August 29, 2014 1:14PM

Ensuring Safe Food in a Free Market: A Lesson from China

Many Americans view the dissemination and enforcement of food safety standards as a basic function of government, and it’s difficult for them to imagine a world where food is both safe and unregulated. Libertarians can point out that the safety of a product is, just like quality and price, something that consumers directly care about and as such will be most effectively preserved in a competitive free market.  But it’s one thing to make abstract economic arguments and quite another to have real life examples.

Well, here’s an interesting story from China, as reported by Reuters last week:

A Chinese retailer is offering insurance to customers who buy infant milk powder, highlighting the lengths to which companies are going to address concerns about food safety in China.

Suning Commerce Group Ltd, which owns the Redbaby chain of stores, told Reuters it had launched the policy this week, backed by China's second largest insurer, Ping An Insurance Group.

The policy stipulates that if a brand of milk powder is recalled, customers who bought cans from any Redbaby store or its e-commerce website would be paid up to 2,000 yuan ($325) per can, with payments capped at 100,000 yuan.

"In recent years, the milk powder market in China has been in a mess," Suning said in an email.

"We realized that parents pay a great deal of attention to their children's health and safety, and in particular, the safety of their infants' foods," it added. Insurer Ping An said Suning's policy is the first of its kind in China.

Concerns about the safety of baby milk powder came to the fore in 2008 when thousands of infants fell sick and six died after an industrial chemical was added to raise the apparent protein content of certain products.

Personally, I doubt consumers actually want recall insurance. Parents don’t want to be compensated for buying a product that might injure their babies; they want safe products. But Suning's providing the insurance signals to consumers that the retailer is willing to vouch for the safety of its product. 

Now that the retailer is on the hook financially, it will predictably put pressure on its suppliers and manufacturers. All of this is done simply to get more business from anxious customers and make more money.

Retailers have always played an important role in bridging the gap between mysterious supply chains and consumer confidence. Even in a highly regulated market, they reliably step in when regulators fail, and they do a better job of meeting the diverse demands of consumers in a pluralistic society.