Kaida: Chinese Toys, Trade and Environemnt (KAIDA Case)

     CASE NUMBER:        324
     CASE MNEMONIC:      KAIDA
     CASE NAME:          Chinese Toy Factory

A.   IDENTIFICATION

1.   The Issue

The Hong Kong based toy company Kaida Enterprises opened a factory
for manufacturing plastic toys in China's Shenzhen Special Economic
Zone. It was later accused by the local residents of releasing
malodorous and toxic gases into the atmosphere and of creating
noise pollution. The case was brought to the Shenzhen Intermediate
People's Court. Kaida Enterprises was found guilty. To make
recompense, Kaida had to pay a fine and clean up its production
facilities.

2.   Description

The case involves several issues. First, the issue of who was
responsible for the company's pollution. The investment contract
that Kaida signed with the Shenzhen government stated no
environmental measures that had to be taken. Also, according to
Hong Kong law, it is the government and not the company which is
responsible for any pollution and its clean up. This issue was made
more complicated because of the impending return of Hong Kong to
China's authority.

Another factor affecting the case was the controversial nature of
the special economic zones among some of China's rulers. Many
leaders were not in favor of the zones or the economic reforms
which they symbolize and would be happy to use pollution as another
criticism of China's burgeoning economic reforms.

A final issue was determing what materials were used in the
production process. Many of the companies producing in China's
special economic zones use technologies and materials far in
advance of those developed in China. These technologies are
industrial secrets protected by patent.

In September 1981, Kaida Enterprises Ltd., a Hong Kong based toy
company, entered into agreement with Chinals Business Solicitation
Bureau to build a factory in Shekou Industrial Zone. The factory
required investment of close to $16 million and would employ
approximately 1,200 people. The first wholly Hong Kong owned
business in Shenzhen, the factory was to produce plastic toys for
export to the United States and Europe. The factory started
operations in 1982.

In production, Kaida mixed polyvinyl chloride with diockyl
phthalate and other plasticizers. When mixed at high temperatures,
these materials produce unpleasant odors and toxic gases. The main
compnent of the gases were found to be polyvinyl chloride and
dioctyl phthalate.  Workers and people in the surrounding
environment began to complain of respiratory problems and choking.

Another problem which soon arose from the plant was the high level
of noise. The employees were working with noise levels between 91
and 106 decibels. The noise level outside the factory often reached
around 87 decibels. These levels far exceeded maximum decibel
levels allowed under Chinese law -- 85 decibels on the factory
floor and 55-65 decibels outside. It added to the anger of the
surrounding population.

The governmental environmental watchdog for the area, the Shekou
District Environmental Monitoring Station, was alerted to the
problem. It urged Kaida to control its pollution but was ignored.
The station also asked academics and technicians from the Guangzhou
Municipal Environmental Protection Equipment and Technology Service
Center and the Guangzhou New Technology Applications Research
Institute, to advise the company on how it could reign in its
pollution. Again this advice went unheeded by the company.

In October 1983, the monitoring station warned Kaida that it had to
clean up its pollution within a set time frame. When the company
failed to take action by the set date, the station took the matter
to the Shenzhen Intermediate People's Court. During the trial,
Kaida claimed that the contract they had signed with the Chinese
government made no mention of environmental guidelines. The company
claimed that according to Hong Kong law -- where the company was
based -- pollution is the responsibility of the government and not
the company. Therefore, the Shenzhen government was responsible for
cleaning up the air and noise pollution. Against the company, the
district provided evidence gained by technicians that the company
was producing noise levels above those stated in Chinese law and
that it was using materials that would produce bad odors and could
cause health problems.

The court found Kaida Enterprises guilty of polluting the
environment. The company was directed to clean up its production
process by 31 October 1984. It was fined H.K.$20,000. Kaida also
had to pay all the legal fees and the fees for the technicians
hired by the district to gather proof agAinst them. The Supreme
Court later upheld the district court's ruling and Kaida complied
with the court's rulings. Kaida currently exports to the United
States, Western Europe, and does only a small amount of business
within China.

