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Reshoring US Pharmaceutical Production Would Create 800K Jobs

March 17, 2020

Health, Security, Economic Benefits from Reshoring

By Steven L. Byers, PhD and Jeff Ferry

With the spreading coronavirus pandemic, Americans are becoming increasingly aware of our dependence on foreign sources for important pharmaceuticals and other health care products.

The US is dependent on China for over one third of all the antibiotics we import, and in the case of many generic drugs, we are completely dependent on China. As Trump administration officials and health care experts consider strategies to boost US production of pharmaceuticals, we investigate the substantial economic benefits of reshoring pharmaceutical production to the US. We found that an ambitious but realistic reshoring program could create 804,000 US jobs and add $200 billion to annual GDP in the first year. The benefits in terms of security of supply are separate, and in times like the present, critically important.

The pharmaceutical industry has grown dramatically with the growth of health care spending in the US and the rise in drug prices. Pharmaceutical imports have also grown dramatically as US-based drug manufacturers moved manufacturing facilities offshore. In the late 1990s, the US began to  import more pharmaceutical products than it exported. In 2019, imports of pharmaceutical products totaled $127.6 billion. As seen in figure 1, in the years following 1997, imports of pharmaceutical products increased at an average annual rate of 15.8 percent and with exports growing at just 10.7 percent, the trade deficit in pharmaceutical products widened to $74 billion in 2019. Last year, pharmaceuticals ranked third as a US import category, behind automobiles ($180 billion) and crude oil ($132 billion), but ahead of cellphones ($102 billion).

The top ten sources of US pharmaceutical imports are shown in table 1. Eighty percent of all pharmaceutical imports are accounted for by the top ten countries. Seven of the top ten countries we import from are in Europe with Ireland having the largest share. China is well behind the leaders, in 17th place, with just $1.6 billion of pharmaceutical imports last year.

However, the Census category of pharmaceutical imports does not include the key ingredients that go into pharmaceuticals, known as Active Pharmaceutical Ingredients (API). According to Senate Finance Committee chairman Charles Grassley, “80 percent of Active Pharmaceutical Ingredients are produced abroad, the majority in China and India.” Pharmaceutical expert Rosemary Gibson said in recent congressional testimony that three antibiotics used to treat coronavirus or related infections, azithromycin, ciprofloxacin, and piperacillin/tazobactam, are all dependent on supplies of APIs from China. In addition, according to a report in Politico, 95 percent of US imports of ibuprofen and 70 percent of US imports of acetaminophen come from China.

In case the implications of the risks of dependence on China are not clear, an economics professor at Tsinghua University, Li Daokiu helpfully explained Chinese strategic options at a National People’s Conference event in Beijing last year: “We are at the mercy of others when it comes to computer chips, but we are the world’s largest exporter of raw materials for vitamins and antibiotics. Should we reduce the exports, the medical systems of some western countries will not run well.”

Table 1 – Top Sources of Pharmaceutical Imports 2019

   

Value of Imports ($’s)

Percent of Total

Cumulative Percent

Unit Value (Dollars per Kilogram)

 

World Total

$  127.6B

   

$     239.53

1

Ireland

$     25.8B

20.2%

20.2%

$  2,391.06

2

Germany

$     17.2B

13.5%

33.7%

$     540.01

3

Switzerland

$     15.7B

12.3%

46.0%

$  2,849.21

4

Italy

$       8.4B

6.6%

52.6%

$     255.75

5

India

$       7.6B

5.9%

58.5%

$        77.65

6

Denmark

$       6.4B

5.0%

63.5%

$  1,641.36

7

Belgium

$       6.4B

5.0%

68.5%

$  1,916.06

8

Canada

$       5.3B

4.2%

72.6%

$     104.05

9

United Kingdom

$       5.1B

4.0%

76.6%

$     304.80

10

Japan

$       4.3B

3.3%

80.0%

$     454.52

17

China

$       1.6B

 

 

$        15.83


Modeling the Economic Impact of Reshoring

Reshoring significant volumes of the production of pharmaceuticals and APIs would have clear benefits for US security of supply. It would also have large benefits for safety, as US-based drug manufacturing facilities are inspected by the FDA more often than foreign facilities. According to pharmaceutical expert Yanzhong Huang, at least 81 Americans died in 2008 following the import from China of a contaminated batch of the blood-thinner heparin.

