Report - America’s Next Rare Earths Crisis Is in Our Medicine Cabinet
The Open Markets Institute released a report on China’s global dominance in the production of active pharmaceutical ingredients (API) and how the U.S. can and must correct its dependency problem.
Just last month, President Trump suffered a serious setback when China was able to avoid concessions to the U.S. after dangling their ability to restrict access to the rare earth elements that are essential inputs for industries like semiconductors and defense technology, and which are produced almost exclusively in China.
As with rare earths, China’s power in the pharmaceutical sector lies in American dependence on Chinese producers for the basic inputs, or active pharmaceutical ingredients (API), that underpin all other production.
Although the COVID pandemic raised public awareness about pharmaceutical supply chain risks, U.S. dependence on Chinese products has only increased. China is now the U.S.’ largest supplier of pharmaceutical products, including both API and finished drugs.
This new report, authored by former National Economic Council policy adviser and Open Markets fellow Garphil Julien and Open Markets industrial policy manager Audrey Stienon, examines these chokepoints and offers an industrial policy roadmap for strengthening U.S. and global production of API.
Next Steps to Reduce Dependency On China for Essential Drugs:
While many initiatives aimed at scaling domestic biomanufacturing have been taken by both the Trump and Biden administrations, further action is necessary to address supply chain fragility and the risk of political coercion.
Among these are:
Benchmarks and Transparency: The Trump administration must build on the work initiated during President Trump’s first term to map out API supply chains and chokepoint risks. Agencies like the FDA, HHS, and DOD have already provided invaluable information on existing risks, but — as demonstrated in this report — a lot of uncertainty on the extent of American dependence on Chinese API manufacturers remains.
Emergency Preparedness: To limit U.S. vulnerability during the time it will take to reduce dependency on Chinese API producers, the current administration should consider building a stockpile of essential medicines and critical API. For example, the Centers for Medicare and Medicaid Services can bulk purchase items on the essential medicines list, while the DOD and Department of Veterans Affairs (VA) can purchase drugs on the FDA drug shortage database. The administration can also use Title I and Title III of the DPA to use priority contracts, loans, and purchase agreements to build a stockpile of critical APIs.
Building Domestic API Production Capabilities: The U.S. government should shift public demand for pharmaceuticals towards domestic producers in order to incentivize production. The DOD and VA can make guaranteed purchase contracts for domestic producers of API used to produce drugs on the FDA shortage database. Congress should pass the BIOSECURE Act, which aims to restrict public contracts and grants from going to foreign monopolists. To help make domestic API production cheaper and more efficient, the administration can offer manufacturers loans or grants through the Biomedical Advanced Research and Development Authority (BARDA). This would build on Section 2401 of the December 2023 budget that calls on BARDA to support domestic manufacturing surge capacity and to create “warm base” domestic manufacturing for medical countermeasures.
Building Resilient International Supply Chains: The U.S. does not need to become the sole producer of critical API, since this would introduce new resiliency risks. To this end, Congress should pass the bipartisan Medical Supply Chain Resiliency Act and incentivize the U.S. to work with foreign government partners to diversify the pharmaceutical supply chain and map, monitor, and strengthen pharmaceutical supply chains.
The U.S. should deepen existing efforts to cooperate with allies in building resilient pharmaceutical supply chains. This includes pursuing the 2024 strategy developed by the Biopharma Coalition (Bio-5), which includes the EU, India, Japan, and South Korea, to diversify API supply chains away from China. Furthermore, the U.S. should work with the Mexican government and Mexican pharmaceutical trade associations (namely the Mexican Association of Pharmaceutical Laboratories, or AMELAF) to nearshore the production of APIs, especially those used for biosimilar and generic medicines.
Finally, the U.S. should continue efforts to reform the international trade system to prevent similar concentrations of manufacturing capacity from emerging in future. If the international trade system continues to prioritize efficiency over resilience, it will continue to incentivize companies and industries to concentrate their production in countries where they face the lowest costs.
This report builds on the Open Market Institute’s long tradition of studying chokepoints in international supply chains that were engineered by corporate monopolists, have created serious fragility issues for the U.S. and other countries, and require government intervention to correct.