April 29, 2020


By John Murphy, U.S. Chamber of Commerce

The COVID-19 pandemic has inflicted a heavy toll on the United States in lost lives and mounting economic hardship. While our resilience is unquestionable, the pandemic has laid bare the inadequacies of some aspects of U.S. preparedness, and policy changes are clearly warranted.

But will we embrace the right solutions?

A number of lawmakers have introduced legislation to address some shortcomings. Several of these proposals proceed from the idea that the United States is dangerously dependent on Chinese medical products. While some of these bills adopt a deliberative approach, others call for quick action to compel firms to “reshore” production of medical equipment and pharmaceuticals.

Before policymakers charge ahead, it’s imperative that we start by identifying the real problems — and then devise the right solutions.

Where Do Medical Products Really Come From?

A chorus of voices is consistently getting the facts upside down. As one television personality tweeted in February: “U.S. Dependent on China: 80% of the active pharmaceutical ingredients needed to make American drugs are produced in China.” This mistruth has been cited widely in recent weeks — so much so that one publication published a forensic analysis of how it was passed from one supposed source to another.

What are the facts? According to an April 3 report on trade in medical goods from the World Trade Organization (WTO), global production of medicines, medical supplies and equipment, and personal protective equipment (PPE) is broadly distributed around the world. Global shipments of medical goods represent about 5% of merchandise trade.

The WTO report shows that the United States is the second largest exporter of medical goods worldwide, with exports of $116 billion, trailing only Germany ($136 billion). (These statistics are from 2017 and are the latest available.) The United States is the world’s second largest exporter of ventilators, trailing only Singapore, and the third largest exporter of PPE.

Economists at the St. Louis Fed estimate that “U.S. imports of medical equipment represent roughly 30% of total domestic demand (i.e., absorption) for these products.” In other words, U.S. production is providing 70% of medical equipment consumed domestically. When it does import medical goods, the United States draws on a diverse array of suppliers to mitigate possible supply chain risks and achieve resiliency. The top sources of U.S. imports of medical products are Ireland ($26 billion), Germany ($16 billion), and Switzerland ($13 billion). China comes in fourth place at $12.5 billion, or half Ireland’s figure.

For pharmaceuticals and other medicines, the United States is also a major manufacturer and exporter — and China is hardly a dominant supplier. Looking first at production of the active pharmaceutical ingredients (APIs) that are the key building blocks of pharmaceuticals, the U.S. Food and Drug Administration (FDA) reported in October that “China has only a modest percentage of the facilities able to produce APIs for the U.S. market. For all regulated drugs, China has 230 (13 percent) of the API manufacturing facilities, while the United States has 510 (28 percent), and the rest of the world has 1048 (59 percent). ‘All regulated drugs’ includes prescription (brand and generic), OTC, and compounded drugs.”


Percentage of API Manufacturing Facilities for All Drugs by Country or Region, August 2019

With regard to the products on the World Health Organization (WHO) Essential Medicines List, the FDA explains that “there is a total of 1,079 API facilities worldwide that make the 370 drugs on the WHO list that are marketed in the U.S. Of these, 166 (15%) are in China, 221 (21%) are in the United States, and 687 (64%) are in the rest of the world.”

Census data on U.S. imports (2019) confirm that China’s role in pharmaceutical manufacturing has been exaggerated. China isn’t even among the top 15 sources of U.S. imports of vaccines or finished pharmaceutical products (FPPs), and it accounts for 9% of U.S. imports of antibiotics (APIs and FPPs). China was the source for 15% of U.S. imports of APIs and just 4% of U.S. imports of all pharmaceutical products last year.

( Table and background on tariff lines)

(Correction: An earlier version of this article reported that China was the source for 2% of U.S. imports of pharmaceutical products in 2019. A further review of the data suggested including additional harmonized tariff system (HTS) codes — for a total of 101 lines— to the calculation, resulting in this higher number (4%) given above. The same addition of tariff lines also lowered China’s share as a source of U.S. imports of APIs from 18% to 15%.)

Because the United States is a major manufacturer of pharmaceuticals, imports account for just a portion of domestic consumption of these products. According to a Bloomberg report, “Economists at the St. Louis Fed estimate that imports of final pharmaceutical products represent about 30% of U.S. domestic consumption by value. Chinese-made medicines? Just 0.5%, according to Ana Maria Santacreu, a senior economist there.”

Promoting Preparedness: Stockpiling

With those facts in mind, what is to be done to ensure a safe and secure supply of medical products? First, for some products, pandemic preparedness can be addressed only by stockpiling well in advance.

Pandemic-driven demand for some key medical supplies, such as PPE, is staggering. COVID-19 has caused U.S. demand for N-95 masks to surge by roughly 40-fold, soaring from about 25 million last year to as many as 500 million, as a spokesperson for the Healthcare Supply Chain Association told Politico Pro’s Morning Trade. Another estimate by federal officials said the United States may need 3.5 billion N-95 masks this year — or 140 times last year’s demand.

The problem isn’t that domestic production is insufficient (though it is). Rather, the problem is that in a global health emergency the entire world’s production is insufficient.

Public health experts had long foreseen this problem. In 2005, the Bush Administration’s “National Strategy for Pandemic Influenza” foresaw the need to distribute PPE from the nation’s Strategic National Stockpile to support state and local responses. As recently as 2018, the Department of Health and Human Services was weighing proposals to address the anticipated need for PPE with “detailed plans for a new machine designed to churn out millions of protective respirator masks at high speed during a pandemic.”

But just-in-time production for PPE — from sources domestic or foreign — cannot meet the staggering demands of a pandemic. Rather, pandemic preparedness experts for years have urged governments to prepare by stockpiling these vital products in large quantities.

