Malaysia's Port Klang free-trade zone. Photo: Wikimedia Commons

The Shanghai Free Trade Zone has just opened outside of China's most cosmopolitan city. In the absence of a global agreement, such free-trade zones (FTZs) have flourished, even in autocratic countries that rhetorically oppose free trade. Most FTZs allow business to operate with zero tariffs or quotas on imports and exports, many exhibit looser labor and environmental laws, and some have almost no interference at all from customs agents. FTZs enhance trade, but with limited oversight they also are exploited by criminals to traffic fake and substandard products. Within China this has often resulted in trade in dangerous products like contaminated milk formula, fake toothpaste, and contaminated pet food. Outside the threats are even more varied.

Western authorities allocate tremendous resources to monitoring and attempting to limit the trade in narcotics through FTZs, but they appear to not closely monitor the bulk chemical trade, which is possibly no less dangerous.

I was introduced to the complex trade in bulk chemicals that circulate around the world, seemingly without inspection, by Guy Villax, CEO of the Portuguese pharmaceutical company Hovione. Villax explained to me how the provenance of many of the chemicals that go into the production of medicines and foods are unknown, even by European and U.S. firms.

Spending a few days in major FTZ ports and witnessing the volumes of container traffic would overwhelm anyone. With the help of some private security officers, I was allowed to review the manifests of cargo ships coming in and out of FTZ ports in three countries in the Middle East as well as the unloading of the products in one. The original source of the products being shipped was incorrectly identified in half of the dozen manifests I saw. Nearly all of the chemicals had originated in China, but their production was in several locations identified as Italy or the United Arab Emirates. And in at least one instance, the chemicals in the container did not match those listed on the manifest.

According to security officials, the chemicals I saw are likely destined for major trade events. In the past they have been sold at trade fairs like the CPhI Global Conferences -- which bill themselves the world's No. 1 pharmaceutical sourcing event. The next one is in Germany later this month. The vast majority of the buyers, sellers, distributors, and middlemen operating at this massive trade fair are legitimate -- but in the past, at least say security experts, amongst these players have been a few disreputable traders who were aware that the stated origin of the chemicals they sold was fraudulent.

Security officials assured me that none of the chemicals I witnessed in transit were explosive or immediately lethal or toxic chemicals. This is apparently enough for authorities to continue to direct limited resources toward more immediate threats associated with narcotics and terrorism. But it was cold comfort for me, knowing how these chemicals can easily end up in medicines that are given to children.

The rapid transit of chemicals through FTZs, where a myriad of corporate identities confuse responsibility, results in trade opaqueness. While a regular port can have just as many corrupt officials, such ports are subject to more oversight from national authorities backed by the political will to protect domestic consumers. FTZs, on the other hand, not only introduce a legal and psychological barrier to the interference by authorities but also allow blame to be shifted to the more amorphous "international community."

Any organization or government that does not conduct rigorous inspections in FTZs will not know that chemicals bound for medicines are routinely mixed up or misidentified. These chemicals could be inferior, which could lead to the production of substandard medicines that endanger lives. It is likely that the purchasers of these chemicals will be at the most cost-conscious end of production, especially in India. And my research team's covert procurement of medicines over the past few years show that about 5 percent of Indian medicines fail basic quality tests, a figure the Indian government confirms.

But even brand-name suppliers might procure incorrectly labeled bulk chemicals through FTZs by mistake. This is most likely to occur if chemical shortages occur, and when major players have to look outside their usual supplier list.

Trade through FTZs may keep the costs of medicines down, but it carries a great risk at the current level of regulation. Most manufacturers do conduct tests on the chemicals they procure, but some important and dangerous problems are not easily spotted in routine tests. Even trace impurities can be carcinogenic, and they are rarely spotted unless specifically targeted for measurement, which is expensive and rarely done.

The death toll from substandard medicines is already in the tens of thousands a year. The specific harm from those bad drugs made with the chemicals transiting FTZs is incalculable, but with the constant downward pressure on medicine prices encourages sourcing from these cheapest suppliers, a major disaster in a Western nation could be just around the corner. Perhaps only when this happens will oversight in FTZs increase. Ultimately it will be up to Western regulators and especially pharmaceutical manufacturers to strengthen controls, so that we can be more assured of the safety of the medicines we take.

Roger Bate is the author of Phake: The Deadly World of Falsified and Substandard Medicines, a contributor at SearchingForSafety.com, and an adjunct scholar at the American Enterprise Institute.