Trade Reform

CPA Applauds Brown, Baldwin Letter to USTR Tai Urging Support of U.S. PPE Production & to End Tariff Exclusions on Chinese PPE

Share Tweet Share

WASHINGTON — The Coalition for a Prosperous America (CPA) today applauded U.S. Senators Sherrod Brown (D-OH) and Tammy Baldwin (D-WI) for leading a letter to United States Trade Representative (USTR) Katherine Tai requesting that 301 penalty duties be assessed to all imported finished state personal protective equipment (PPE) and key raw material inputs, including single-use N95 and KN95 masks, reusable and surgical masks, and surgical gowns. A 2018 investigation under Section 301 of the Trade Act of 1974 found that the Chinese government’s anti-competitive trade practices restrict U.S. commerce. Subsequently, the U.S. imposed duties on goods from China, with an exclusion process awarded on a case by case basis. In March 2020, the Trump administration provided exclusions to the tariffs imposed for medical products.

The letter was also signed by U.S. Senators Elizabeth Warren (D-MA), Bob Casey (D-PA), Tina Smith (D-MN), Chris Murphy (D-CT), Richard Blumenthal (D-CT), Kirsten Gillibrand (D-NY), Bernard Sanders (I-VT), Jack Reed (D-RI), and Ed Markey (D-MA).

“Senators Brown and Baldwin, as well as their Senate colleagues who joined this letter, should be commended for their efforts to support U.S. domestic manufacturers of PPE,” said Michael Stumo, CEO of CPA. “Allowing Chinese imports to be excluded from current Section 301 tariffs—especially for critical products like PPE—is not how you Build Back Better. Instead of rewarding China by granting tariff relief, we strongly urge Ambassador Tai and the Biden administration to not exclude any product from Section 301 tariffs imposed on Chinese imports.”

Yesterday, urged Ambassador Tai to not expand exclusions to Chinese imports subject to Section 301 tariffs. Currently, the Biden administration is reviewing 549 products currently subject to 301 tariffs imposed on Chinese imports. CPA strongly supports the current 301 tariffs on Chinese imports and believes that the current review should result in zero new exclusions.

Earlier this week, CPA Chief Economist Jeff Ferry outlined in a working paper that the “U.S. has a national interest in a reliable health care system that is not dependent on China. It has an interest in rebuilding U.S. production to rebuild our economy, create jobs that pay above the average and reduce income inequality.”

The post CPA Applauds Brown, Baldwin Letter to USTR Tai Urging Support of U.S. PPE Production & to End Tariff Exclusions on Chinese PPE appeared first on Coalition For A Prosperous America.

House Committee Hearing on Small Business Supply Chains Forgets About Reshoring

Share Tweet Share

Labor shortages, rising costs for raw materials be it lumber or chemicals, and the importance of private-public partnerships in manufacturing critical supply chains were the main topics of discussion during a House committee hearing on Wednesday. But missing from the debate was a discussion on reshoring American manufacturing as another solution. More goods made here means fewer goods waiting to get into ports.

Rep. Carolyn Bourdeaux (D-GA-7) was the best example of the day. She said supply chain problems have been getting worse over the last two months.

Rep. Carolyn Bordeaux of Georgia said a company in her district had to shut down production due to supply constraints stemming from China.

“In my district, Metcam Metal Fabricators had to shut down production of certain items due to a shortage of titanium dioxide that is an important component almost exclusively available from China,” she told the House Committee on Small Business’s Subcommittee on Oversight, Investigations and Regulations on October 20.  The hearing was titled “Global Supply Chains and Small Business Trade Challenges.”

Bourdeaux said Metcam’s business led to restrictions of manufacturing at Carrier, a multinational famous for heating and cooling systems, due to Metcam.  She laid part of the blame on just-in-time manufacturing models and globalized supply chains.

“We have not matched that change with sufficient government review and support for supply chains of critical goods,” she said, adding the line of the day: “This is not only an economics issue. This is a national security issue.”

The CPA Reshoring Index

CPA’s proprietary index measuring the return of manufacturing businesses from abroad shows that dependence on imports has been rising steadily over the last 18 years. Imports accounted for 30% of all manufactured goods consumed in the U.S. last year, up 8 percentage points in a decade despite tariffs.

