Pandemic-induced protectionism endangers lives

Peter Navarro, one of President Trump’s top trade advisers, recently slammed pharmaceutical lobbyists for opposing Trump’s “Buy American” executive order.

In his view, these “well-heeled Swamp Creatures” only oppose the proposed order – which reportedly would require government agencies to purchase medicines and medical supplies from domestic suppliers – because it would hurt their companies’ bottom lines.

But there are several reasons for relying on the diversity created by international supply chains that have nothing to do with pharmaceutical company profits. Think of it as the pharmaceutical equivalent of an investment adviser telling a client not to put all of his eggs in one basket. 

While the coronavirus pandemic has demonstrated that the labor force in other countries can be hit hard and essentially shut down, threatening supply chains, the U.S. labor force is not immune from a pandemic-induced shutdown. 

Suppose Navarro’s proposed executive order had gone into effect a few years ago, and drug manufacturers had moved their plants to New York and New Jersey — which have largely shut down. Would we be better off?

Navarro says the EO would not prohibit the United States from buying from other countries in a pandemic. But foreign companies would be obligated to fill their regular customers first. They may not have the capacity to begin filling massive orders from the United States.

The pandemic has demonstrated the need for more diversity in the supply chain, not less. If anything, drug makers rely on too few foreign countries for their raw materials, not too many. The more diversified the supply chain, the less vulnerable it is to disruptions. Shutting down global trade and headquartering everything in the United States would make medical supply chains even more precarious.

Offshoring has another significant benefit: It helps keeps prices down, especially on generics. That benefits patients, not pharmaceutical companies.

Nine out of 10 U.S. prescriptions are generics, and about 95 percent of those prescriptions are filled for $20 or less. Forcing companies to make their drugs and medical devices in the United States would lead to significant price increases — hardly a win for patients.

And that re-shoring process would take years under ideal conditions, providing virtually no relief in this pandemic.

During a national health emergency, with tens of millions of workers under strict orders to stay home – or reluctant to go to work – meeting the needs would likely be impossible. Pharmaceutical firms would quickly run into shortages of everything from allergy medicines and statins to antibiotics.

Or take medical equipment. Hospitals across the nation face rampant shortages of face masks, ventilators and other vital equipment. In the weeks and months ahead, the ability to import supplies and parts from areas less affected by the pandemic will be crucial.

To be sure, strengthening America’s manufacturing sector is a worthy goal. And Trump has taken the biggest step he could take to achieve that goal by passing his tax reform package.

The U.S. Congressional Research Service has shown that the U.S. offshoring trend began in the late 1980s, which was precisely when other countries began cutting their corporate tax rates. The worldwide average corporate tax rate began declining from just under 40 percent in the late ‘80s to a little more than 20 percent by 2017. The U.S. corporate tax rate was 35 percent from 1986 until tax reform lowered it to 21 percent, finally making the United States tax-competitive once again.

While several factors played a role in U.S. companies’ decision to offshore more jobs, the high corporate tax rate was a major one. The tax-inequity problem has been fixed, and we have seen several companies announce they would be re-shoring some or all of their operations.  

The Trump administration is also rolling back regulations at record speed. That too will lure more companies back. 

The “Buy American” executive order wouldn’t make our economy stronger. And it certainly wouldn’t make American patients any healthier or safer. Instead, it would compound the shortages brought on by COVID-19 and put countless lives at risk.

Low taxes and a lite-touch regulatory environment will encourage manufacturers of all stripes to re-shore at least part of their operations. But they need the freedom and flexibility to maintain diverse supply chains so that no pandemic or natural disaster threatens supplies and the American people.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.