The ongoing COVID-19 pandemic has exposed the vulnerability of many health care systems around the world as most countries rely heavily on offshore pharmaceutical suppliers, particularly in India and China, for critical medical supplies.
In the United States, where demand outran supply for surgical masks and ventilators amid the global outbreak, the situation has highlighted the lack of medical product manufacturing in the country, which has been a controversial subject even prior to the COVID-19 pandemic. When China and India imposed temporary export regulations on critical medicines and its formulations during the initial stages of the global COVID-19 breakout, it was a wakeup call that brought pressure not only on the U.S. health care system but also on the government.
Executive order under consideration
While the U.S. Food Drug Administration (FDA) does not track the amount of medicines imported into the country, it has records on the location of the factories that produce these drugs. According to the data, 72 percent of the active pharmaceutical ingredient (API) manufacturers are from overseas, out of which 13 percent are in China. Over the last two decades, the U.S. generic drug production has shifted overseas primarily due to cost benefits and lenient regulations.
With the U.S. currently having the highest number of COVID-19 cases globally, lawmakers and officials have been pushing the federal government to limit the sourcing of APIs abroad and to bring back U.S. pharmaceutical supply chains to the American soil by citing national security concerns.
In response to the recent medical supply shortages amid the COVID-19 pandemic, the White House has reportedly drafted an executive order that would extend the existing ‘Buy American’ laws to medical products and pharmaceuticals, in alignment with President Donald Trump’s ‘America First’ trade policy. The new executive order would require certain essential drugs to be made in the U.S. and mandate federal agencies, including the Departments of Defense, Veterans Administration, and Health and Human Services, to purchase the U.S. made medical supplies such as raw materials, medicines, and vaccines. If the order is enacted, it would remove some or all exceptions to the ‘Buy American’ laws, which allow the federal government to buy foreign-made medical goods under special circumstances. As of this writing, the order, which has been signed off by the president in mid-May, is still reportedly under a review process.
Potential challenges to reshoring
While the policy and the post-pandemic environment may increase domestic production of medical supplies and personal protective equipment in the U.S. in the next few years, it is unlikely to have a significant shift in the global pharmaceutical supply chains anytime soon. This is because the U.S. cannot solely manufacture these goods due to the complexity of some medical products. For example, manufacturing N95 masks requires 70 different parts and ventilators consist of around 300 components. If the new mandate were to be enacted, the domestic capacity to manufacture all necessary components would have to be ready before reshoring all activities.
Revision of stringent environmental and wastewater legislation also need to be considered in order to make it favorable for the API manufacturers to operate in the U.S. Moreover, time is another concern, as building a new pharmaceutical manufacturing facility reportedly takes on average 5 to 10 years before it is fully operational. Lastly, there is a concern around higher costs for producing medicines if all American pharma companies were to domestically source within the country. To make the ‘America First’ policy viable, the U.S. Department of Commerce and the Department of State are reportedly considering tax incentives and potential reshoring subsidies of around USD 25 billion (EUR 22 billion) to entice U.S. companies, including pharma manufacturers, to bring operations back into the country.
Outlook and recommendation
While the executive order to entice American companies to return their pharma production facilities back to the U.S. is in the works, other options of relocating elsewhere in Asia, amid the U.S. and China trade war, are also currently considered not feasible. For example, the Indonesian government has been in discussion over the possibility of offering incentives to U.S. pharmaceutical firms that want to move out of China. However, its unfavorable regulatory environment, lower productivity, and higher wages pose major challenges for pharma companies.
In the midst of the ongoing pandemic and the uncertainty of the outbreak’s longevity, the upcoming mandate exacerbates constraints on foreign trade, subsequently increasing the risk of disruptions in the current pharmaceutical supply chains and creating challenges for U.S. companies in securing critical medical supplies. Moreover, the new mandate may antagonize other nations as it violates certain obligations under the World Trade Organization. As no specific details have been announced by the White House pertaining to the mandate, Resilience360 customers are advised to keep abreast of the situation and closely monitor forthcoming developments and regulatory changes.