Reshoring pharmaceutical production would also have economic benefits. To quantify those benefits, we used the REMI Policy Insight Model[1] to estimate the impact on the US economy of restoring our level of pharmaceutical imports to the level of 2010, when we imported $61.6 billion of pharmaceuticals. We also reduced chemical imports by $4.9 billion in our simulation, to account for the increased imports of chemical ingredients that go into pharmaceuticals. We ran our model over a five-year period, 2020 through 2024.

We estimated a baseline case assuming real GDP growth of around 2 percent a year, a figure that represents a consensus figure before the onset of the coronavirus panic. The baseline model results are shown in Table 2.

Table 2 – Baseline Economic Model

Category

Units

2020

2021

2022

2023

2024

Total Employment

Thousands (Jobs)

156,325

156,690

157,050

157,412

157,966

 

% Change YoY

0.24%

0.23%

0.23%

0.23%

0.35%

Gross Domestic Product

Billions of 2020 Dollars

$21,937

$22,295

$22,656

$23,019

$23,433

 

% Change YoY

1.96%

1.63%

1.62%

1.60%

1.80%

PCE-Price Index

2009=100 (Nation)

120.05

122.79

125.55

128.33

131.09

 

% Change YoY

2.28%

2.29%

2.25%

2.21%

2.15%

Net Trade of Goods and Services

Billions of 2020 Dollars

-$687.5

-$682.8

-$696.1

-$715.5

-$722.1

 

% Change YoY

1.95%

0.16%

2.14%

2.74%

1.39%

Imports of Goods and Services

Billions of 2020 Dollars

$3,256.19

$3,321.3

$3,405.4

$3,497.6

$3,580.5

 

% Change YoY

2.65%

2.00%

2.53%

2.71%

2.37%


To simulate the reshoring of imports of pharmaceuticals and inputs to pharmaceutical manufacturing by the amount of the increase in imports in these sectors from 2010 through 2019, we reduce imports of these products and increase US production of pharmaceutical and selected chemical products.  We also adjust the cost of the new production to account for the trade-weighted cost differential of imports with US production.

In our model simulation, we reduced pharmaceutical imports in 2020 down to the 2010 level (a reduction of about 50 percent), and made a similar adjustment to pharmaceutical-related chemical imputs. We allowed both production and imports to rise gradually from the lower base, in keeping with demand, in subsequent years. The trade-weighted differential in production cost between imported and US  production was 3.34 percent for pharmaceutical products and 2.59 percent for inputs to pharmaceutical manufacturing. In other words, US production is more expensive, but by less than 4 percent. Our cost estimates are based on the Boston Consulting Group’s 2018 Global Manufacturing Cost Competitiveness Index[2] and the Conference Board’s estimates of international comparisons of hourly compensation costs in pharmaceutical and chemical manufacturing[3]. The reason why the cost differentials are so small is that some of the largest sources of pharmaceuticals and ingredients include Germany and Switzerland, nations where manufacturing costs are higher than the US. Of course, for those pharma products sourced from China and India, costs would rise by larger amounts when reshored.

We use six policy variables in the REMI model to perform the simulation. We reduce imports of pharmaceuticals and medicine manufacturing and basic chemical manufacturing, increase US sales in the pharmaceutical sector and  chemical sector. We increase the cost of production in the two sectors by 3.34 percent and 2.59 percent, respectively. The results of the simulation are shown in Table 3.

