BEIJING – China's position as a global power in active pharmaceutical ingredients (API) could be jeopardized by the ongoing and worsening trade war with the U.S. Perhaps more worrisome for the pharma industry, any disruption to Chinese supply chains could have a serious impact on drug manufacturing and accessibility globally.
China is the largest supplier in the world of APIs used to make drugs. The country is believed to account for around 40% of global production. Exports of APIs have been growing by 13.7% per year, further consolidating its dominance over that part of the global supply chain.
The pharma and biotech industries are as globalized as any other. As is the case with high technology, the sourcing of many of the raw materials used to manufacture chemical drugs has been centralized in the biggest producers, which in turn export around the world. China and India generate about 70% to 80% of all APIs, making them the beginning of complex global supply chain. The FDA estimates that 80% of APIs used in the U.S. come from those two countries.
"China dominates global manufacturing of thousands of APIs in medicines," Rosemary Gibson, a U.S.-based health care expert, told BioWorld. She recently exposed America's dependence on China for medicine in her 2018 book "China Rx."
"Its dominance is especially pronounced in generic drugs, which are 90 percent of the medicines dispensed in the U.S.," she noted. "Even India, with its large generic manufacturing industry, depends on China for 80 percent of the key ingredients required to make generic drugs sold domestically in the U.S. and around the world."
Increasingly, the U.S. government sees increased Chinese dominance of the global API market as a national security risk. The National Security Council is reportedly looking into Chinese drug manufacturing.
Gibson has previously warned that if China cuts off supplies, U.S. hospitals could theoretically cease to function.
Fortunately, that scenario has not translated into reality as the trade war between China and the U.S. has yet to result in any direct tariffs on drugs. Both governments are well aware of the potential risks to patients.
"The U.S. biopharma industry has successfully lobbied against tariffs on medicinal-related products made in China and sold in the U.S. The industry expressed concern about the prospect of tariffs increasing prices and creating shortages," Gibson said.
"And frankly, it would be very risky if China cut off supply and compromised peoples' access to needed medicine. That would be a reputational black mark lasting for generations," she added.
Another health care expert, Jonathan Kimball, vice president of trade and international affairs at the Association for Accessible Medicines, also said the U.S. government recognizes the impact that tariffs would have on U.S. drug prices.
"The U.S government exempted APIs from the increased tariff rates. Continuing this exemption in the case of China is critically important," he told BioWorld.
"While we believe that the U.S. government will continue to exempt pharmaceuticals and their inputs from tariffs, there is still a level of uncertainty that the generic and biosimilar industry must deal with," he warned.
The unpredictability of an aggressive trade policy causes concerns in terms of the predictability of markets, and supply in particular, for an industry that is highly globalized with a supply chain extending to countries around the world, Kimball said.
The development of the trade war has been so unpredictable that many market watchers have been left confused and surprised.
A couple of weeks ago, the U.S. decided to delay imposing tariffs on some Chinese goods such as clothing and cellphones until Dec. 15. That move came just two weeks after U.S. President Donald Trump announced the imposition of 10% tariffs on $300 billion worth of Chinese imports starting Sept. 1. China also moved to increase tariffs on about $75 billion of U.S. goods by between 5% and 10%.
As of today, the chances of the two countries reaching an agreement on trade remain as uncertain as ever. Trump is widely seen as a wild card.
India, another major API supplier to the U.S., has also been targeted by the unpredictable president, who threatened to strip the country of special tariff status last month. More than 30% of the APIs manufactured in India are exported to countries such as the U.S., the U.K and Japan.
"If the Trump administration were to raise tariffs on India, as the president has threatened, it will be even more important that pharmaceuticals and pharmaceutical input be exempted," Kimball noted, stressing that the pharmaceutical sector should not be involved in the global trade disputes.
But even if tariffs do not come into force, retaliatory export controls placed on pharmaceutical exports from China or India could also have a much more consequential impact, he said.
"Such a move could have a devastating impact on the U.S. pharmaceutical supply and severely affect American patients," Kimball warned.
Still, China's industry would also be damaged and patients would suffer.
"China is depending on the know-how of Western companies to achieve its aim to become the pharmacy to the world, and it would be contrary to China's interests to interfere in the flow of medicinal products to the U.S.," Gibson said.
Stephen Ezell, vice president of the Information Technology and Innovation Foundation, said that if the trade war continues, it threatens to lead to further decoupling of supply and innovation chains across a host of industries, including life sciences.
"In an environment where uncertainty around tariff levels and regulatory policies prevails, there's likely to be less collaboration between U.S. and Chinese companies on drug discovery activities and also fewer Chinese-made APIs finding their way into U.S. life sciences supply chains," he told BioWorld.