “the China price,” the radically collapsing base price for every imaginable product ranging from air conditioners to zinc batteries. Freaked-out U.S. companies were racing each other to set up shop in Shanghai or the Pearl River Delta.   

Of late, however, those cautionary words by Shoshana Cohen of PRTM ring particularly true. The summer of 2007, I predict, will be remembered as a pivotal moment when China sourcing was subjected to serious second thoughts. Products manufactured there triggered bans, health alerts, and recalls. Made-in-China fake Viagra, lead-painted toys, toxic toothpaste, and poison dog food entered the global supply chain.

Indonesia began testing popular imported products from China and found mercury-laced makeup that turns skin black and dried fruit spiked with industrial chemicals. The Philippines warned of candy contaminated with formaldehyde. In Malaysia, it was fungus-infested nuts.  

Amidst a wave of growing unease President Bush established an interagency group—chaired by the Secretary of Health and Human Services and including representatives from State, Treasury, Agriculture, Transportation, Homeland Security et. al—to monitor import safety, tasked “to identify actions and appropriate steps that can be pursued, within existing resources.” There’s talk of an ‘import czar’ to oversee all aspects of the process (although, given the dubious success of the ‘drug czar’ in curtailing controlled substances, this model makes one pause).

A lot of the problem is ‘China-specific,’ the result of millions of liberated small-scale entrepreneurs largely operating outside of public scrutiny and the rule of law. Given the scale of the country, the ability of Chinese authorities to police their own shops is problematic (little wonder that the country’s top food and drug regulator was indicted for malfeasance, although summary execution seemed particularly dire punishment).

But the underlying issue—the sheer complexity of supply chains folding in upon themselves like strands of DNA—pertains to places other than China. Even the best intentioned, most responsible final ‘brand’ manufacturer is multiple levels removed from the original source of components or basic ingredients. And the bigger the company, the better the odds that much of that stuff is coming from outside the U.S.

Simply put, this is an endemic problem that puts aspects of the global supply chain at potential risk. The collective interests of the various parties engaged in those global supply chains is presumably too great to allow this situation to persist over the long-term. One would expect international standards regimens to be established and enforced (check out Policy Perspectives in this month’s issue for a salient conversation of the role of international regulatory bodies in governing trade).

In the short-term, however, well-placed consumer concern and renewed commitment on the part of manufacturers to product safety on the part of manufacturers looks to be the best we can hope for. Thin reeds, those! But at least a start.