U.S. Healthcare Industry Could Be Decimated by China Trade War

Yves here. This article repeats the canard that the US should be worried about the prospect of China selling US Treasuries. First, na ga happen, because selling Treasuries would mean selling dollars and buying renminbi, which would drive the renminbi up against the dollar, the last thing that China wants. It would have an impact similar to increasing the tariffs. Second, the US does not depend on China to finance its deficits. Issuing Treasuries is a convention that is a holdover from the gold standard days. And look at how the effect of the tariff tantrum has been to send yields even lower, with the Wall Street Journal speculating tonight about the prospect of negative yields in the US.

However, this article is on solid ground in suggesting that China could make life difficult for the US on other fronts. The US has recklessly allowed China to become a dominant or even monopoly provider of key medications and/or their key components. We’ve posted on this topic before as experts have raised warnings about quality control shortcomings as well as the lack of alternative suppliers, at least in any reasonable time frame. From a 2018 post, China Rx: How the US Depends on China for Its Drugs:

A recent book, China RX: Exposing the Risks of America’s Dependence on China for Medicine by Rosemary Gibson and Janardan Prasad Singh, appears not to have gotten the attention it warrants…. You can also listen Gibson describe some of the key points from her book in the interview below.

The big message of Gibon’s and Singh’s book is that the US relies on China for the production of active ingredients in drugs and in many cases, of the medications themselves, to the degree that we would have a public health crisis if supplies were interrupted. As Gibson said on C-SPAN:

Many people that we spoke to, both former government officials and some in industry said that if China shut the door on exports, within months, pharmacy shelves in the United States to be empty, and hospitals would cease to function.

And don’t assume generics king India would step into the breach. India gets many of the active ingredients for its pharmaceuticals from China. Gibson forecasts that China will overtake India in generics manufacture within a decade.

By Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at SafeHaven

Beijing has more than one powerful ace up its sleeve in the trade war theater, and drug manufacturing is a foreboding one.  Over the past week, the ongoing conflict between the world’s largest economies took a turn for the worse after President Trump threatened to slap tariffs on virtually all Chinese imports into the country. Washington has a clear advantage when playing the tariff trump card since the country imports nearly 4x as many goods (dollar value) from China as China does from the U.S.

But China has repeatedly refused to be the first to blink.

Its immediate response was to allow the yuan to devalue to an 11-year low–effectively nullifying some of the effects of the tariffs–and also threatened tostop buying U.S. agricultural products.

If push finally comes to shove, China might decide to stop playing passive aggressor and resort to even deadlier measures.

The two most frequently mentioned ‘nuclear options’ at its disposal are dumping it’s trillion-dollar cache of U.S. Treasuries and cutting off rare-earths supplies to U.S. manufacturers.

Yet, another oft-ignored risk is Beijing’s potential disruption of vital drug supplies to the U.S. or, worse still, willfully contaminating the drugs with harmful compounds.

Drug Supply Dominance a Security Threat

According to Bloomberg, Trump’s administration has become increasingly wary of China’s dominance in the global drug supply chain and now sees it as a genuine national security threat. China has grown into the world’s largest supplier of active pharmaceutical  ingredients (APIs)–useful drug-making compounds supplied to drugmakers.

A year-long recall of blood pressure and heart medication such as losartan, valsartan and irbesartan after discovering they contained trace amounts of cancer-causing impurities has turned attention to this real or perceived threat even as the trade war escalates to unprecedented proportions.

What has rung the tocsin for the authorities, including the Pentagon, is the fact that millions of civilians and military staff take drugs whose active ingredients are made in China.

For instance, Larry Wortzel, a military retiree and member of the U.S.-China commission, has told Bloomberg that four versions of  his blood-pressure lowering medication valsartan were recalled over a three-month period after it was discovered that they were laced with rocket fuel. Specifically, the drugs contained NDMA, a manufacturing by-product and potential carcinogenic that was once used to make rocket fuel. The drugs were manufactured in India but had active ingredients sourced from China.

“They were contaminated with rocket fuel,” he revealed. “I imagine active people have the same problem. This affects the readiness of our troops.”

Catch 22

Just like the rare earths dilemma, the U.S. healthcare industry is finding itself in a Catch 22 situation since it cannot easily cut off all drug supplies from China.

