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Spokane, Washington  Est. May 19, 1883

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Sally C. Pipes: Diversifying America’s supply chains point to a more prosperous economic future

By Sally C. Pipes

By Sally C. Pipes

Rep. Cathy McMorris Rodgers, R-Wash., the chair of the powerful House Energy and Commerce Committee, recently warned that the United States is “dangerously dependent” on Chinese supply chains, especially for the raw materials used to make medicines.

Her statement reflects the genuine worries of industry experts and ordinary Americans. If drug manufacturers were unable to secure sufficient quantities of “active pharmaceutical ingredients,” or APIs, the resulting medicine shortages could prove lethal.

Too often, however, concerns about the resilience of international supply chains devolve into mandates that companies “Buy American.” Such mandates are infeasible in the market for active pharmaceutical ingredients. And they won’t actually prevent the supply chain disruptions that Rep. McMorris Rodgers rightly worries about.

By contrast, market forces and international diversification are the most effective ways to ensure that we have the inputs we need to manufacture advanced pharmaceuticals.

For starters, China’s hold on the market for active pharmaceutical ingredients tends to be overstated. As of 2021, 13% of API manufacturing facilities supplying the U.S. market were located in China. About 10% were located in the United States. India accounted for 48%, Europe another 22%, and the rest of the world the remaining 7%.

Of course, cultivating suppliers outside China may be wise. The Chinese government’s decision to close much of the economy in response to COVID-19 proved that we may not be able to count on manufacturers in China for crucial inputs in the future.

But that’s an argument for further diversification, not self-sufficiency in the market for APIs. If a “Buy American” policy led to a single domestic supplier for certain inputs, the market for finished pharmaceuticals would remain highly vulnerable. A natural disaster such as a hurricane could take down all production. So could a terrorist attack.

Consider last year’s baby formula shortage following the temporary closure of a major U.S. formula plant. Tariffs and import restrictions prevented foreign manufacturers from sending formula to help meet U.S. demand – and thus allowed the shortage to persist. Restrictions on imports of APIs could yield similar outcomes, if a U.S. manufacturer were to close.

Further, replicating the 90% of pharmaceutical manufacturing facilities currently operating abroad here in the United States is logistically impossible. Constructing even a single such plant in the States could take a decade or more and cost over $2 billion.

In addition, if “Buy American” became the law of the land, the prices that Americans pay for drugs could increase. Manufacturers source many APIs from overseas facilities because production is cheaper there. Reshoring production to the United States would raise their costs. And they’d pass those cost increases onto American consumers.

Consider that U.S.-produced APIs account for just 10% of the pharmaceutical ingredients consumed in the United States – but 53% of total spending on APIs in this country.

That’s not just because manufacturing is more expensive in the United States. It’s because American producers tend to be more technologically advanced than their foreign peers – and focus on creating the most complex APIs.

Such high value-add manufacturing could be at risk under “Buy American” mandates, as the makers of APIs retool to create all the inputs U.S. drug makers need – from the most complex to the least. The upshot would be higher prices, potential shortages of key ingredients, and a much more fragile pharmaceutical market.

Indeed, if drug makers abroad remain nimble and are able to source their inputs from anywhere in the world, “Buy American” could end up toppling the United States from its perch as the global leader in biomedical innovation. That’s not what proponents of “reshoring” say they want.

Leveraging the power of market forces by diversifying suppliers can strengthen supply chains and save Americans money on drugs, not to mention other products. It’s this diversification, not the simplistic sloganeering of “Buy American,” that offers the best path forward.

Sally C. Pipes, of Pasedena, California, is president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is “False Premise, False Promise: The Disastrous Reality of Medicare for All” (Encounter 2020). Follow her on Twitter @sallypipes.