The drivers of US-China trade are shifting in the wake of the US-China trade war and the Covid-19 pandemic. In some areas, like aircraft and their component parts, trade between the two countries has shrunk considerably. Yet, in other areas trade between them is reaching new heights. Pharmaceutical products have emerged as one of the largest winners. Over the past five years, two-way trade of pharmaceuticals has grown from composing just 0.6 percent of the trading relationship to nearly 3 percent of its total value. This growth is not the result of a surge in cheap, Chinese imports. The trade is broadly balanced—the US imported $10.2B while exporting $9.3B to China—and is driven by advanced medicines such as cancer treatments and antibiotics.
The emergence of this important, new supply chain linking both economies has implications for economic interdependence and national security. However, despite the increase and the tone of recent rhetoric around the US-China pharmaceutical trade, China does not have a stranglehold on the US medicine supply chain. Still, the US ought to prioritize a regular supply-chain mapping exercise in order to provide policymakers ample breathing room to act well before dependence on China becomes a material risk to the US healthcare system.
What’s behind the rise of US-China trade in pharmaceuticals?
Chinese firms have become major suppliers of US pharmaceuticals. Since 2020, US imports of Chinese pharmaceuticals (defined by the US tariff code to include packaged medicaments, vaccines, blood, organic cultures, bandages, and organs) has grown by 485 percent, going from $2.1B in 2020 to $10.3B in 2022. In two years China’s import share has more than doubled with the US going from buying just under 2.5 percent of its total pharmaceuticals from China in 2020 to more than 6 percent last year. China is now the US’ fourth largest supplier of medicines after Ireland (19.8 percent), Germany (10.8 percent), and Switzerland (10.7 percent).
China has been a longstanding supplier of bandages to the US. Over the past decade Chinese shipments have, on average, comprised 40 percent of total imports. But bandages aren’t behind the rise in imports. The majority of recent growth has instead been driven in a surge of imports of drugs dosed and ready for use by American consumers and hospitals. In 2022 the US imported $7.2B of such medicaments from China, whose imports now comprised 7.9 percent of total US imports, up from 1 percent in 2020.
The import growth is largely explained by the importance Beijing has placed on biotech as a part of an effort to advance China’s manufacturing sector up the value-added chain by targeting high-tech fields, such as the pharmaceutical industry. Simultaneously, Chinese regulators have implemented policy changes reducing the cost of domestic drug development while also bringing their regulatory framework in line with global standards, allowing Chinese producers to competitively participate in the global pharmaceutical trade. These goals were recently reaffirmed with nine PRC agencies jointly issuing the “14th Five-year Plan for the Development of the Pharmaceuticals Industry” which called for increased innovation and expanded Chinese participation in global regulatory developments.
China is prioritizing a domestic pharmaceutical industry partly in preparation for its own population’s burgeoning public health issues. As China’s population has grown wealthier and its median age increases, the prevalence of diseases such as cancer, diabetes, and heart disease have also grown. As a result, many of Beijing’s pharmaceutical ventures focus on innovative, novel treatments for chronic diseases and cancers.
US exports of pharmaceuticals to China have also been increasing. This growth is overwhelmingly driven by US shipments of immunological products, such as steroids used to treat or manage Asthma, dosed and packaged for use in Chinese hospitals and by consumers. Since 2017, Chinese imports have increased by nearly 2700%, meaning US companies now control more than 65% of this $7.9B import market. US export growth to China has coincided with a general increase in export capacity for immunological products. Since 2017, US global exports of immunological products have more than doubled in response to the increasing importance of this drug class as well as the proliferation of USG policies designed to increase onshore manufacturing capacity of critical drugs.
Trade in pharmaceutical ingredients has been steady
In 2021 the Biden Administration identified pharmaceuticals as a supply chain of critical importance, implying the White House views them in the same light as semiconductors, batteries, and critical minerals. Congress is also increasingly focused on them. Representative Mike Gallagher—who is also chairman of a new Select House Committee on US-China competition—and Senator Tom Cotton have repeatedly called attention to the issue and have even introduced legislation aimed at reducing possible risks. What concerns them the most, however, are not imports of Chinese finished pharmaceuticals such as those discussed above. Rather, they are focused on the precursor ingredients that give drugs their desired effects. Commonly known as active pharmaceutical ingredient (API), these chemicals are the most important component to any pharmaceutical manufacturer’s supply chain. Disruptions to the delivery of APIs could seriously impede production of finished pharmaceutical goods.
US policymakers’ concerns are not without reason. Chinese commentators have long suggested leveraging the market share of Chinese API producers in service of Beijing’s policy goals. For example, in 2019 a former central bank adviser suggested that Beijing should leverage its exports of antibiotics as a retaliatory tool in the US-China trade war. More recently in a March 2020 editorial in state media outlet, Xinhua, made a similar suggestion saying China could assume “strategic control” over supplies and limit exports.
While it is important to be aware of such risks, it is also crucial not to overstate them. Although China may dominate the import supply chains of certain chemicals—for example the US relies on China for more than 75 percent of its vitamin B6, B12, B1, C and nearly 70 percent of its vitamin E imports—it makes up a much smaller portion of overall API imports. Even if US imports of Chinese APIs have grown by around 24 percent since 2020 in absolute terms, Chinese imports as a portion of all imports of APIs have stayed relatively flat over the past four years and are even down by over 10 percent from a spike in 2018. Over the past decade the US has gotten, on average, around 17 percent of its API imports from China. While still considerable, this number is far short of the often cited but erroneous statistic that 80 percent of APIs the US uses come from China (which was the result of a misinterpretations of an FDA study).
Towards a stronger US pharmaceutical supply chain
The surge in US-China pharmaceutical trade has resulted in Chinese producers achieving a considerable share of US imports in both benign areas such as fever reducers and laxatives and some critical drugs like antibiotics. While still a relatively small share of trade, Chinese shipments of cardiovascular medicine as well as cancer treatments are notable to watch given their importance to US healthcare infrastructure and because they are some of the fastest growing trade flows, increasing some 1147 and 401 percent respectively since 2017. However, these are the exception, not the rule. China still only makes up around 6% of overall US pharmaceutical imports and 17% of API imports.
In the areas where China has considerable market share, the US should pursue a de-risking strategy centered around identifying alternative sources of supply. More broadly, the US should prioritize regular supply chain mapping exercises. These efforts could serve as an early-warning mechanism in the long run. And supply-chain mapping should consider indirect US exposure through other trading partners. Although US direct reliance may be manageable, China is a major supplier to many other countries in the global pharmaceutical value chain. For example, by some estimates, China supplies India—the US’ fifth largest source of pharmaceutical imports—with nearly 70% of its APIs. A mapping effort that traces the full supply chain of critical pharmaceuticals could reveal other areas of indirect risk that China could effectively leverage if the bilateral relationship substantially deteriorates.
As Beijing continues to prioritize pharmaceuticals, its manufacturing capacity and relevance to global supply chains will only grow. If recent import growth around cardiovascular medicine and cancer treatments continue, for example, in a few short years China could control concerning portions of the US supply chain. A regular mapping exercise would help policymakers assess how supply-chain risk is changing over time.
Niels Graham is an Assistant Director with the Atlantic Council GeoEconomics Center focusing on US trade policy and the Chinese economy.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.