Keep in mind that tariffs, we were told by the anti-tariff crowd, were supposed to crush demand and raise prices. Instead, exporting companies found ways around those tariffs by relocating manufacturing to non-tariffed countries (like China in Southeast Asia), absorbed the entirety of tariff costs themselves or shared it with their buyers.

Some sectors are almost fully import-dependent. Clothing imports account for around 90% of the local market share.

“Our dependence on imports, combined with growing reliance on one or a tiny number of suppliers, many of them in China, lies at the root of the global supply-chain snafu the world is experiencing right now,” said Jeff Ferry, chief economist for CPA. “The best solution would be to begin unwinding these excessively long and complex global supply chains and bringing production back closer to home.”

House Committee talks ‘Solutions’

Congress is not short of ideas on issues related to the supply chain. Be it reshoring critical medication, or the infrastructure bill that will set aside billions for ports or roads.

Earlier this month, Bourdeaux introduced the Supply Chain Health and Integrity Act, which would create an office of supply chain resiliency inside the Department of Commerce that is responsible for producing a national strategic plan for manufacturing and industrial innovation that will “guide our nations efforts to secure our most critical supply chains,” she said.

Some of this work is already ongoing. Last year, the Food and Drug Administration developed a list of hundreds of medications it deemed essential. Mostly all of it was imported.

Months before the FDA list was finally published, the government’s Biological Advanced Research and Development Authority, aka BARDA gave local generic drug maker Phlow $354 million in funding to produce essential medicine. Phlow is also building the United States’ first Strategic Active Pharmaceutical Ingredients Reserve, a long-term, national stockpile to secure key ingredients used to manufacture the most essential medicines, reducing import demand.

“Public and private partnership will be key to this solution,” said hearing witness Chris O’Brien, chief commercial officer for logistics firm R.H. Robinson. He was not speaking to pharmaceuticals directly but did mention his company’s financing from his home state of Minnesota during the crisis for personal protection equipment manufacturing and delivery at the height of the pandemic in 2020.

O’Brien also said he doubted manufacturers would move away from lean manufacturing because this keeps costs lower and enables companies to compete with cheaper producers in Mexico and Asia, where the currency differential alone is astronomical.

Majority of Businesses Not Thinking About Reshoring

Rep. Beth Van Duyne (R-TX-24), the ranking member on the Committee, started the day by quoting from a Small Business Association (the NFIB) survey that showed 90% of survey respondents had said that the current supply chain mess is impacting their business. At least 50% said they were experiencing product delays, and 25% said they were experiencing slower delivery times to customers with another 20% saying they will “rethink” their current supply chain.

That this number is so low – at just 20% — suggests most businesses are still not looking to reshore even after nearly three years of higher tariffs on more than $300 billion worth of goods from China. This should serve as a reminder that China is not our only deficit market. The European Union is closing in on them. As is Mexico.

Many CPA members who source the majority of their goods domestically are not having problems with their supply chains, but are having serious problems finding workers.

“Worker shortages have hindered the ability to get products out,” Van Duyne said, citing a WSJ article during the hearing that reported 51% of small businesses had unfilled job openings, a 48-year record high for the third consecutive month. “Container ships have no available slips to unload and small businesses cannot find workers. Without the products or workers, store shelves around the country are becoming increasingly empty,” Van Duyne said.

“Congress needs to focus upon building a minimum domestic production capacity for goods when shortages appear or when there is a risk of shortage. This will ensure price and supply stability, protect against geostrategic vulnerabilities, and create good paying jobs. All trade and industrial strategy tools should be on the table to rebuild these demonstrated shortages sectors that harm our national economic interests.” – Michael Stumo, CEO of the Coalition for a Prosperous America

If the U.S. was not so import-heavy, this would not be as big a problem as it today. While global supply chains are not going away anytime soon, and numerous factories will always need parts from abroad – whether its printed circuit boards from Mexico, Swedish steel, or German engines – it is clear that companies with stronger domestic supply chains are better off than those dependent on foreign supply chains.

The Chairman Blames ‘Trade War’ Tariffs

Committee Chairman Dean Phillips from Minnesota blamed trade war tariffs for part of the supply chain bottlenecks. CPA respectfully disagrees that tariffs caused any of these problems.

