"The overriding aim [of Chinese policy] is to replace foreign technology with Chinese technology in the China market through any means possible so as to ready Chinese companies for dominating international markets," the U.S. Trade Representative (USTR) claims in a new report.
Two of the sectors China is preparing to dominate through its Made in China 2025 initiative are biopharmaceuticals and advanced medical devices, according to the USTR's annual report to Congress on China's compliance with World Trade Organization (WTO) principles, which was issued along with its 2017 report on Russia's WTO compliance.
Both countries "have failed to embrace the market-oriented economic policies championed by the [WTO] and are not living up to certain key commitments they made when they joined," the USTR said in releasing the reports.
While Russia is following what the USTR called a "very troubling trend" that indicates the country is turning away from WTO principles and is instead relying "on arbitrary behind-the-border measures and other discriminatory practices to exclude U.S. exports," China is looking to give its companies a global competitive edge over products from the U.S. and other countries.
The Made in China 2025 initiative is at the heart of that effort. The initiative is ostensibly intended to raise industrial productivity through more advanced and flexible manufacturing techniques in specific sectors, including biopharma and medical devices. In reality, it "is emblematic of China's evolving and increasingly sophisticated approach to 'indigenous innovation,' which is evident in numerous supporting and related industrial plans," according to the USTR report.
The initiative "seeks to build up Chinese companies in the 10 targeted, strategic industries at the expense of, and to the detriment of, foreign industries and their technologies through a multistep process over 10 years," according to the report. The first step is to ensure that Chinese companies develop, extract or acquire their own technology, intellectual property and know-how to establish their own brands.
The next goal is to substitute domestic technologies and products for foreign ones in China. The third goal "is to capture much larger worldwide market shares in the 10 targeted, strategic industries," the report said.
To accomplish those goals, the Chinese government is using policy tools that raise serious concerns and are largely unprecedented among WTO members. The tools include "a wide array of state intervention and support designed to promote the development of Chinese industry in large part by restricting, taking advantage of, discriminating against or otherwise creating disadvantages for foreign enterprises and their technologies, products and services," the USTR said.
The report noted that the Made in China 2025 initiative "differs from industry support pursued by other WTO members by its level of ambition and, perhaps more importantly, by the scale of resources the government is investing in the pursuit of its industrial policy goals."
Given that investment, the initiative is "likely to create or exacerbate market distortions and create severe excess capacity in many of the targeted industries," even if the government fails to achieve all of its industrial policy goals, the report said.
In addition to the initiative, the USTR report cited a number of concerns about China's biopharma policies, including:
• required patent and technology transfers;
• unfair commercial use of undisclosed test or other data generated to obtain marketing approval for drugs;
• lack of enforcement against drug patent infringement;
• a backlogged drug regulatory approval system;
• the creation of an expedited regulatory approval process for innovative new drugs where the applicant's manufacturing capacity has been shifted to China;
• patent examiners' continued denial of requests to supplement test data.
On the device side, provincial government purchasing plans in China often contain requirements that unfairly disadvantage foreign manufacturers, the USTR said. For instance, some plans impose ceiling prices for tenders that discriminate against imported medical technology products, and some require the manufacturers to disclose sensitive data. The plans also may impose controls on imported products, limit procurements to only domestically manufactured products or directly subsidize the purchase of domestically manufactured products.
The Russian report
The USTR wasn't as harsh with Russia, but it did cite a lack of transparency and uneven enforcement that could put U.S. drug and device companies at a disadvantage in the Russian market. The report highlighted a 2016 requirement that drug companies must be certified for compliance with Russia's new good manufacturing practices (GMP) regime.
In practice, the GMP requirement could have a disproportionate adverse impact on imports, U.S. drug companies have said, because Russia doesn't have the inspection infrastructure necessary to expeditiously certify manufacturing sites for GMP compliance. U.S. officials continue to press the issue with their Russian counterparts, according to the report.
As for medical devices, U.S. officials have raised red flags in the WTO about Russia's unclear device classifications, lack of consistency with international best practices in market approvals, long processing times for market authorizations and onerous labeling requirements.
Also of concern are the Russian and European Economic Community technical regulations governing medical devices, which could be used to exclude U.S. products from those markets.