The COVID-19 crisis revealed how reliant the United States has become on imported masks, respirators and other essential medical goods. The latest news is about medicine shortages. Decades of bad trade and tax policies have incentivized pharmaceutical corporations to outsource the production of many categories of drugs – and also production of the Active Pharmaceutical Ingredients (APIs) that are drugs’ key ingredients. Most APIs come from just two countries, China and India. As workers there have fallen ill and plants have been closed for social distancing, production has dropped. In many categories, there is no domestic production to make up the difference.
Transcribed by Lauren Martin
RYAN HARVEY: Welcome back to Rethinking Trade where we don’t just talk about trade policy, we fight to change it. I’m Ryan, and I’m joined once again by our in-house trade expert, Lori Wallach. Lori, today we’re going to be talking about a topic that’s been in the news recently, and that is this forecast that we might be looking at a shortage of medicines in the US sometime soon. What is all this about and what are some of the major issues at play in this forecast?
LORI WALLACH: The prediction that you’re seeing now, that we’ll fall short of the medicines we need, not medical supplies, is related to the broader problem of how our system of hyperglobalization has made us very vulnerable to getting everything we need to be safe and to fight this virus from one or two countries. There are two different, related issues. First is where medicine itself is actually made, and then there is where the things that go into medicine, which are called active pharmaceutical ingredients, APIs, are actually made. There are 156 essential, critical medicines that every hospital has. The stuff on the crash cart, the stuff that every floor of every hospital has,96% of those critical 156 drugs are produced just in China and India. And even before the COVID crisis there were potential shortages and short supplies in 63 of those 156 drugs. China, obviously, has had a big slowdown, because people there got sick. And both China and India have stopped exporting a lot of their medical supplies. So that means, even if there are countries that produce medicine, they can’t get the inputs. And a lot of generic finished medicines actually come from India. So all in all, because there’s no redundancy, because a handful of really big companies have concentrated production and made a lot of money that way in a few very low wage countries, we could end up seeing shortages.
HARVEY: That term you used Lori, redundancy, we’ve talked about that in previous podcasts. Can you just remind the listener what we mean when we say redundancy?
WALLACH: It’s a production issue, and it means that there isn’t just a sole source of a supply, or just one or two. So redundancy is something that, basically, you would think of in every critical system. So if you have an emergency plan, about, say, how to get out of town if there’s a terrorist attack, you have plan A: a car, plan B: the train, plan C: the bicycle. Those are all redundant ways to meet your goal. And so in a lot of companies, for a very long time, they would have redundant production. So in order to make sure they could make the final product, they would have two or three sources. Maybe one that was their own factory and then two other suppliers outside that made the key parts. And so they had lots of different options in case their factory had a problem or one of the other factories had a problem. They had redundancy in their supply chain.
But over time, in the medical sector very dramatically, a handful of really big companies have been buying up their competitors. And once they buy, one pharmaceutical company buys the other one, they don’t just keep running the same plants and making the same stuff and getting double the income. They typically close down the production capacity that’s considered an efficiency. That would mean less costs. Translated out that means they fire all the people who are in the other plant and then they have wherever outsourced work is in India, in China, wherever, they add another shift or they add more people. And now the one company has only its production capacity- maybe a few more hours, a few more workers- but that whole different factory that once existed if something happened to company A’s production, company B’s production was there, now it’s just company A that bought up company B and shut down that production. So we see that for instance, the big pharma companies, they don’t want to change that, because it’s super profitable to basically have all this production in China and India, where people are paid very little, the environmental costs are extremely limited, and then they import the goods back to sell at a high, high price here.
HARVEY: And, maybe we can talk about how this situation came to be. A couple decades ago, what did this industry look like, and how did it change over the last few decades of neoliberal trade policies and other really corporate driven, corporate rigged policies pushed in the international trade arena?
WALLACH: So the pharmaceutical industry looked a lot more like every other industry, which is companies had redundancy in their supply chain so they either made some of the parts themselves or they had two or three sources of it, and there were a lot more competitors. I mean if you’re old enough, you remember a bunch of airlines that don’t exist anymore, and you remember a bunch of telephone companies that don’t exist anymore, and you remember a bunch of car models and brands that don’t exist anymore. So we don’t notice it as often with the pharmaceutical companies cause they’re not really brand names in the way we know, “hmm, there’s no more Plymouth, there’s no more Pontiac, no more Saab, there’s no more Oldsmobile.” But in fact, these companies have been consolidating and consolidating so that there is a really short list of really big companies that both do medicine and medical supplies.
But some of the pharmaceutical companies just do pharmaceuticals, but you know, they buy up and shut down their competition. It helps their monopoly. They have monopoly licenses called patents to sell their medicines for whatever price they want, then heaven forbid another company comes up with something that is a different medicine that can compete, so they buy them up and put them out of business. As a result we have a very limited supply, and right now we need to gear up to make more of a lot of things. So things where the supplies are really short right now are the drugs that are being used for COVID:Like the sedatives that are being used when you have to put someone on a ventilator, because it’s obviously, you’re going to be fighting against having something down your throat. They’re going to put you in an almost induced coma. And the supply chain is both way too concentrated, but also elements of it, like the second stage(not just the active pharmaceutical ingredient but the compounding) ironically for instance, a lot of [them] were made in the Lombardy region of Italy, whichhich has been the hardest hit, the first area where really there was a huge COVID outbreak. So when we have both limited suppliers and limited alternatives for the parts, the APIs and the actual production is too concentrated in a few places- antibiotics in Lombardy- then the whole world can have economic and health problems that are actually worse than the medical problem that the drugs are needed to combat.