The Trade Agreements Act of 1979 requires the Defense Health Agency and other federal agencies to only use pre-approved drugs that are made in the U.S. or from a compliant country.

As you might imagine, China is not on the approved list; however, the agency has waivers for nearly 150 drugs from the country because it would not be able to procure them from anywhere else. Moreover, the TAA only covers finished products and not their components–though that’s more of a legislative issue that can probably be fixed.

Yet, quality is just one of the concerns here. China can potentially cut off actual drug supplies to the U.S. thus crippling the industry. Rosemary Gibson, the author of China Rx, highlights this dilemma:

If China shut the door on exports, our hospitals would cease to function, so this has tremendous urgency,” she has told Bloomberg.

The potential solution is definitely not short-term. As Christopher Priest, a Defense Health Agency director, told a U.S.-China advisory panel last week, the federal government should compel pharmaceutical companies to build and maintain the necessary infrastructure to manufacture drugs without relying on unfriendly countries like China.

That might sound like another bad case of American jingoism yet the end might, in the end, justify the means.

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34 comments

    1. Amfortas the hippie

      the Little Vulcan in my head agrees…and similarly with Big Ag…
      the unwinding of the Empire was never gonna be pretty, or fair, or comfortable, and us little people were always gonna bear the brunt.
      from another angle…once again, our elites are revealed to be shortsighted, starry eyed morons, with no conscience or scruples.
      like the foreign and domestic labor arbitrage, the “smartest guys in the room” thought it would be cool to outsource such vital systems to china…assuming that the chinese would just stay in their lane, and be happy being a serf nation forever.
      because “trade” is always good, right?
      and like the rest of the rush to globalisation, it was sold to us as leading to lower prices and domestic nirvana.
      like the epstein mess…at what point are the Masters no longer seen as legitimate…or moral(per the idea of the last 50 years that great wealth means god has smiled upon you)…or anything but psychopathic, perfidious parasites?
      again, hostis humani generi.
      https://en.wikipedia.org/wiki/Hostis_humani_generis

      Reply
      1. Code Name D

        And not just big AG or pharmaceuticals. China is becoming the dominant player player in telecom (mainly in cell phones and G5 technologies.) and avionics as well.

        Reply
  1. Stadist

    “They were contaminated with rocket fuel,” he revealed. “I imagine active people have the same problem. This affects the readiness of our troops.”

    As far as I know, large majority of high blood pressure cases are explained by life choices instead of true underlying medical conditions. So in reality the active personnel whose readiness is compromised have either caused it themselves or alternatively have larger medical issues and should not even be part of the active pool. Of course it’s convenient to give this matter militaristic spin, USA is so militaristic society.

    Reply
  2. The Rev Kev

    Going by a page that I found, if China did an embargo of drug export to the US, the US would be particularly hard hit by this. Of all the countries that imported drugs in terms of the highest dollar value worth of drugs and medicines last year, the US comprised about one-fifth (about US$72.8 billion) of the world’s total. That trend, this page states, is going up as the market for all these drugs in the US has increased about 30% from 2014 to 2018

    http://www.worldstopexports.com/international-markets-for-imported-drugs-by-country/

    Reply
    1. Ignacio

      Interesting and curious list. Why on earth Belgium, with about 12 million inhabitants, is the third importer with a 5% share in total imports? Do Belgians swim within medicine pools?

      Reply
      1. PlutoniumKun

        Yes, there are odd anomalies there – Ireland too, its not credible that Ireland imports two thirds as much as France.

        Either the figures are wrong, or they are distorted by some sort of arbitrage, or (more likely I think), they include precursor compounds for manufacture – both Ireland and Belgium have very a large presence of manufacturing facilities for pharmaceuticals and medical devices.

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        1. Clive

          Yes, Belgium featured heavily in the Wikileaks critical infrastructure list (or CFDI, in National Security Agency speak).

          China scarcely warranted a mention. I suppose the list is from 10 years ago, so things could have changed. I guess a lot comes down to the availability of alternate sources of supply. Reading between the lines of the CFDI report, the only thing that worries the US are single-source supply risks, so long as there’s other options (India, maybe?) then it’s not deemed to be a cause for concern. Precursor agents might have the benefit of being, in effect, commodities, so it would be a case of supply restrictions rather than supply cessations.