Chairman Dean Phillips (D-MN-3) said “port closures in Shanghai can lead to short supply of tools in a tool shop in the U.S.” He added that such news doesn’t make it on the cable news shows, but it actually does. The supply chain crisis is one of the biggest problems facing the country at the moment.

Phillips blamed lockdowns and “trade wars” for the problem.

O’Brien chimed in, seemingly in agreement.

“The trade war has caused higher prices to small businesses,” O’Brien said. “They are wondering if tariffs are likely to continue or expire. Congress and the administration can provide more signals to small businesses regarding the direction of the trade war so they can make long-term decisions.”

CPA believes American businesses have been warned of tariff risks since 2017. Companies have had four years to remap their supply chains away from China, but many have chosen not to, assuming the status-quo would return.

Protectionism has been intruding on supply chains at least since 2008 when the Doha round of global trade talks collapsed. The U.S.-China trade war took those frictions to a new level. In its wake, the U.S., China and Europe are all pursuing self-sufficiency in key sectors such as semiconductors and batteries. Other threats loom, such as green tariffs on high-carbon imports. Meanwhile, arbitrary import bans and detentions are now routine parts of China’s foreign-policy tool kit, as export controls are part of the U.S.’s. – Greg Ip, “Supply-Chain Crisis Fuels Latest Retreat From Globalization”, Wall Street Journal, October 20, 2021.

Moreover, O’Brien’s comment in response to Chairman Phillips is a good example of how inflation will be blamed on tariffs, leading to an increasing call to remove protections on key industries that will either be forced to stop investing or will manufacture more abroad. The other possibility is that more, costly government subsidies will be required to keep some of these companies in business.

Congress should prepare for this argument. While inflation weakening the tariff argument serves the interests of some small businesses, it primarily suits the anti-tariff position at the global corporations who those small businesses serve. Global companies would likely replace domestic suppliers for cheaper ones elsewhere soon after China tariffs are removed.

Chairman Phillips knows that small (and mid-sized) businesses will have a difficult time weathering that storm. He said that they are currently having a hard time dealing with the big multinational shipping giants like Maersk. Imagine trying to convince their big multinational customers like Cummins to buy a widget from them now that they have become 20% cheaper due to tariff removals on the same items made in China.

“Big firms can negotiate with shipping companies to lower prices, but small companies cannot,” Phillips said, adding we have to make the supply chain more resilient. “The Federal government has to work with the private sector to find solutions…because we already know the problems,” he said.

Phlow and BARDA are good examples of finding a solution.

If the infrastructure bill ever passes and we get expansion of ports, that might help. But if the investment in ports is just a bigger door opening for more imports, then it is the exact opposite of supply chain resilience. Yes, China ports are gigantic. But that is because China has made investments in being the global manufacturing hub. Those ports were made with exports in mind. Without support for domestic supply chains, expanding U.S. ports will be built with imports in mind.

Christine Lantinen, president and owner of Minnesota candy maker Maud Borup Inc doesn’t really need to rely on imports, but she can’t get employees. Her company is over 100 years old. “At 200 employees, I am down maybe 100 for an optimal number. Since December we have instituted a 36% hourly salary increase and we still have trouble recruiting workers.” Recruiting workers was her biggest problem.

Record subsidies to individuals during the pandemic is one reason people have not yet returned to the labor market, many manufacturing companies are saying.

“The situation is so severe, that despite the purchase of six acres of land, we put our expansion plans on hold. This is unsustainable,” Lantinen said.

Global supply chains today are too lengthy, too complex, too interdependent, too polluting and too subject to the risk of cascading delivery failure to be sustainable.

Companies that are doing well, like Toyota and Tesla, are those that have always made it a priority to keep suppliers close to the point of final production.

 

The post House Committee Hearing on Small Business Supply Chains Forgets About Reshoring appeared first on Coalition For A Prosperous America.

