Coronavirus Outbreak Exposes China’s Monopoly on U.S. Drug and Medical Supply Industry
The coronavirus outbreak has exposed the United States’ dangerous dependence on China for pharmaceutical and medical supplies, including an estimated 97 percent of all antibiotics and 80 percent of the active pharmaceutical ingredients needed to produce drugs in the United States.
The economic repercussions of the coronavirus reveal the dangers of allowing one country to have a near-monopoly on global manufacturing, David Dayen explains in an article at the American Prospect:
China is a source of not only finished goods but also of input parts and raw materials. A substantial number of the materials needed for defense and electronic systems come from China, and that nation is “the single or sole supplier for a number of specialty chemicals,” according to a recent Defense Department report.
Rare earth minerals, which are critical to electronics, are largely mined in China. As a result, Chinese disruptions don’t just hit Chinese manufacturing, they hit everyone. Automakers have already had to slow or shut down factories globally due to supply shortages.
Perhaps the biggest concern is over medical supplies. China produces and exports a large number of pharmaceuticals to the U.S., including 97 percent of all antibiotics and 80 percent of the active ingredients used to make drugs here. Penicillin, ibuprofen, and aspirin largely come from China. Last month, the medical supply firm Cardinal Health recalled 2.9 million surgical gowns “cross-contaminated” at a plant in China; the blood pressure drug valsartan also saw shortages recently, thanks to tainted active ingredients at one Chinese plant. The combination of supply chain disruptions and increased demand at hospitals if coronavirus spreads to the U.S. could prove devastating.
In a dark irony, most of the world’s face masks—now ubiquitous in China as a precaution—are made in China and Taiwan, and even for those made elsewhere, some component parts are Chinese-sourced. Shortages have led China to declare the masks a “strategic resource,” reserving them for medical workers. U.S. hospitals are “critically low” on respiratory masks, according to medical-supply middlemen. Lack of protective gear could increase vulnerability to the virus, and the one place on earth suffering from production shutdowns is the one place where most of the protective gear originates [emphasis added].
In testimony yesterday before the Senate Committee on Homeland Security and Governmental Affairs, Scott Gottlieb, a physician and the former Food and Drug Administration commissioner in the Trump administration, explained in detail the extent of the U.S. pharmaceutical industry’s dependence on China:
About 40 percent of generic drugs sold in the U.S. have only a single manufacturer. A significant supply chain disruption could cause shortages for some of many of these products.
Last year, manufacturing of intermediate or finished goods in China, as well as pharmaceutical source material, accounted for 95 percent of U.S. imports of ibuprofen, 91 percent of U.S. imports of hydrocortisone, 70 percent of U.S. imports of acetaminophen, 40 to 45 percent of U.S. imports of penicillin, and 40 percent of U.S. imports of heparin, according to the Commerce Department. In total, 80 percent of the U.S. supply of antibiotics are made in China.
While much of the fill finishing work (the actual formulation of finished drug capsules and tablets) is done outside China (and often in India) the starting and intermediate chemicals are often sourced in China. Moreover, the U.S. generic drug industry can no longer produce certain critical medicines such as penicillin and doxycycline without these chemical components.
According to a report from the US-China Economic and Security Review Commission, China’s chemical industry, which accounts for 40 percent of global chemical industry revenue, provides a large number of ingredients for drug products. It’s these source materials — where in many cases China is the exclusive source of the chemical ingredients used for the manufacture of a drug product — that create choke points in the global supply chain for critical medicines.
Moreover, when it comes to starting material for the manufacture of pharmaceutical ingredients, a lot of this production is centered in China’s Hubei Provence, the epicenter of coronavirus. Most drugmakers have a one to three months of inventory of drug ingredients on hand. But these supplies are already being drawn down. Among big [active pharmaceutical ingredient] makers in Wuhan are Wuhan Shiji Pharmaceutical, Chemwerth, Hubei Bio-cause, Wuhan Calmland Pharmaceuticals. [emphasis added]
Gottlieb notes that “80 percent of the U.S. supply of antibiotics is made in China.” The sourcing of this estimate is explained in greater detail in section three of the U.S.-China Economic and Security Review Commission’s 2019 report to Congress, titled “ Growing U.S. Reliance on China’s Biotech and Pharmaceutical Products.”
The report notes that China is “the world’s largest producer of active pharmaceutical ingredients (APIs). The United States is heavily dependent on drugs that are either sourced from China or include APIs sourced from China.” The report further explains that although India is the world’s leading supplier of generic drugs, India gets 80 percent of its active pharmaceutical ingredients directly from China. The United States also imports 80 percent of its APIs from overseas (primarily from India and China) and “a substantial portion” of its generic drugs “either directly from China or from third countries like India that use APIs sourced from China.”
In other words, almost all pharmaceutical roads lead to China.
Furthermore, the report notes that China’s dominance of the chemical industry and global manufacturing of active pharmaceutical ingredients means that “the world is becoming increasingly dependent on China as the single source for life-saving drugs.”
“The U.S. generic drug industry can no longer produce certain critical medicines such as penicillin and doxycycline, and the APIs needed to make these antibiotics are sourced from China,” the report states.
China achieved this dominance in the pharmaceutical industry by the same methods it employed to dominate the steel industry – through anti-competitive trade practices that dumped cheap state-subsidized products on foreign markets to drive competitors out of business.
The report states:
Rosemary Gibson, senior advisor at the Hastings Center and author of China RX, noted in her testimony before the Commission that the United States is losing its ability to produce generic drugs because Chinese drug companies dumped low-price products into the global market, which in turn pushed U.S., European, and Indian producers out of the generic drug manufacturing business.