          I often wonder if a lot of Trump’s policy making (a rather generous term for it) isn’t in reality the national security dog wagging the Trump tail. Globalisation is all well and good, but eventually, lack of resiliency and redundancy in supply chains is an inescapable risk to national security. Those agencies responsible for national security have been, presumably, cowed by the economists for 20 or 30 years into going along with it all. I suspect now they are saying enough is enough. Which means that weaning yourself off all those easy, cheap and convenient sources of supply has got to start somewhere, it’s always going to have a cost associated with it, and none of the parties who benefit from the Ancien Régime are going to like it (there’s going to be a lot of squealing) — but there’s going to be no rolling back on this. No matter who’s in charge, or notionally in charge.

          (Bob said all that in a single sentence below; I can’t help but admire the economy of phrasing)

          Reply
          1. Synoia

            But, currently there is no sign of the other part of Tariffs, an Industrial Policy, or a “Make in the USA” program.

            Reply
            1. Clive

              No, because of the miracle of “market forces” and the “invisible hand” which are supposed to sort all these things out unbidden, without anyone needing to do anything. Which is where the scheme, if it is indeed a scheme, gets made the victim of dumb execution.

              Reply
  3. Ignacio

    I find the bit on hospital closure because no medicines wildly exaggerated. To support this a list of active ingredient supply chains and their uses should have been provided. Also, unlike oil products or rare earths, active ingredients are used in minute amounts in not particularly big facilities. These facilities rely on alienating robo-human cheap workers doing the same manual activity for long hours. All Trump would need to do is to welcome a few migrants to do the job.

    Reply
    1. NotTimothyGeithner

      https://www.youtube.com/watch?v=OvHIuo-t794

      I’m fairly certain Lawrence O’Donnell, MSDNC host, wrote this episode of The West Wing, and farming vital trade interests out to a closed society is just a complaint of the hippies. ‘

      If the hippies clapped louder with their drum circles, “free trade” Democrats from the 90’s wouldn’t look like such crooks.

      Reply
  4. a different chris

    WTF? This is Russia-Russia-Russia level hysteria:

    >or, worse still, willfully contaminating the drugs with harmful compounds.

    Do they? Maybe, the scumbags the make these things are really scumbags. They certainly do wind up with contaminated drugs, but deliberately or just don’t care is the question. I’m betting on “don’t care”.
    Now would they do it deliberately upon orders from up high, and could they target just the US? Family blog not gonna happen and no. Why would China’s leadership want to get the reputation of exporting killer drugs? Lordy.

    But I read the rest of the article anyway, it’s just more “hey we suddenly realize that offshoring everything wasn’t such a great idea” and yeah it wasn’t, but that really put me off.

    Reply
    1. Ian Perkins

      Agreed.
      Willfully contaminating drugs would make their reputation crash to well below zero. And not just for drugs: the supposed back doors in Huawei stuff would then seem like a certainty, and everything else emanating from China would be viewed as a probable weapon, and not just by the US.
      Equally, “they were laced with rocket fuel” is deliberately alarmist. Like saying beer is laced with rocket fuel. [“In Europe, there is only one facility for testing engine components for orbital rockets … with ethanol fuel: the P8 test facility at the DLR site in Lampoldshausen.” – https://www.dlr.de/dlr/en/desktopdefault.aspx/tabid-10285/417_read-20952/year-all/ ]

      Reply
      1. GF

        Actually (I wish I could find the link) rocket fuel has been shown to greatly reduce blood pressure/flow when ingested in large quantities.

        Reply
    2. Nancy E. Sutton

      I think Boeing’s (pre-737 Max fiasco) outsourced Dreamliner production and ensuing delays, delays, delays, might have caused some rethinking…

      Reply
    3. Summer

      The only problem every country sees is that they may have to increase their middle class to replace the buying power of shrinking middle classes in what are called “developed countries.”
      They all have that in common: no country is really too anxious to increase the buying power in their own countries (China even seems tentative about it, despite the increasing buying power in that country)…..they all want off-shore buying power to keep domestic populations at heel.

      That’s just my take on the “trade wars.”

      Reply
  5. Felix_47

    If the medicine is made in China why is it so expensive? That is a rhetorical question since the answer is obvious.

    Reply
    1. 728huey

      For the same reason some Chinese manufacturer can make an Air Jordan or Lebron James pair of sneakers for three bucks yet Nike can turn around and sell that same pair for $150 or more. It’s all about insane profit markups.