CPA Urges USTR Tai Not to Expand 301 Tariff Exclusions on Chinese Imports

Share Tweet Share

WASHINGTON — The Coalition for a Prosperous America (CPA) today urged U.S. Trade Representative Katherine Tai to not expand exclusions to Chinese imports subject to Section 301 tariffs. Currently, the Biden administration is reviewing 549 products currently subject to 301 tariffs imposed on Chinese imports. CPA strongly supports the current 301 tariffs on Chinese imports and believes that the current review should result in zero new exclusions. Read the full text of CPA’s letter here.

“We write to urge the Biden Administration not to expand the exclusion process beyond the current review of 549 products subject to our China tariffs imposed pursuant to Section 301 of the Trade Act of 1974 (“301 tariffs”),” the letter states. “We do not believe any rationale exists in 2021 – more than four years after the initiation of the Section 301 investigation – for revisiting any Section 301 exclusions. We hope that the current review of the 549 products results in none being restored. We are concerned, however, that the Biden Administration has left open the possibility for a more general exclusion round.”

In a recent speech at the Center for Strategic and International Studies, Ambassador Tai said that the administration “will keep open the potential for additional exclusion processes.” CPA Trade Counsel Charles Benoit wrote that the Biden administration’s announcement that it would restart the exclusion process for Chinese imports subject to 301 tariffs undermines President Biden’s Build Back Better agenda and rewards the Chinese Communist Party.

“When President Biden further outlined his vision for the Build Back Better agenda in front of Congress in April, CPA praised the goals as good economic sense,” the letter continues. “However, we believe that a renewed general 301 tariff exclusion process runs counter to that vision. Every time an exclusion is granted, it is a missed opportunity for American workers and producers. Our 301 tariffs are necessary to ensure they have a fighting chance.”

Earlier this month, CPA wrote about Ambassador Tai’s comments that the Section 301 tariffs on China are “effective policies” to defend “the interests of the American economy, the American worker, and American businesses and our farmers, too.”

“Despite ongoing bad behavior by the Chinese Communist Party (CCP), we are concerned that the Administration seems intent on rewarding China,” the letter concludes. “The CCP shows no inclination of changing its ways. Our 301 tariffs were imposed to counter the unfair trade advantages the CCP accrued thanks to their decades-long brazen Intellectual Property (IP) theft and blatant disregard for American IP rights… Expanding opportunities for 301 exclusions penalizes American companies, and the workers that they employ, that made the investments and did the hard work of shifting supply chains out of China.”

In April, CPA wrote a letter to Senators in response to their letter requesting that Ambassador Tai to renew expired and expiring China Section 301 tariff exclusions. CPA urged the Senators to reconsider their support for renewing 301 exclusions, an action that would be contrary to America’s national and economic security interests.

The post CPA Urges USTR Tai Not to Expand 301 Tariff Exclusions on Chinese Imports appeared first on Coalition For A Prosperous America.

CPA Letter to USTR Tai on Section 301 Tariff Exclusions

Share Tweet Share

CPA sent the following the letter urging U.S. Trade Representative Katherine Tai to not expand exclusions to Chinese imports subject to Section 301 tariffs.

Dear Ambassador Tai:

We write to urge the Biden Administration not to expand the exclusion process beyond the current review of 549 products subject to our China tariffs imposed pursuant to Section 301 of the Trade Act of 1974 (“301 tariffs”). CPA is the leading national, bipartisan organization representing exclusively domestic producers and workers across many sectors of the U.S. economy.

We do not believe any rationale exists in 2021 – more than four years after the initiation of the Section 301 investigation – for revisiting any Section 301 exclusions. We hope that the current review of the 549 products results in none being restored. We are concerned, however, that the Biden Administration has left open the possibility for a more general exclusion round.

Restarting the 301 Tariff Exclusions Runs Counter to the Build Back Better Agenda

When President Biden further outlined his vision for the Build Back Better agenda in front of Congress in April, CPA praised the goals as good economic sense. However, we believe that a renewed general 301 tariff exclusion process runs counter to that vision. Every time an exclusion is granted, it is a missed opportunity for American workers and producers. Our 301 tariffs are necessary to ensure they have a fighting chance.

Alleviating 301 Tariffs Rewards China’s Bad Behavior

Despite ongoing bad behavior by the Chinese Communist Party (CCP), we are concerned that the Administration seems intent on rewarding China. The CCP shows no inclination of changing its ways. Our 301 tariffs were imposed to counter the unfair trade advantages the CCP accrued thanks to their decades-long brazen Intellectual Property (IP) theft and blatant disregard for American IP rights.

