One of the big critiques of a hyper-globalized supply chain in which America’s manufacturing was outsourced was that it would, in a time of crisis, put America at a huge disadvantage. Unable to produce needed equipment or pharmaceuticals, we’d be left at the mercy of the countries who did.
But, says the economic theory of free trade, this would never happen. Because if one country turned off the spigot, we’d simply go elsewhere, to another country willing to sell to us. Maximizing imports, after all, is the entire point of the unilateral free trading strategy.
But theories, however well-intentioned, do not always mean success in practice. And the coronavirus pandemic has made this plain.
India announced April 6 it would be limiting its supply of hydroxychloroquine, the much-heralded potential vaccine for coronavirus. That’s okay, we can just get it from somewhere else, right? Wrong. India also manufactures most of the chemical components that go into the drug — ones that take years to develop.
After a call with President Donald Trump, India agreed to sell to the United States on a “case-by-case basis.” Not, presumably, because of its economic incentive to do so, but because upsetting the United States, a critical ally, is politically perilous for India.
China, meanwhile, has been hoarding face masks and “donating” defective personal protective equipment (PPE) to impacted countries. China also makes at least half of the chemical components for U.S. drugs as well as 97% of the antibiotics Americans take, and has threatened to turn off exports of these critical U.S. supplies.
More than 80 export curbs have been imposed globally since the virus first emerged in China in late 2019. South Korea, Germany, India and Taiwan, among other nations, have restricted the exports of masks and protective gear over worries their own supplies could fall short. Forty countries have outright bans in place on the export of drugs, pharmaceutical ingredients, or medical equipment, including India, Turkey, Russia, the United Kingdom and Saudi Arabia.
It turns out that in a crisis, the self-interested, self-serving notion of the Westphalian state is very much alive and well. Countries, even the freest of traders, will always serve themselves first in a time of trouble.
A grimmer corollary is that countries who wish ill will hoard their capacities, restricting them from reliant countries. China’s state newspaper already threatened as much, stating that China would consider banning the export of drugs, so “the United States would sink into the hell of a novel coronavirus epidemic.”
What’s happening is obviously not a repudiation of trade itself. Free trade, and its requisite result, globalization, has lifted millions out of poverty, and produced some major benefits.
But the economic theory we’ve relied upon for years — that countries will always act in their rational, economic self-interest, and if they do not, we can just find other trading partners — has been shaken. And, moreover, we have been left exposed by a crisis that has unmasked some critical vulnerabilities.
Big Pharma = Big China
Nowhere is this more apparent than in our pharmaceutical supply chain. The short version of the problem is this: the United States lacks the capacity to manufacture critical drugs, or the ingredients that make them, within our borders. Generic drugs, which account for about 90% of those consumed by Americans, are all made overseas — much of them in China and India.
Chinese pharmaceutical companies have captured 97% of the U.S. market for antibiotics, and more than 90% of the market for vitamin C (which is used in all manner of things besides as a supplement).
In 2018, 95% of ibuprofen, 91% of hydrocortisone, 70% of acetaminophen (Advil), and 40% to 45% of the blood thinner heparin imported into the United States came from China, according to the Commerce Department.
But it gets worse. Not only are we super reliant on other countries — and, in the case of China, an outright adversary — for our critical medicines, they also control the ingredients that make them. Eighty percent of the Active Pharmaceutical Ingredients, or APIs, that are the active ingredients in the drugs Americans take are made overseas.
In 2010, 70% of pharmaceutical executives reported having key ingredient suppliers in China. Even India, a large supplier of drugs to America, gets 80% of their API’s from China — meaning the majority of the drugs we import from India also have active ingredients made in China.
The Food and Drug Administration (FDA) can’t give a precise number of how many American drugs contain Chinese ingredients, because they don’t track it, and pharma companies aren’t required to report it. But based on available evidence, one can reasonably estimate that anywhere from 60% to 80% of the active pharmaceutical ingredients in American drugs come from China.
It’s why the threat made in China’s state paper — to cut off export of drugs to the United States — was not an idle one. They know just how much of our pharmaceutical supply they control. They know much more about it, in fact, than we do.
As countries, even friendly ones, begin to restrict their exports of necessary medicine and equipment, it is no longer a far-ranging hypothetical that China could one day, in the near term, do the same.
The Chinese Have Total Control
It would be easy to do. In the 1990s, the United States, Europe and Japan made up 90% of the global supply of key pharmaceutical ingredients. But over the past 30 years, illegal Chinese trade practices and government subsidies have dramatically changed the landscape.
While economists call this China’s “marginal advantage,” China does not make most of our drugs because they are inherently better at it. Rather, they make them because controlling the global pharmaceutical supply is their government policy — along with all the cheating and law-breaking that entails.
In fact, Chinese vitamin C producers are actually using their criminal state policies as a defense in court. Two Chinese producers are being sued by U.S. vitamin C purchasers, who are arguing that China has fixed prices in the industry. The Chinese producers don’t deny it; in fact, they admit to it. But they claim they shouldn’t be penalized for it, because price-fixing and export control practices are required of them by Chinese state regulation.
This is also how China took over the global production of penicillin. In 2004, the Chinese governments formed a cartel, and began dumping penicillin ingredients onto the global market, according to the European Fine Chemicals Group, the trade association for pharmaceutical ingredient makers in Europe.
U.S. manufacturers couldn’t compete with China’s illegal trade practices and government subsidies, and were forced out of business. The last U.S. penicillin fermentation plant in Syracuse, New York, closed in 2004. Penicillin API manufacturers in Europe and India followed shortly.
Within four years, the Chinese gained a chokehold on the global supply, and increased prices dramatically.
So What Do We Do About It?
At a minimum, it’s worth exploring how to restore America’s critical pharmaceutical manufacturing capabilities. If the global response to coronavirus has made anything plain, it is just how fragile our reliance on other countries becomes in a crisis. But with regard to China in particular, it has exposed just how dependent we are on an adversary for the basic health resources of our population.
Various proposals are already being put forward. Republican Tennessee Sen. Marsha Blackburn has put forward a bill to increase the country’s ability to produce APIs. Republican Missouri Sen. Josh Hawley has introduced legislation to empower the FDA to gather much-needed data on the location of their supply chains. Republican Texas Rep. Chip Roy introduced the BEAT CHINA Act to incentivize pharmaceutical companies to come back home.
In the White House, President Trump’s economic advisor, Peter Navarro, is reportedly drafting an executive order to streamline regulatory approvals for “American-made” products, and encourage the U.S. government to buy only American-made medical products.
Whatever the approach, the coronavirus outbreak has made clear that this is a problem that must be taken seriously. America has become too reliant on an adversary for fundamental needs. And because of it, China has the ability to cut off the export of critical drugs on which millions of Americans rely. They’ve already made the threat, and they know it’s a credible one. This should never be allowed to happen again.
Rachel Bovard is the senior director of policy for the Conservative Partnership Institute.
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