      Reply
  6. Ptb

    Why decimated? Concerns about quality / nat’l security are a perfect excuse to ban generics. No money lost at all. Sick people without drugs make even better customers. (For a while anyway).

    The drug & device industry should see this as a golden opportunity.

    Reply
  7. Jack P Lifton

    When the specter of “security of supply” was raised during the “first” rare earths’ crisis in 2010 all it engendered was a field day for “junior mining” scams. The broken domestic American rare earth supply chain was not repaired and the unprofitable restart of the Mountain Pass, California, rare earth mine was again halted.
    Now our pharmaceutical supply is “front and center” for the same reason, security of supply.
    Globalization in the real world only works to funnel profits to a few.

    Reply
    1. Susan the other`

      And all the BS rationalizing this situation is for their continued profits. But here’s one to ponder: my little pharmacist, who has all the political gravitas of a 9-year-old, informed me that the pharmacy’s inability to get my drugs (everyone is out, and China is out, and now India is being monitored for quality control and that slows up the supply chain – really, he believes the whole story) but then he comes up with a batch of losartan that wasn’t recalled and all is well… it all just sounds like deception to me, for whatever reason. It’s a form of extortion, kind of a gentle terrorism. And all wide-eyed he tells me that this delay is not his fault, the pharmacy is as much a victim as the customers… and he has heard that the government is going to step in and control the manufacture of these drugs domestically because it is so serious. Interesting. I say bluntly as I walk away it is because capitalism has failed. He ignores me.

      Reply
      1. JBird4049

        Amazing isn’t? The United States has always been good with brainwashing people especially its own in the Empire’s bosom.

        Will there be a push for general autarchy now, or will we have to wait until the Elites start to suffer, if they ever do?

        Reply
  8. Jessica

    There is some parallel between the US trade war with China and Brexit. In both cases, complex extensive ties have built up with the outside, the current political leadership has decided that they need to cut back those ties, and it turns out that those ties are more difficult to cut than they had imagined. In addition, both cases are exposing weaknesses in political decision-making structures.

    Reply
    1. Inode_buddha

      Perhaps the political weakness in the decision making structures is due to those decisions being made by financial structures and not political ones?

      Reply
  9. Ford Prefect

    Corporations as sociopaths.

    The “greed is good” generation from the mid-80s to now have simply been focused on profits with scant attention to national security or well-being, even if the companies are headquartered in the US.

    Who in the world thought it was a good idea off-shoring almost the entirety of chip and pharmaceutical manufacturing? BTW – while the Republican administrations did this on steroids, the Democrats also were cheer leaders. There should have been much more focus on situating large capacities of both of these key industries in the NAFTA region, so that US, Canada, and Central America could have been generally self sufficient without crossing an ocean.

    Reply
  10. Ashburn

    I can’t understand why some intrepid politician isn’t making this a major issue in the primary campaign. Most voters don’t like commies and would be shocked to learn we are so dependent on China for such critical inputs. They would be even more upset to learn that this dependency is the result of same neoliberal policies that transferred our manufacturing technology to China–while shuttering our home grown industries–all for the sake of multinationals’ profits. Next to such a revelation, a plan to revive US manufacturing and technology dominance a la the Green New Deal would sound very reasonable.

    Reply
  11. JBird4049

    I can’t understand why some intrepid politician isn’t making this a major issue in the primary campaign.

    Thou shalt not speak ill of Neoliberalism and its servants, the unregulated Free Market and Capitalism, or else be struck down by The System. Some, like Bernie Sanders, who are somewhat separate from it have been speaking out about the destruction of most American industries; like Sanders, everyone who does point the cause as neoliberalism are mocked as unserious, unAmerican, waging class warfare, or some other nonsense.

    I read conservative and leftist, even some liberal writers pointing out the dangers of shipping everything overseas, especially in the name of profit, really greed. They have all been mocked, which is why we have the Deplorables, the DSA, and the Orange Menace.

    However, the United States is the largest producer of food on the Earth. China can easily flatten our economy. The United States can flatten most of Asia with hunger. Stupidity is not just an American trait.

    Reply
    1. Inode_buddha

      And yet, those on the very bottom of our economic heap, what is left of manufacturing and day laborers, etc., call out this simple truth every day. They know where the jobs went and why.

      Reply

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