Friday, May 15, 2020

Why Mandating That Essential Drug Production Remain In The US Is A Bad Idea

Sources in the US government say that President Trump will issue an Executive Order that will require that certain essential drugs be produced in the US. The order, which is a response to shortages incurred in the Coronavirus pandemic, could come as soon as today reports CNBC. Unfortunately, the move is likely to be counterproductive.
The text of the Order has not yet been released but White House trade advisor Peter Navarro has pushed a plan that would streamline approvals for American-made products and impose similar FDA restrictions on US facilities as on those abroad. Navarro’s proposal would also encourage government agencies to buy only American-made products.
The Executive Order, which will probably be popular, is reminiscent of a famous quote by H. L. Mencken: “There is always a well-known solution to every human problem—neat, plausible, and wrong.”
In this case, the fallacy is that America’s medical supply problem can be fixed by mandating that American companies produce the items at home. The idea of “just make everything here” is appealing in its simplicity but, in reality, is fraught with problems.
Aside from the fact that moving production to the US would take at least a year, one of the most obvious problems is that the United States has a finite industrial capacity and labor pool. If we move essential pharmaceutical production to the US, that means that we can’t make something else.
Scott Lincicome, a trade lawyer at the Cato Institute, notes that such a policy would have many other hidden problems as well, comparing the idea to the Jones Act on a recent Jonah Goldberg podcast. The Jones Act is a shipping law that requires that all goods shipped between US ports be shipped on vessels that are flagged under the US as well as being built, owned, and crewed by Americans. In theory, it’s a sensible idea but in practice, it has led to higher costs, cronyism, inefficiency, and decreased national security, Lincicome wrote in 2015.
Lincicome recently penned a critique of the idea of “repatriating” supply lines that appeared in National Review. In it, he addressed the question of critical medical supplies, pointing out that the claim that the majority of America’s medical supplies come from China is “essentially baseless.”
Per Lincicome’s investigations, China’s stranglehold on American medical supplies is greatly exaggerated. For example, even though China produces 30 percent of imported medical equipment, it accounts for only nine percent of medical items used in the US because American companies already produce more than 70 percent of items consumed here.
Further, only 13 percent of factories that produce active pharmaceutical ingredients (APIs) are in China compared with 28 percent in the US. Most of the remainder are in the EU, Canada, or India. For essential medicine APIs, 21 percent are already produced in the US versus only 15 percent from China.
If the threat of China to our medical supplies and pharmaceuticals is overblown, the threat of protectionism is not. Protectionist policies have a history of backfiring and weakening the industries they were supposed to protect while stifling innovation at the same time. President Trump’s own steel and aluminum tariffs are one recent example of such a failure.
Rather than inspiring companies to become more innovative and competitive, protectionism does the opposite. Companies spend more time and energy lobbying to protect their fiefdom than in expanding their core business. Often higher costs are associated with protectionism as well.
There are better options than government edicts moving production to the US. For example, when the pandemic is over and prices of medical supplies drop, the government should replenish strategic stockpiles. Both the Obama and Trump Administrations failed to restock N95 mask supplies that were used in the 2009 flu outbreak. Proper planning would make a big difference in future pandemics. This year the Trump Administration wasted months and did not order necessary supplies until mid-March, weeks after the pandemic was well underway.
As I’ve pointed out before, another good solution is to provide companies with an alternative to China. Or better yet, with several. The Trans Pacific Partnership was supposed to be an counterweight to China but the president canceled the agreement as one of his first acts.
If we had free trade agreements with countries such as Australia, Japan, Vietnam, and Malaysia, it would diminish China’s influence in the region as well as providing an incentive for companies to move operations out of China. The pandemic should make the risks of doing business with an untrustworthy authoritarian regime obvious but businesses still need viable alternatives.
There are better solutions to the problems in medical supplies than to decree a top-down order for companies to realign their supply chains and unilaterally force them to move production to the US, regardless of the costs. The idea that government knows best and that businesses should just fall into line and do as they are told is the sort of thing that Republicans and conservatives used to oppose.
Originally published on The Resurgent

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