Forcing a restructuring of the current pharmaceutical supply chain is a terrible idea. Yet, as a recent Wall Street Journal editorial exemplifies, there is growing support for this ill-considered policy. And, these proposals are not simply mere academic musings.
The Trump Administration may implement an Executive Order that would turn this idea into actual policy. Congress, not to be outdone, is also considering several proposals that would force federal agencies to purchase drugs and medical supplies exclusively from U.S. suppliers.
If implemented, these “Buy American” policies will jeopardize Americans’ health and wealth.
The advocates for buy American proposals claim that the U.S. pharmaceutical supply chain is heavily dependent on China – allegedly up to 80% of the U.S.’ drug supply comes from China. The buy American advocates further claim, without evidence, that the quality of the U.S. drug supply is at risk. A further, often unstated, accusation is that China could cut off our drug supply in the midst of a pandemic and jeopardize American lives – an unnecessary and unacceptable national security risk.
None of these accusations is valid. The buy American policy is predicated on faulty premises and ignores the benefits of the globalized supply chain.
Take the allegation that 80% of the drug supply chain comes from China. Eric Boehm, a reporter from Reason, demonstrates that this oft-repeated statistic is “misleading and mistaken”. His piece traces the origins of the 80% statistic back to a GAO report that evaluated where the active pharmaceutical ingredients, APIs, are sourced. APIs are the part of the drug that produces the intended therapeutic effects. The GAO found that 80% of APIs for the U.S. market are manufactured in more than 150 countries.
Boehm’s article shows that mis-citations, which is the charitable interpretation, turned the GAO’s finding that “80% of American drugs are manufactured in more than 150 countries around the world” into the incorrect assertion that “80% of drugs come from China”.
In fact, based on Congressional testimony by the FDA, 54% of the manufacturing facilities making APIs for the U.S. market are located in either the U.S. (28%) or the EU (26%). As a further illustration of the diversity of the U.S. drug supply, out of a total of 370 drugs listed as an essential medicine by the World Health Organization (WHO), only three are sourced solely in China.
Taken together, the actual production data demonstrate that the U.S. has a globally diverse drug supply that is not vulnerable to manipulation by China, or any individual country.
More important, as my colleague Sally Pipes argued,
the diversity of this global supply chain offers a number of advantages. Foreign jurisdictions offer companies a varied mix of benefits including tax incentives, affordable raw materials, relatively low-priced energy, and large pools of highly skilled workers. Together, these factors can result in enormous savings: A 2011 FDA report found that making an API in India can be 30 to 40 percent cheaper than doing so in the United States, savings that are passed on to patients.
Promoting wider affordability remains an important health policy goal, even during the current coronavirus pandemic. An important driver of affordability is generic medicines. These lower cost competitors save the U.S. health care system $293 billion annually according to the Association for Accessible Medicines. Generic medicines also account for 90% of all prescriptions filled at a pharmacy, and 95.3% of these were filled at a patient cost of $20 or less.
Forcing these medicines to be produced at politically favored locations jeopardizes these savings, which will directly harm millions of patients in America. Given the importance of promoting greater health care affordability, it is unconscionable for Congress or the Administration to implement policies that unnecessarily increase the cost of care.
Disregarding these fundamental problems, even if the buy American policy had merit, as I argued previously, implementing such a fundamental change in the industry’s production process in the midst of a pandemic would be disastrous.
Our political leaders continually liken our efforts against the coronavirus as a war. And as Donald Rumsfeld noted, “you go to war with the army you have, not the army you might want or wish to have at a later time”. Applying the analogy to the coronavirus pandemic, changing where drugs are sourced during the pandemic distracts the industry from finding effective vaccines and treatments at the height of the war against COVID-19.
There is simply no effective way for the industry to simultaneously restructure its global supply chain and develop innovative coronavirus vaccines and treatments at unprecedented speed. Forcing the industry to do both at the same time will decrease its ability to do either.
The justification for the buy American policy is faulty. If implemented, this policy would weaken our ability to respond to the coronavirus pandemic in the near-term and decrease the affordability of medicines in the long-term. Ultimately, if this policy were implemented, it is patients in the U.S. who have the most to lose.
I am a Senior Fellow in Business and Economics at the Pacific Research Institute and the Director of PRI’s Center for Medical Economics and Innovation. My research explores the connection between macroeconomic policies and economic outcomes, with a focus on the health care and energy industries. I have over 25 years of experience advising Fortune 500 companies, medium and small businesses, and trade associations. I received my Ph.D. in economics from George Mason University.