USTR found, among other things, that the Chinese government deprived U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies. In the last year, the Chinese government has further ramped up its discriminatory forced localization practices, now through their courts by way of anti-injunction suits to force American businesses to license their IP.

Some critics may deride the 301 tariffs as “not working” because they failed to dissuade the CCP’s bad behavior. These critics are wrong. The tariffs have been critical at limiting the unjust enrichment China enjoys from its exploits.

More 301 Exclusions Penalizes Companies Committed to Building Back Better

Expanding opportunities for 301 exclusions penalizes American companies, and the workers that they employ, that made the investments and did the hard work of shifting supply chains out of China. For List 1 exclusion requests in 2018, businesses could plausibly argue that they needed a bit more time to shift their sourcing from outside of China. However, we are now in the fourth quarter of 2021 and it is clear that this rationale is long since extinct. Indeed, from our examination of List 3 exclusion requests in 2019, we found examples of requestors openly acknowledging that they had no plans to shift sourcing from outside of China as it was not cost competitive. Our view is that if this is the case, then the answer is a further increase of tariffs on that product, not exclusions.

Even absent reform in China, please consider that our 301 tariffs are invaluable and provide multiple essential benefits. These benefits include relocating supply chains out of China, whether to less hostile nations, or better yet, reshoring to America. And where sourcing from China has persisted, the U.S. Treasury has enjoyed a windfall that denies the CCP unjust enrichment. In their most recent update, U.S. Customs & Border Protection’s Office of Trade announced that we collected over $105 billion dollars thanks to our China 301 tariffs. This is almost half of the amount our country collects in annual corporate income tax. This should be celebrated.

Thank you for your attention to this important matter.

Sincerely,

Zach Mottl, Chairman                                                Michael Stumo, CEO

Coalition for a Prosperous America                           Coalition for a Prosperous America

The post CPA Letter to USTR Tai on Section 301 Tariff Exclusions appeared first on Coalition For A Prosperous America.

Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman

Share Tweet Share

CPA’s report, titled “Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman,” details how a loophole in the Hatch-Waxman Act has led to generic drug shortages in the U.S., offshoring of America’s domestic production of generic pharmaceuticals to China and India, and price gouging by foreign companies in the U.S. The report documents specific generic medicines and foreign companies that have slashed prices or acquired their American competitors to gain a monopoly over the production of one drug, only to gouge U.S. patients by raising prices as much as 2,000 percent once they eliminate their competition.

Read CPA’s press release here.

view_full_document_.png

Key Findings:

  1. The unfortunate reality is that the hollowing out of America’s public health industrial base is largely a result of a loophole in the Hatch-Waxman Act, a 1984 law designed specifically to create more competition in the generic drug market. While the law rolled back some regulatory barriers in order to make it easier for new companies to enter the market, the law’s original intent was never to create a race to the bottom that forced companies to cut corners in order to manufacture drugs for less than the price of a cup of coffee in order to remain competitive. This loophole has been exacerbated and actually eliminated competition in certain cases – leading to these problems.
  2. The U.S. is reliant on imports for at least two-thirds of its generic medicines, and nearly 90 percent of generic Active Pharmaceutical Ingredient (API) facilities are overseas. The majority of those supply chains run through China and, to a lesser extent, India, leaving Americans in a vulnerable position.
  3. Nearly half of all generic pharmaceuticals on the Food and Drug Administration’s (FDA) newly created essential medicines list appear in some form on the FDA’s drug shortage list.
  4. Reliance on foreign manufacturers, particularly those in China and India where manufacturing quality and oversight standards are poor, has proven to be a major factor in causing shortages.
  5. The FDA itself notes that two-thirds of drug shortages are caused by quality issues, and China and India have established themselves as world leaders when it comes to evading FDA regulations and getting deadly, ineffective drugs to American patients.
  6. Restricting imports from these manufacturers will likely lead to a drug shortage; failing to do so will embolden the manufacturers to continue selling substandard, unsafe products that can potentially kill American patients.
  7. Foreign manufacturers have a long history of slashing prices or acquiring their American competitors to gain a monopoly over the production of one drug, only to gouge customers by raising prices as much as 2,000 percent once they eliminate their competition

Policy Recommendations:

  1. The U.S. government must create a reliable source of demand for domestic manufacturers.
  2. The U.S. government must use trade remedies to defend domestic manufacturers from predatory policies by foreign governments and manufacturers.
  3. Because America’s pharmaceutical industrial base has been so thoroughly depleted, there needs to be some direct financial support to re-establish America as a global pharmaceutical manufacturing leader.

