Trump's Pharmaceutical Tariffs Are Not the Right Solution for a Big Problem

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2 days ago

President Donald Trump has threatened to impose 25 percent tariffs on pharmaceutical imports, the fourth largest contributor to America's trade imbalance, after machinery and electrical equipment and automobiles. A vast majority of these imports are low-cost medicines which account for 90 percent of all prescriptions filled in the U.S. Millions of Americans take them daily for heart diseases and strokes, and to treat life-threatening infections. Disruption of their supply will have catastrophic consequences on America's health, for pharmaceuticals aren't like cars or smart phones one can do without — they're a basic necessity, like food and water.
But there's a serious case to be made to bring back a large chunk of the manufacturing to the U.S. for reasons of national security, especially in the current divisive and uncertain political climate. It is no secret that the U.S. and China are currently in a testy relation that could escalate into a full blown military conflict over Taiwan. What if supply of these drugs are interrupted? Could there be a scenario where Americans aren't able to attend to machinery in factories or on the farm or, worse, aren't able to respond to a national threat because they don't have the medicines to stay fit for the job?
Tariffs, however, will not alleviate such a scenario. But America's vulnerability is real, and it will take a concerted effort on multiple fronts to make America self-reliant in health care.
The problem with trying to relocate manufacturing of these drugs to the U.S. — which is the president's objective with tariffs — is that these imports are low-margin products. Companies will have a hard time making a business case to manufacture them in the U.S. They can't compete with India and China, the two countries that account for most of the supply of these 'commoditized' pharmaceuticals to America, saving the American health care system reportedly more than $400 billion annually.
India is the main source of supply to the U.S.; in chronic diseases (which account for 90 percent of national health care expenditure) it supplies 60 percent of all hypertension medicines and 90 percent of the two most prescribed blood pressure medicines, amlodipine and losartan. But the kicker is that India relies on China for 70 percent of the raw material. And China directly supplies 40 percent of all raw ingredients used in the U.S. to manufacture drugs.
For certain life-saving antibiotics like cephalosporins, azithromycin, and penicillin, the dependence on China is as high as 90 percent. One single key ingredient, 6-aminopenicillanic acid, or 6-APA — which is the starting material for a class of antibiotics used to treat bacterial infections and is growing in demand — is largely sourced from China.
The U.S. Food and Drug Administration estimates that in 2019, 72 percent of the raw materials that went into drugs prescribed in the U.S. came from FDA-approved facilities that were located outside the country.
In 2021, the Biden administration singled out the raw materials used in drugs sold in the U.S. as being just as critical for national security as semiconductors, batteries, and critical minerals. It pointed to antibiotics as an example, citing a 2019 report from China that spoke of Beijing considering leveraging export of 'antibiotics as a retaliatory tool in the U.S.-China trade war.' It mentioned Xinhua, China's state media, suggesting China could assume 'strategic control' over supplies and limit exports.
And during Trump's first term, Gary Cohn, then an economic adviser, warned at a security hearing that a Department of Commerce study found that 97 percent of all antibiotics in the U.S. came from China. 'If you're the Chinese and you want to really just destroy us, just stop sending us antibiotics,' he said.
When a skirmish broke out between India and China over a border dispute in 2020, Indian companies became alarmed about whether they would be able to manufacture antibiotics for the country. A story in the Times of India reported that the country depended on China for 90 percent of the raw materials to make the lifesaving drugs. Indian companies urged the government to provide help to bring production back into the country, which they had lost due to China's 15-20 percent cost advantage.
An executive of a leading manufacturer of antibiotics in India (which manufactures for my firm) said, 'We can switch to another country, but the starting chemical to make the raw material comes from China. Without China, we are finished.'
But China can't be blamed for its success — and its competitors' despair. More than a decade ago, it declared that medicines were a basic necessity for its huge population. With government support, it meticulously invested in large-scale manufacturing plants and manufacturing innovation to make pharmaceutical raw materials cheaply. It was a clever strategy of self-reliance, having full control of the hundreds of raw materials on which others depended.
U.S. drugmakers seemed not to care. For one, making pharmaceutical raw materials often involves hazardous compounds, and it generates harmful pollutants that are costly to contain. But the biggest reason is that as world leaders in innovation, they're highly focused on research and development. Innovation is their mission, not manufacturing. Patents protect their profit, which depends less on manufacturing costs.
These innovator companies have little incentive to plunge into mass manufacturing low-cost medicines, especially the raw materials, where China has a 35-40 percent cost advantage over the U.S.
To the president's credit, he is pushing other avenues to make these companies fall in line on his mission to rebuild American manufacturing. He has issued an executive order to push the FDA and other regulatory agencies to expedite the approval process for establishing pharma manufacturing plants in the U.S. And indeed, several leading pharma companies have announced eye-popping investments: Johnson & Johnson said it will invest $55 billion in R&D and manufacturing; Genentech, $50 billion; and Novartis, $23 billion.
The president seems lulled by these instantaneous pledges. But the fact is they involve manufacturing mostly patent-protected, highly profitable blockbuster weight-loss and diabetes and cancer drugs, and flu vaccines. Few of these medicines are currently imported from China or India.
To relocate the production of the low-cost imports on which American health care is so dependent, one of the ideas that has been bandied about in the industry is to modernize and overhaul pharmaceutical manufacturing, a sort of gut-renovation.
Today's pharma manufacturing is primitive compared with the aerospace and semiconductor industries, even steel and autos. It's reminiscent of Normal Rockwell's painting of a druggist calmly compounding various ingredients in a mortar and pestle as a sick boy looks on with anticipation. (Parke-Davis, then the largest drug company and now owned by Pfizer, commissioned Rockwell to make a series of illustrations for its ad campaign.)
Production in the factories takes place in a disjointed fashion, in batches: Raw materials are stored in drums in a room, then transferred to another, where they are mixed in a large rotating tumbler. The mixture is hauled to another room, where it's dried, and then to another room where it's pressed into a tablet or filled into a capsule, and finally these are fed into a machine that packs them in blister strips and into a box. One can imagine a continuous process going seamlessly from chemical synthesis to the final tablet or capsule, managed and monitored by sophisticated technology. (This is currently done with biological medicines, where going from cell culture to propagation to filtration, formulation, and filling of vials and syringes is a seamless, automatic process.)
In October 2019, Janet Woodcock, then director of the Center for Drug Evaluation and Research at the FDA, testified before a congressional committee that revolutionizing drug and drug-substance manufacturing was the only way to match the low cost of labor in China and India and bring manufacturing back to the U.S. The agency announced programs to support companies wishing to adopt innovative technologies. (It didn't respond to my request for information on the status of the program.)
Manufacturing innovations no doubt will help slash costs, but they will be slow and incremental. What is needed is a leapfrog to get to the goal faster. One obvious way is to strongly persuade some of the companies that export to America to move their production to the U.S. and set up modern, cost-efficient plants.
These solutions, few as they are with complex challenges, cannot be pursued with tariffs or executive order or piecemeal actions. The administration needs to consider a large-scale initiative, akin to the Marshall Plan, to reconstruct pharma manufacturing with loans and grants and other incentives. If there is one industry outside of aerospace and defense, it's the pharmaceuticals where America can be forgiven for ignoring its cherished free-market principles for trade and commerce for national security.
A former senior executive in the U.S. pharmaceutical industry, Mr. Naj divides his time between overseeing medicine companies he has founded and writing; his latest book, Pandastic Times (Brazen House), is a fable of the Covid pandemic.
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