HARVEY: So, Lori, you mentioned Big Pharma earlier, but I wanted to talk a little bit more about their role in this whole process. Not just in accumulating large amounts of money and of outsourcing jobs to countries with lower wages and less restrictions to, you know, participate in the race to the bottom, but they’ve also been active in here in the US on domestic policy and also influencing other trade policies. Maybe you could talk a little about that.
WALLACH: So, the big pharmaceutical companies have done a couple different things. One, they’ve pushed for trade agreements that include these extreme monopoly protections and that basically make other countries—poor, developing countries with low wage workers—sign up for the special protections, so that they can outsource their production there and still get the monopoly guarantees. Then, number two, they have fought for tax policies in the US so that they can literally ship their corporate headquarters someplace else and then claim that they get a lower tax rate because they’re a foreign company. That’s called an inversion. So a lot of the big US pharmaceutical companies are incorporated in Ireland because it’s a tax haven. And then number three, they have pushed for other tax policies that have let them actually charge them. American companies can charge the Irish company basically a business expense for the patents that are held in the US. They take it as a business deduction. So they’re dodging taxes basically twice while getting more incentives to outsource. And that whole combination of policies in the face of also no anti-trust policies to speak of, certainly not in our trade agreements and not very strong any place except Europe, means that these companies keep consolidating and consolidating and consolidating until there are just a few, so there’s no competition between them. And they are able to rig the policies so that the countries also aren’t making these companies face market competition terms.
HARVEY: When you brought up Ireland, it made me think. I was looking through the TAA database,which is up on the Public Citizen website, and when I was looking up medical supplies, I was noticing a lot of outsourcing to Ireland. Is that because manufacturing jobs are going to Ireland, or was this part of that process you were describing?
WALLACH: You can see this fluky trend of the pharmaceutical corporations trying to dodge taxes, if you look either at the Trade Adjustment Assistance database that tracks certain certified job losses caused by trade by the government, or if you look at trade flows in pharmaceuticals. So if you look at TAA you see this weird situation where all these pharmaceuticals factories that used to employ workers in New Jersey, in Pennsylvania, in California, in Wisconsin, in Illinois, you see them certified as job loss outsourced to Ireland. Well, the company relocated to Ireland as a corporation to dodge taxes, but they’re not opening big factories there. Then they’re outsourcing the production to some contract company that is, for instance, in India, or in China or some other low wage venue, and that contract company is getting the APIs down the supply chain from some other company almost certainly in India or China, and those companies are sourcing some of the things that make the APIs from within their own countries. So we have basically seen both job loss,but more importantly in the short term now, a lack of reliable supply caused not by acts of God but by specific trade and tax policies. Because you can also see if you look at the trade data of the value of pharmaceutical goods, it looks like Ireland is our number one trade partner. That’s what it most looks like if you look at value of imports of pharmaceutical goods. But that’s just because of the corporate patent licensing scam. In factif you look at the volume, where the stuff actually comes from, it’s all coming from China and India.
HARVEY: On that point, since we should wrap up, what are the solutions here? What’s currently being done regarding securing adequate supply lines of APIs, and also what kind of policies are needed? What could help change this scenario to something a lot better?
WALLACH: Maybe if there’s any good thing that comes out of this COVID crisis it is that governments start to take seriously the warnings that have been issued for years. That they need to have certain essential goods produced closer to home and also to have stockpiles.
So in 2014 the Department of Defense did a study, and it was looking simply at the military readiness in medical supplies for an emergency like a pandemic or, heaven forbid, a war. And what that study (and again, six years ago) determined was that supply chains are so incredibly thin, capacity to manufacture was so limited, and so much of it was relying on China, a country that could be on the other end of a dispute whether directly or through proxies, that the US military was in enormous peril of not having the supply of essential goods and medicines that were necessary. And no one did anything about it.
So what should happen? Different layers. In the short term, we need to figure out where we will have these shortages and quickly start to gear up production using for instance, the Defense Production Act, to turn the kinds of facilities that are making now certain kinds of clean production (because obviously pharmaceutical production has to have very strict controls) to be able to make some of what we may not be able to get in the global market. Number two is thinking forward. We need to think about how both the making of key medicines but also the components of them, the APIs, can have production if not increased in the US, which is in itself a good idea, but also production increase, if you will, in the region. And the importance of that is emphasized by if you look at the critical list. There are 156 drugs that are basically in every crash cart, in every hospital, they’re the medicines you have to have. And right now 96% of those, 96% of those, are produced outside of the US and not even nearby. So if we think of what we want to have here and what we want to have in neighbors, in the Caribbean, which before all the companies started merging the Caribbean actually interestingly and Puerto Rico (part of the US but in that neck of the woods) there were tax incentives and other programs to have pharmaceutical manufacturing there. Or, in Mexico and Canada there is a sort of North American and the Caribbean redundancy in the medicine supply chain with APIs and the actual production. And then the final piece of it is, obviously, the government has entirely mismanaged the situation. We still need stockpiles even if it’s the case that we need to be having the ability to ramp up production and we need more production capacity. I mean that’s the thing about redundancy, there’s a continuum from “it’s lean, it’s mean, it’s super profitable” and the whole damn thing goes to hell if one thing goes out of place, versus having enough redundancy that if you need to gear up production in the face of some crisis, you actually have the hardware to be able to make what you need to be healthy. And there’s short-term and long-term ways in which we can and we really must make those changes. That’s certainly one thing everyone’s learning the hard way from this crisis.
HARVEY: That’s all for today. Thank you all for listening. Rethinking Trade is produced by Public Citizen’s Global Trade Watch. I would encourage you to visit rethinktrade.org as well as tradewatch,org today to educate yourself and find out how you can get more involved in the work we’re doing to fight for fairer and more equitable trade policies.