The economy generates 804,000 additional jobs in 2020. The addition to GDP was $200 billion in the first year, or just under 1 percent.  The impact on inflation is insignificant, with inflation rates remaining under 2.3 percent for all five years in both the baseline and the reshoring model. Total US imports were around $40 billion a year lower in the reshoring case The trade deficit remains between $600 billion and $700 billion in both cases. Ironically, the reshoring of pharmaceutical production stimulates the US economy, leading to more imports, partially offsetting the direct reduction in imports from the pharmaceutical reshoring. The improvement in employment and GDP in the reshoring case declines after 2020. We attribute this to the model’s conservative estimation of industry investment. In our view, a reshoring of some $70 billion of production would lead to further investment and employment gains in future years.

Table 3 – Reshoring Model: Simulation Results and Changes from Baseline

Category

Units

2020

2021

2022

2023

2024

Total Employment

Thousands (Jobs)

157,129

157,304

157,598

157,865

158,337

Change from Baseline

Thousands (Jobs)

804

614

548

453

371

Gross Domestic Product

Billions of 2020 Dollars

$22,137

$22,465

$22,814

$23,161

$23,561

Change from Baseline

Billions of 2020 Dollars

$200

$170

$158

$142

$128

PCE-Price Index

2009=100 (Nation)

120.25

123.13

125.89

128.68

131.42

PCE-Price Index % Change YoY

% Change YoY

2.45

2.4

2.24

2.21

2.14

Net Trade of Goods and Services

Billions of 2020 Dollars

-$641.3

-$640.1

-$657.7

-$680.0

-$689.1

Change from Baseline

Billions of 2020 Dollars

$46

$43

$38

$36

$33

Imports of Goods and Services

Billions of 2020 Dollars

$3,208.3

$3,274.8

$3,361.4

$3,455.1

$3,539.4

Change from Baseline

Billions of 2020 Dollars

-$48

-$47

-$44

-$42

-$41


In the reshoring case, increased output and employment are largest in the pharmaceutical and medicine manufacturing sector. Output rose 63% and employment 62% in 2020  as compared to the baseline model.  This would be a valuable boost to the US economy, creating more good-quality jobs. US government data shows that in 2018 there were 294,250 employees in pharmaceutical and medicine manufacturing with a median income of $74,890, 47 percent higher than the median for all private-sector employees.

The economic benefits of reshoring US pharmaceutical production are thus substantial. They are also strategic; in that they would reduce US dependence on potentially hostile countries like China. In times of pandemic, there is also a non-zero risk that even friendly nations will prioritize their own citizens over exports. At the very least, the US needs a comprehensive audit of its dependence on individual nations and companies for pharmaceuticals, APIs, and any other key inputs.

Policy Issues

Pharmaceutical expert Rosemary Gibson has pointed out in congressional testimony that Chinese pharmaceutical companies are subsidized by the Chinese government as part of China’s campaign to achieve self-sufficiency in key industries.. She cited the case of Zheijiang Huahai Pharmaceutical (ZHP), which after exporting contaminated batches of valsartan to the US, disclosed in a 2018 report that it received $44 million of Chinese government subsidies that year. For US pharmaceutical companies to profitably produce drugs and ingredients in competition with subsidized Chinese companies, policies would be needed to incentivize US companies to enter the market. Policy options to consider include tariffs on any ingredients linked to a subsidized manufacturer or quotas on imports. Another option is for all federal or federally-supported purchasers to buy all drugs on a list of critical supplies only from domestic producers.

However, it is worth noting that cost is not the only issue behind offshoring. There is a cultural issue at work too. US pharmaceutical companies have been the most aggressive at both outsourcing production to other manufacturers and offshoring production. The Swiss pharmaceutical industry by contrast, has maintained a larger share of production at home. Pharmaceuticals are Switzerland’s largest export, accounting for $83 billion or 26 percent of Swiss exports last year.  Switzerland’s trade surplus in pharmaceuticals last year was $51 billion (compared with the US deficit of $74 billion).

