In the face of the rising storm of complaints from around the world, and anxious to defend the international reputation of China as a global supplier, the Chinese government treated the problem seriously and attempted to put in place effective measures to ensure the safety of food and the general reliability of Chinese products. [...] Given the growing importance of the Canadian market for Chinese food exports and the decline of trust among Canadian consumers; What should be the appropriate response of the Chinese and Canadian governments? [...] This paper examines the welfare effects of various policy options and then examines the evolution of both the Chinese and Canadian governments’ response in the wake of the spate of product safety incidents in 2007. [...] In the absence of consumer concerns pertaining to the safety of imported Chinese products the demand curve in Canada is DCdn0 and the Canadian market is in equilibrium at P0 and QCdn1. [...] Given that the externality that led to the collateral damage arose from the actions of other Chinese firms or a failure in the food safety regime of the Chinese government (or both), the Chinese government might wish to engage in activities that would remove the market failure – to move the demand curve in Canada from DCdn1 back towards DCdn0.