3.   Related Cases

     DOOSAN case
     MINAMATA case
     CHINCOAL case
     BALTIC case
     BLACKSEA case
     MEDIT case

     Keyword Clusters    

     (1): Forum                    = HongKONG
     (2): Bio-geography            = TROPical
     (3): Environmental Problem    = MANUFacturing

4.   Draft Author: Leigh Powell (May, 1994)

B.   LEGAL Cluster

5.   Discourse and Status:  DISagreement and COMPlete

The discourse in this case was a disagreement. It was a legal case
between the citicizens of a Chinese free trade zone and a foreign
company taken up at a local/prefectural level, the Shenzhen
Intermediate People's Court.

The case has been decided in favor of the people of the Shenzhen
district and the Kaida toy company has been fined and forced to
clean up its operations.

6.   Forum and Scope:  CHINA and BILATeral

7.   Decision Breadth:  2 (Hong Kong and China)

8.   Legal Standing:  LAW

China's Environmental Protection Law Article 9 of the Environmental
Protection Law states that all foreign nationals and foreign
aircraft, vessels, vehichles, materials, and living beings entering
or transiting the territorial land, waters, and airspacce of China
must observe this law as well as other regulations and rules for
environmental protection. Kaida Enterprises was also found guilty
of violating Articles 6 and 32 of the Environmental Protection Law
for illegal pollution and failing to introduce satisfactory
controls on operations.

Article 6 provides that in selecting construction sites, making
designs, carrying out construction projects, and embarking on
production, all enterprises and other undertakings shall pay
adequate attention to preventing environmental pollution and
damage.  While carrying out new construction or renovation
projects, an environmental impact report shall be submitted first,
and design work can be started only after such a report has been
reviewed and approved by the department concerned. Facilities for
preventing pollution and other hazards to the public must be,
built, and put into operation simultaneously with the principal
project. The discharge of all harmful materials shall be carried
out in accordance with the standards prescribed by the state.
Other: Agreement reached between Kaida Enterprises and Chinals
Business Solicitation Bureau The agreement did not include any
provisions for pollution control and environmental pollution. China
claims, however, that a state's sovereignty is that the
negotiations and content of contracts must comply with the laws of
the People's Republic of China, including the Environmental
Protection Law

C.   GEOGRAPHIC Cluster

9.   Geographic Locations

     a.   Geographic Domain : Asia
     b.   Geographic Site   : East Asia
     c.   Geographic Impact : China

10.  Sub-National Factors:  YES

11.  Type of Habitat:  TROPical

D.   TRADE Cluster

12.  Type of Measure:  Regulatory Standard [REGSTD]

13.  Direct vs. Indirect Impacts:  INDirect

14.  Relation of Measure to Environmental Impact

     a.  Directly Related     : YES  TOY
     b.  Indirectly Related   : NO
     c.  Not Related          : NO
     d.  Process Related      : YES  Pollution Land [POLL]

15.  Trade Product Identification:  TOY

16.  Economic Data

17.  Impact of Measure on Trade Competitiveness:  LOW

18.  Industry Sector:  Manufacturing

19.  Exporter and Importer:  CHINA and USA

E.   ENVIRONMENT Cluster

20.  Environmental Problem Type:  Pollution Land [POLL]

The plasticizers used in the toy-manufacturing process were
producing malodorous and toxic gases mainly composed of
polychloroethylene mixed with phosphobenzenediformatedicaprilate.
he noise levels ranged from a low of 91 to high of 106 decibels
during work days. The state limits are 85 decibels in the work day.

Local residents complained of lung and respiratory problems. The
air pollution were likely harmful to the surrounding wildlife
either. However, there were no reported effects and no studies were
made of the effect on wildlife.

21.  Name, Type, and Diversity of Species 

          Name:          Many

          Type:          Many

          Diversity:     China

22.  Impact and Effect:  LOW and PRODuct

23.  Urgency and Lifetime:  MEDIUM and 1-3 years

24.  Substitutes:  Biodegradable products

Kaida did not have to find substitutes to its production
materials--most plasticizers contain fatty acids which would
produce malodorous gases. Instead, it was able to invest in
pollution control equipment to stop the release of the toxic and
malodorous gases.

VI.  OTHER Factors

25.  Culture:  NO

26.  Trans-Border:  NO

27.  Rights:  YES

28.  Relevant Literature

Lester Ross and Mitchell A. Silk.  Environmental Law and Policy in
the People's Republic of China, Quorum Books, New York, 1987.

Vaclav Smil.  China's Environmental Crisis, East Gate Book, M.E.
Sharpe Inc., 1993.