The post Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman appeared first on Coalition For A Prosperous America.

Tariff Incidence in the Real World: Why Consumers (Mostly) Didn’t Pay the Steel Tariffs

Share Tweet Share

Summary points:

  • The import price of steel fell in the period following the 2018 imposition of a 25% steel tariff, an indicator that steel tariffs were not passed entirely onto consumers.
  • Steel tariffs did not lead to a proportional rise in consumer prices of steel-intensive goods, such as automobiles. In many instances, firms will internalize small price increases before they raise prices.
  • The assertion that tariffs are passed wholly onto consumers is theoretically unlikely, especially for products with complex supply chains such as steel.
  • Tariff incidence – the measure of who pays a particular tax or charge – depends on the elasticity of demand and supply in both the domestic and foreign markets. Economic studies of tariff incidence have long demonstrated that the cost is shared, in varying degrees, between buyers and sellers at each level.
  • In the context of imported goods, tariffs are more likely to be borne by foreign sellers where the domestic production constitutes a greater share of the market.
  • Tariffs are also more likely to be paid by foreign sellers when the US has considerable buy-side market power.

 

Introduction

Many policy makers and reporters have assumed that tariffs are passed entirely onto consumers. We believe this was unlikely to happen in theory and based on the evidence did not happen in the case of the steel tariffs. Tariff incidence, like tax incidence, is a question of mathematics and market dynamics not ideology. Basic economic theory suggests that only under extreme circumstances would final consumers pay a full upstream cost increase of a complex supply chain, whether tariff induced or otherwise. In extreme cases, every market interface at every level of the supply chain would have to perfectly and entirely passes on the price increase, we do not know of any instance in which this has occurred.

We further analyzed the roughly one-year period when the Trump tariff on steel was applied most broadly. In March 2018, the Trump administration announced a 25% tariff on steel under Section 232 of the 1962 Trade Expansion Act. Steel tariffs on Canada and Mexico, who are among the foreign largest suppliers of U.S. steel, were removed about a year later in May 2019. The time frame is also limited because steel and auto prices changed dramatically after COVID-19 began.

A look at the data shows that following the 2018 steel tariffs, the import price of steel fell. When U.S. steel import prices fall, it means that steel is now relatively cheaper to buy than sell (export) on the global market, which economists call an improvement in the terms of trade. This means that U.S. national income rises.

Consumer prices of steel-intensive downstream goods such as automobiles, did not increase proportionally to the tariff. The lack of a tariff pass-through on automobile prices reflects the dynamics of price determination, which involves not only the market structure but also consideration for how firms respond to input price increases. Together, this means that steel tariffs did not or would not proportionally raise consumer prices.

This analysis is part of a continuing effort at CPA to evaluate how tariffs affected the U.S. economy. Tariffs are a legitimate economic development tool that can improve economic outcomes and, we believe, should not be rejected outright.

 

Market elasticities are important to determine whether buyers or sellers absorb a tariff

Economic theory shows that tariff incidence between buyers or sellers is different for every product, and at every level of the supply chain. More precisely, it depends on the relative elasticity of demand and supply within domestic and foreign markets for a specific product.

The elasticity of demand or supply for each product depends upon how responsive quantity (volume of sales) changes when price changes. Tariffs, like a tax, make the selling price higher. A buyer will pay the full amount of this tariff price increase if they demand the tariff good perfectly inelastically, or unresponsive to price changes. Alternatively, the seller will pay the full amount of the price increase if the demand for the tariffed good is perfectly elastic, or responsive to price increases. Essentially, whoever is more inelastic will pay more, and only when we have perfect elasticity or inelasticity does someone pay the full amount.

