Made in China, Is It Worth the Savings? You Get What You Pay For



Volume 91 No. 5 - May 2020


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We live in an interconnected world. We depend on other countries for the things we need. While trade with other nations brings us a higher standard of living, the coronavirus crisis has exposed strategic vulnerabilities in our domestic supply chains, including—notably—in pharmaceuticals.


As coronavirus cases surged in China earlier this year, eventually spreading to virtually every country in the world, a backlash against China emerged in the media. The backlash didn’t come out of the blue; it reflected the thoughts of many Americans looking for someone to blame. Current science indicates that COVID-19 originated in China. There’s also been criticism in how China first confronted the novel coronavirus and how it communicated about the disease with the rest of the world.


Now, as the world confronts the COVID-19 pandemic, two themes have emerged:


  • The call for political and economic retribution against China

  • The call to reduce our dependence on China for strategic goods



Political and Economic Retribution


COVID-19 has developed into a generational event, a trauma on the level of wars and other pandemics we’ve faced in our history as a nation. It’s human nature that we seek someone to blame.


Regardless of political party, the number of Americans who hold an unfavorable opinion of China has jumped this year. According to Pew research released on April 21, 72% of Republicans and 62% of Democrats view China unfavorably. That’s up significantly from 2018 when those numbers were 51% and 47%, respectively.


President Trump has said there are “a lot of ways you can hold them [China] accountable.” Other countries, like Germany, Australia, and the UK are also considering political and/or economic retribution against China for what they did or did not do in the earlier days of this pandemic. China, for its part, has pushed back, calling these claims frivolous, negligent, and denying the jurisdiction of non-Chinese courts in evaluating how the Chinese people fought their outbreak. Any attempts for political and/or economic retribution against China seem, at best, lengthy and resource-intensive, and, at worst, destined to fail.


The Trouble with Trusting China


While any retribution leveled at China will likely take years to resolve—if it’s ever resolved—the will and need to change our overdependence on China—a country with which the US is frequently at odds politically and ideologically—is real. We’ve sold our souls to reduce costs.


Nearly every US industry is dependent on China to varying degrees, and key industries—key to our national interests and defense—are overly dependent on China. Without Chinese imports, we would struggle to make cars, cameras, mobile phones, TVs, PPE, infrastructure.


We would also struggle to make pharmaceuticals. Even though the US ranks high among world leaders in discovering new drugs, the making of those drugs has moved offshore—in large part to China. According to a March 2020 New York Times article, over 90% of US antibiotics, vitamin C, hydrocortisone, and ibuprofen come from pharmaceutical companies in China. That same article pointed out that the last US-based production of penicillin stopped in 2004.


This outsourcing of pharmaceuticals to China not only exposes the US to the political whims of a sometime adversary, but it also calls into question the components and quality control processes used to make those drugs if they are no longer under US control.



How Did China Come to Dominate US Pharmaceuticals?


Our over-dependence on Chinese pharmaceuticals is a self-inflicted wound. The US once had a thriving manufacturing center for pharmaceuticals in Puerto Rico, created by Tax Reform Act of 1976 that exempted from taxation corporate income generated in Puerto Rico. By 1985, pharmaceutical companies in Puerto Rico were saving some $86 million in taxes annually.


It was not to last, however. By 2006, the tax breaks had been repealed and pharmaceutical manufacturers looked elsewhere to base their operations. By 2019, the US Department of Commerce was reporting that 97% of antibiotics came from China. “If you’re the Chinese and you want to really just destroy us, just stop sending us antibiotics,” Gary Cohn, President Trump’s chief economic advisor at the time said.


He’s right. Putting that much dependence on a foreign country like China for products that are critical to our health exposes us strategically and physically to the whims of a country that has often been adversarial.



The Path Forward


How this pandemic ends remains to be seen. While politicians fight about who is to blame for how the crisis has played out, ICI sees a need to bring the manufacturing of strategic items like pharmaceuticals back to the United States. We will have to accept higher costs in doing this, but the costs of single sourcing something as critical as medicine to a foreign producer are often much higher in the long run.


This reshoring of pharmaceuticals and other strategic products will result in changes and opportunities in investment strategies. ICI will continue to monitor our positions and approved stock list for companies that have:


  • Strong balance sheets

  • The continued ability to pay dividends

  • The ability to weather a slowdown


To this list, we will also add companies poised to benefit from this reshoring of strategic manufacturing.


We live in interesting times. We must see beyond the noise to the common good. We must see this renewed call for Made in the USA as a renewed opportunity for not just our domestic survival strategies, but also for US companies, US jobs, and US investing. As we navigate this crisis together, it’s time to think about the new and better future we will build on the other side.


Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

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