The Swiss provide a good example of preparedness. “With between three and six months’ worth of essential foodstuffs and goods kept in storage within the country’s borders, Switzerland maintains one of the largest strategic stockpiles in the world,” the Financial Times reports. The Swiss approached COVID-19 with relative calm, the article recounts: “Swiss authorities have dipped into some medical supplies” is a statement that contrasts positively with events in many other countries.

Still, this kind of stockpiling is easier said than done. The willingness of elected officials to budget for such purchases of products that may never be used has proven sadly insufficient. As Bush Administration Secretary of Health and Human Services Michael Leavitt said in 2007: “Everything we do before a pandemic will seem alarmist. Everything we do after a pandemic will seem inadequate.”

Promoting Preparedness: Diversifying Supply

For other medical products, solutions other than stockpiling may be more suitable. As noted above, the global production of some medical products, including pharmaceuticals, is spread across dozens of markets, and that’s a good thing.

Diversity of supply has long been a touchstone for strategic planning. Before the recent dramatic increase in U.S. oil and gas production, the fact that the United States was importing oil not just from the Middle East but from Canada, Nigeria, Indonesia, and Colombia was widely acknowledged as a way to mitigate risks.

Similarly, auto manufacturers learned after the 2011 Fukishima earthquake the value of diversifying “the sourcing of parts, inputs and components among multiple suppliers in many countries, so as to have fallbacks if one country is hit,” as the Financial Times recently noted.

In addition to our robust domestic manufacturing in the pharmaceutical sector, the United States today draws on a diverse array of suppliers to mitigate possible supply chain risks. According to U.S. Census data, Ireland (21%), Germany (13%), and Switzerland (12%) are the top sources of U.S. pharmaceutical imports. Ten additional countries (eight in Europe plus India and Japan) account for between 3% and 6% each.

Relying entirely on domestic production does not necessarily ensure resilience or security. Consider the stress today on U.S. food supply chains: The sharp drop in gasoline use has led also to less ethanol usage, so ethanol plants have closed; those ethanol plants also produce carbon dioxide for use as a refrigerant and preservative in meat producing facilities. The resulting carbon dioxide shortage is now threatening to affect meat availability and prices on top of closures of some meat facilities due to COVID-19 outbreaks in those plants. These food supply chains are looking fragile — even though they are almost entirely domestic.

As Christopher Holt, Director of Health Care Policy at the American Action Forum, writes, “the global supply chain for U.S. drugs is actually quite diverse… Far from a problem, the diversity of the global supply chain provides some measure of security. Having API suppliers all over the world allows for manufacturers to shift procurement when circumstance require. If the supply chain is more localized, it’s also more likely to be impacted by natural disasters or outbreaks like the coronavirus.”

Promoting Preparedness: Keeping Trade Open

One final element in pandemic preparedness must be to keep trade open. There’s ample evidence export bans and other trade barriers reduce the availability of critically needed medical supplies in the short term and hurt our industrial competitiveness in the long term.

As Secretary of State Mike Pompeo told his Canadian counterpart in early April, “international cooperation to contain COVID-19 transmissions and to address the public health threat caused by the pandemic” is indispensable, and the United States is committed to working with its international partners “to ensure the viability of international supply chains for crucial medical supplies.”

In the short term, imposing trade barriers such as export bans risks undermining pandemic response. Scores of countries have imposed export restrictions on PPE, for example, with the United States doing so relatively late (on April 2), but the costs of these actions have rapidly become apparently. As a bipartisan group of a dozen senators noted in an April 17 letter to the Chinese ambassador, new Chinese export restrictions aimed at “preventing the export of low-quality products… appear to have the unintended consequence of blocking critical, high-quality medical products from reaching the United States in a timely manner.” In short, our own ability to tap into overseas production of critically needed goods in a crisis is limited by the spread of trade barriers.

There are long-term implications as well. The United States has powerful offensive interests (in trade policy parlance) in the manufacture and export of medical goods, and U.S. medical device export sales — to give one example — are a major engine of growth and job creation at home. Ensuring the long-run competitiveness of our export industries will pay dividends in post-pandemic recovery.

For complex manufactured goods such as these, trade barriers threaten to interrupt international supply chains in which parts are manufactured and ultimately assembled in value chains that go back and forth across national borders.

One good example is ventilators, which auto companies such as GM are heroically beginning to manufacture. As Politico recently reported, “Each ventilator that GM intends to make requires 419 major parts, and there are ‘literally thousands of sub-components that go into those 419 parts, especially given the complexity of several of the individual part designs,’ company spokesperson Jeannine Ginivan said…. About 70 percent of the parts manufactured in the United States and about 10 percent in the rest of North America. The remaining 20 percent needs to be imported from countries including France, Italy, South Korea, Thailand, U.K., Japan, China and Taiwan.” More trade barriers means fewer ventilators.

Keeping trade open is also about America’s compassionate values. Consider how organizations such as The AIDS Institute, American Cancer Society Cancer Action Network, American Kidney Fund, National Alliance on Mental Illness, National Multiple Sclerosis Society, and Susan G. Komen recently wrote to President Trump to insist that government policies should “not restrict access to — or destabilize the supply chain for — currently available pharmaceuticals or medical devices.” “Today, patients in the United States and around the world depend on the use of global supply chains that facilitate ongoing access to needed medicines,” they argued.

The COVID-19 pandemic has revealed serious shortcomings in pandemic preparedness in the United States and around the globe. We need to learn from this grim experience. In our drive to ensure a safe and secure supply of medical products, we need to look much more seriously at stockpiling, ensuring diversity of supply, and keeping trade open. It’s vital we learn the right lessons and safeguard our supply chains for a better future.