According to Ms. Gibson, China is seeking to disrupt, dominate, and displace U.S. pharmaceutical and other medical companies, and in doing so limit the United States’ ability to produce its own medicines, including critical antibiotics such as penicillin and even generic aspirin. She believes the United States could see its generic drug industry made uncompetitive within five to ten years due to the Chinese government’s policies (including subsidies and export incentives) that allow Chinese pharmaceutical firms to undercut prices and drive the U.S. firms out of business. [emphasis added]
Ironically, China’s success in monopolizing the U.S. drug market with these anti-competitive trade practices was reportedly cited by President Trump’s former economic adviser Gary Cohn as an argument against Trump’s efforts to fight back against China’s trade violations.
In his book Fear: Trump in the White House, Bob Woodward describes a heated discussion among Trump administration officials about the repercussions of a trade war with China. Cohn, who disagreed with the president’s decision to impose tariffs on Beijing, reportedly invoked a Commerce Department study showing that 97 percent of all U.S. antibiotics come from China. “‘If you’re the Chinese and you want to really just destroy us, just stop sending us antibiotics,’ he said.”
Globalist critics like Cohn of Trump’s trade policies “fretted that turbulence from the Trump administration’s tariffs would have catastrophic results on the global economy,” Curtis Ellis wrote last week in an op-ed for Breitbart News. These critics were proven wrong.
However, the virus itself will cause economic disruptions because it “has exposed the frailty of global supply chains and the fallacy of the management theory calling for intercontinental supply chains and just-in-time inventory management,” Ellis writes.
Or, to put it another way, the tariffs did not hurt the U.S. economy, but the current virus outbreak in China could due to the very problem that the tariffs were enacted, in part, to address. In this sense, the virus has vindicated the Trump’s administration’s tough trade stance and affirmed the necessity of moving the world’s supply chains out of China. If anything, Trump’s tariffs may have actually made the U.S. economy somewhat more resilient because they encouraged companies to begin the process of moving production out of China.
But this vindication will be of little consolation to Trump if the virus’s ripple effects hurt the economy during an election year. The political repercussions could be significant for a president who has touted the strong economy as a major selling point for his re-election.
Economists are already expecting the virus to have a major impact on China’s economy. Breitbart News’s John Carney reports that HSBC “lowered its estimate for the first quarter growth from an annualized rate of 5.8 percent to 4.1 percent” for China. “The bank’s estimate for full-year growth was lowered by half a percentage point from 5.8 percent to 5.3 percent.”
As for the global economic impact, Dayen quotes Washington University in St. Louis professor Panos Kouvelis who estimates $300 to $400 billion in supply chain damage over a period of up to two years.
“That’s actually manageable as a share of the global economy,” Dayen writes. “But as new cases pop up in Singapore, an important financial hub, and as the head of the World Health Organization warns that we could be seeing only the ‘tip of the iceberg,’ those numbers could already be out of date.”
Those numbers may indeed be overly optimistic. In his testimony before the Senate yesterday, Gottlieb warned of the potential for the coronavirus epidemic to become a full pandemic–and maybe even endemic–now that it has spread to Singapore, Hong Kong, and Japan. “It could take a new position as a more sinister member of the seasonal pathogens that circulate each year and infect humans,” he said, noting that “the next month is critical.”
“We must prepare for the prospect that the virus evaded our border protections and was already introduced into the U.S. in late December or early January — when it first appears to have become epidemic in China’s Hubei province. Those index cases could have seeded community spread, and eventually, outbreaks could emerge in America,” Gottlieb stated.
Whatever the economic impacts of the coronavirus, the current dependence on an authoritarian communist regime for vital necessities is an indictment of globalist neoliberal economic policies that have endangered U.S. national security and long-term prosperity.
“[T]he economic threats to locating so much of the global supply chain in one part of the world were eminently predictable,” writes Dayen. “Neoliberal dogma about ‘comparative advantage’ and a concomitant preference for mass outsourcing put the world on a tenuous path.”
There is a growing consensus among populists on the right and left about the need to address the neoliberal trade and economic policies that gave China a monopoly on the world’s supply chains.
Gottlieb urged Congress to empower the Food and Drug Administration (FDA) “to look not only at the supply of finished products but to also identify circumstances where key components may have only a single source across an entire category of products.”
Matt Stoller, the author of Goliath: The 100-Year War Between Monopoly Power and Democracy, writes that Gottlieb is essentially asking for the FDA “to have the authority to uncover hidden monopolies.”
“The Federal Trade Commission already has this research authority, it just doesn’t use it very often,” Stoller explains. “And the United States Trade Representative has information on our dependencies on China, because when they threatened tariffs large numbers of companies came to them during a notice and comment period whining about how such dependencies would hurt their business. So we have some information about the scale of the problem. Just not enough.”
“The strongest reason to address monopolies isn’t that monopolies are unjust, but because they are dangerous,” Stoller notes. “And we may be about to find out just how dangerous they are.”
If nothing else, the coronavirus offers business and government leaders another reason to continue the process of decoupling the U.S. economy from China. And it also offers a warning for those who seek to simply relocate production to another developing country in order to exploit cheap labor and lax regulations. All of these short-term money-saving decisions come with long-term risk.
“If there’s a silver lining, it’s that this threat could inspire more diversification of supply chains,” Dayen writes. “The race to the bottom in manufacturing clearly has a cost, and countries must learn that self-preservation demands maintaining some semblance of an industrial base.
The U.S.-China trade war did lead to some companies moving their work out of China, but only to cheaper countries where multinationals will likely conglomerate, to build economies of scale. We know the dangers inherent in that. Rebuilding domestic manufacturing is not just a question of jobs; it’s a question of safety.”