Switzerland’s two largest pharmaceutical companies, Roche and Novartis, are both headquartered in Basel, Switzerland. Senior executives at both companies have spoken repeatedly about the importance of keeping a large share of their activities, including production, in Switzerland. The nature of the ownership of the companies plays a key role in setting the pro-Swiss and pro-Basel culture. Over 40 percent of Roche shares are owned by the founding Hoffman-LaRoche family. The founding Ciba, Geigy, and Sandoz families have significant stakes in Novartis. At both companies, Wall Street fund management firms own less than 15 percent of the stock. By contrast, Wall Street firms own more than 70 percent of the stock of most major US pharmaceutical firms, with Vanguard, BlackRock, and State Streeet Investment Management prominent among the top ten holders of each US firm. The US firms are thus more susceptible to the short-term pressures of the US stock market. Ironically, US pharmaceutical firms do not appear to trade for higher prices (i.e. multiples of forecast earnings) than the Swiss giants. But US managers of pharmaceutical firms have undoubtedly and publicly followed the fashionable rush to outsource and offshore that began around the time of Pfizer’s 2007 announcement that it would move 30 percent of its production to Asia, cut staffing levels by 10,000 and save investors $2 billion.

Conclusion

The US has become increasingly dependent on imports of foreign produced pharmaceutical and other health care products as well as the ingredients that go into their production. As a result, the supply chain is highly susceptible to interruption which would put significant pressure on our healthcare system. In response, there are growing calls in Washington, DC to bring back pharmaceutical production to the US.  We measure the economic impact of reshoring all the production that we have lost to imports since 2010 and find that it could result in an additional 804,000 US jobs and add an additional $200 billion to annual GDP in the first year. The benefits of reshoring pharmaceutical and ingredient production are large in terms of national security, patient safety, and economic welfare.

Appendix A. Imports of Ingredients Used in Pharmaceutical Manufacturing

The U.S. imports many inputs used to manufacture pharmaceutical products. We identified 50 such inputs, listed in the Table 4 below, The list is not exhaustive but illustrates the extent of foreign imports of pharmaceutical ingredients. In 2019, these inputs accounted for $51.3 billion of imports from 137 different countries. Table 5 below shows that Ireland and China are the leading sources of these products. In many cases ingredients are imported from one country for manufacture in a second country before reaching the country of consumption, so Table 4 likely understates our dependence on individual countries for specific drugs, especially generic drugs and over-the-counter medicines.

Table 4 – Imports of Inputs to Pharmaceutical Manufacturing

Import Category

2019 $ Value of Imports

Total

$                       51,255,641,650

Heterocyclic Comp, Nit Hetero-atoms Only

$                       12,851,629,773

Nucleic Acids & Salts, Heterocyclic Comp Nesoi

$                          6,667,033,673

Sulfonamides

$                          4,234,776,648

Hormones; Derivatives & Steriods Used As Hormones

$                          4,019,959,957

Heterocyclic Compounds, Oxygen Hetero-atom(s) Only

$                          2,271,719,234

Acyclic Alcohols & Halogenat, Sulfonatd Etc Derivs

$                          1,948,085,129

Oxygen-function Amino-compounds

$                          1,847,750,618

Polycarboxylic Acids & Anhyd Etc, Halog, Sulf Etc

$                          1,482,317,628

Provitamins And Vitamins & Derivatives & Intermixs

$                          1,177,396,930

Organo-inorganic Compounds Nesoi

$                          1,141,022,804

Carboxylic Acid, Added Oxygen & Anhy Etc, Hal Etc

$                          1,105,565,251

Unsat Acyclic & Cyclic Monocarbox Acid & Anhyd Etc

$                          1,064,963,096

Carboxyamide-function Comp; Amide-function Com Etc

$                          1,015,421,955

Antibiotics

$                             855,758,912

Amine-function Compounds

$                             842,564,578

Sat Acyclic Nonocarbox Acid & Anhyd, Halogon Etc

$                             804,395,425

Organo-sulfur Compounds

$                             791,684,907

Ketones & Quinones & Halogenatd, Sulfonatd Der Etc

$                             756,812,315

Ammonia, Anhydrous Or In Aqueous Solution

$                             711,874,467

Ethers, Ether-alcohols, Alcohol Peroxides Etc.

