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“Buy American” Isn’t Always Best

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eye on the news

“Buy American” Isn’t Always Best

Onshoring all drug manufacturing would make us less resilient. June 11, 2020
Covid-19
Health Care
Economy, finance, and budgets

Covid-19’s economic implications will unfold for decades. The virus will pass; people will go to baseball games and concerts again. But economic policy will change in ways that will affect our lives for generations. Presidential economic advisor Peter Navarro is advocating a “Buy American” executive order that would force federal agencies to buy American-made versions of some medical and pharmaceutical equipment, drugs, and vaccines. One justification for this proposal is the oft-cited statistic that 80 percent of drugs in America come from China. Given that the government is a primary purchaser of drugs, Navarro’s order would force the pharmaceutical industry to restructure the way it manufactures and distributes its products.

Even if that order doesn’t come to fruition, changes in how we source drugs are probably inevitable. New York governor Andrew Cuomo uses his daily updates to call for bringing more medical-supply manufacturing back to America, to promote resilience. Economists and commentators, once unabashed champions of globalization, are rethinking our reliance on foreign suppliers in all industries.

The question is presented as a trade-off between resilience—the ability to withstand a big, unpredictable shock—and efficiency, getting stuff as cheaply and quickly as possible. Americans have just experienced shortages of many goods, especially medical supplies, so it’s tempting to argue that we should focus on resilience. But a “Buy American” drug program does not promote resilience.

First, like it or not, beating Covid-19 will require international cooperation. The best scientists and drug makers in each country are working on treatments and vaccines. Making these treatments or vaccines available to as many people as possible will require goods, knowledge, supplies, and chemicals from around the world. Buy American would not just slow progress on Covid-19; pharmaceutical companies would be left scrambling to produce other critical drugs, like insulin.

Even as a longer-term strategy, a Buy American program would make us less resilient. First, the 80 percent figure of drugs coming from China is false. In fact, about 60 percent of American pharmaceutical spending is on domestically produced drugs, though strictly speaking, American-made is hard to define, because many intermediate inputs come from abroad.

Diversification is less risky than concentrating all your supply from one place, even if it’s your own country. If something happens to disrupt your domestic supply chain, like a disease outbreak, major earthquake, or war, then sourcing from multiple, less affected countries means less risk. Our supply chain is highly diversified and includes 150 countries; relying on one country is risky. Less trade would also make drugs more expensive and increase health-care costs.

It’s possible, and even wise, to promote more domestic drug manufacturing to improve efficiency and resiliency. But a major reason why drugs aren’t made in America is tax and regulatory policy that makes it prohibitively expensive to do so. Part of the executive order would lessen FDA regulations and hold foreign suppliers to the same standard. But instead of a Buy American policy, the U.S. should remove such distortions and create a natural incentive to make more drugs here. With increased investment and technical innovation, it may even become more profitable and efficient to do so.

Photo: 1933bkk/iStock

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