$                             647,046,956

Veg Alkaloids, Nat Or Synth & Salts, Ethers Etc.

$                             397,788,403

Nitrile-function Compounds

$                             357,618,313

Chlorides Etc; Bromides Etc; Iodides Etc.

$                             339,590,720

Aldehydes, Its Cyclic Polymers; Paraformaldehyde

$                             312,562,003

Sulfates; Alums; Peroxosulfates (persulfates)

$                             309,980,512

Nitrogen Function Compounds Nesoi

$                             279,872,910

Chlorates Etc; Bromates Etc; Iodates Etc.

$                             253,909,366

Carboxyimide-function Comp; Imine-function Com Etc

$                             236,654,831

Quaternary Ammonium Salts Etc; Lecithins Etc.

$                             234,315,063

Cyclic Alcohols & Halogenatd, Sulfonatd Etc Derivs

$                             233,975,820

Glycosides, Natural Or Synth & Salts, Ethers Etc.

$                             224,357,258

Sodium Hydrox; Potass Hydrox; Sod Or Potass Perox

$                             207,912,763

Esters Of Inorg Acids & Salts; Their Halog Etc Der

$                             206,742,071

Phenols; Phenol-alcohols

$                             191,397,730

Fluorides; Fluorosilicates, Fluoroaluminates Etc

$                             189,902,766

Fluorine, Chlorine, Bromine & Iodine

$                             158,295,646

Sugars, Chem Pure (exc Sucrose, Lactose, Etc)

$                             154,768,443

Epoxides With A 3-memb Ring & Halog, Sulfon Etc

$                             152,580,393

Organic Derivatives Of Hydrazine Or Hydroxylamine

$                             146,617,169

Phosphoric Esters & Salts, Lactophosphates Etc.

$                             109,660,906

Organic Compounds Nesoi

$                             100,754,875

Diazo-, Azo-, Or Azoxy-compounds

$                                55,963,344

Hypochlorites Etc; Chlorites; Hypobromites

$                                35,960,200

Phenol Or Phenol-alcohol Deriv, Halog, Sulf Etc

$                                35,117,317

Hydrox Etc Of Magnesium; Oxides Etc Strontium Etc

$                                25,673,251

Sulfites; Thiosulfates

$                                22,376,090

Sulfides; Polysulfides

$                                19,986,911

Acetals And Hemiacetals With Or W/o Oth Oxy Func

$                                11,093,461

Sulfur, Sublimed Or Precipitated; Collodial Sulfur

$                                  6,354,718

Halogenated, Sulfonated Etc Der Of Aldehyde Compds

$                                  6,078,141

 

Table 5 - Top Ten Sources of Imported Pharmaceutical Inputs

   

Total Chemical 2019

Percent of Total

Cumulative Percent

 

World Total

$51.3B

   

1

Ireland

$15.2B

29.7%

29.7%

2

China

$7.6B

14.8%

44.5%

3

Switzerland

$3.9B

7.5%

52.0%

4

India

$2.7B

5.3%

57.4%

5

Germany

$2.6B

5.2%

62.5%

6

United Kingdom

$2.2B

4.3%

66.8%

7

Canada

$2.1B

4.2%

71.0%

8

Italy

$0.9B

1.7%

72.7%

9

Belgium

$0.8B

1.6%

74.4%

10

Denmark

$0.2B

0.5%

74.8%

 

[1] https://www.remi.com/model/pi/.

[2] How Shifting Costs are Altering the Math of Global Manufacturing (2018), Justin Rose, Ian Colotla, Michael McAdoo, and Will Kletter. Boston Consulting Group

[3] International Labor Costs: International Comparisons of Hourly Compensation Costs in Manufacturing and Sub-Manufacturing Industries, Update 2016. The Conference Board.


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