Consider two examples on tariff incidence: first where a buyer pays a greater share and second where a seller absorbs more as a cost.

 

Tariff Incidence Example 1: Prescription Drugs

For the first example, consider a tariff on a good for which there is relatively inelastic demand. “Necessity goods” such as prescription drugs are classic examples. That is because consumers will buy the same amount whether the price goes up or down. For the market to be truly inelastic, there must also be few sellers with considerable market power. Under these circumstances, consumers have no choice but to accept price increases because (1) they need it and (2) they have no alternative.

Prescription drugs sellers have considerable market power in relation to end use consumers. This means that supply will be somewhat inelastic because there will be fewer suppliers to meet demand if price changes. There will be some domestic producers of prescription drugs, but assume that foreign suppliers can produce them at lower prices, and as such, meet a significant portion of domestic demand. In this example, both supply and demand are inelastic, but if consumer demand for prescription drugs are relatively inelastic, they will pay more of the burden of a tariff.

This simple example reveals that a cost increase, such as a tariff on imports of prescription drugs, is more likely to be passed on to domestic consumers. However, it should be noted that consumers do not buy medicines at the Port of Los Angeles. There are several links in the supply chain from importers to wholesalers to distributors to pharmacies that a tariff would have to passthrough to be fully passed on to consumers. Further, firms will often choose not to raise prices first in order to remain price competitive, instead firms will turn to cost-saving methods to absorb price increases.

 

Tariff Incidence Example 2: Steel

Next consider a tariff on goods that have a more elastic demand than prescription drugs, such as steel. Even though steel is a very critical resource, demand for foreign steel is more elastic because alternative sources exist, namely domestic production.

A second key consideration is that the U.S. is the largest steel customer for several steel producing countries. Our domestic consumption volume provides significant buy-side bargaining power in relation to those foreign sellers.

In this example, tariff incidence would fall more on foreign sellers who would have to lower the price they accept by paying a tariff. A reduction in the import price of steel, holding export prices constant, means that it is now relatively cheaper for U.S. to buy than sell steel. In other words, an increase in the ratio of export to import prices is an improvement in our terms of trade.

 

Long supply chains mean consumers unlikely to pay most of the tariffs

Despite the empirical studies that have claimed that consumers paid the full amount of the section 301 (China) tariffs or section 232 (steel and aluminum) tariffs, it is very difficult to imagine a situation in which that would be possible. Unlike sales taxes, tariffs are not necessarily levied directly in the market they are sold to consumers. Tariffed goods are almost always purchased by different companies several times over before they reach a market where consumers can buy them. In order for the downstream final consumer to pay the full tariff, the individual market dynamics at every level of the supply chain must have a perfect scenario of supply elasticity or demand inelasticity.

Steel is a raw material that can be imported through our port system. If a tariff of 25% is placed on steel, then the importers that buy foreign steel will pay the entire 25% increase only if the supply of foreign steel is perfectly elastic or the demand for steel is perfectly inelastic. We know this is not likely in reality because we have alternative sources of raw steel materials, namely our own supply. But lets assume a fictional case in which the tariff is fully passed through anyway.

Tier 3 suppliers buy the imported steel to make semi-finished products. These firms sell to a broad array of manufacturing customers including automotive, aerospace, defense and other markets.  Tier 2 firms then purchase the Tier 3 products to fabricate metal parts and components for automobiles.

After this, Tier 2 firms sell their fabricated products to Tier 1 firms like Bosch or Denso Corp. These Tier 1 firms then produce automotive grade systems that are sold directly to automobile manufacturers, also known as “original equipment manufacturer” or OEM’s.

You would think that the last step in the supply chain ends with the manufacturers, but in fact we have to consider another market, where automobile manufacturers sell to their dealerships. That is, a dealership sells directly to consumers, not automobile manufacturers. Dealerships order automobiles based on the market they sell to consumers in.

 

Figure 1: Steel Tariff Pass-through in Automotive Market

 

 

The question is, how can the original 25% tariff can be passed through Tier 3, Tier 2, Tier 1, OEM’s, and finally through dealerships in every market? Each level of figure 1 represents its own supply and demand dynamics. Tier 3 companies supply goods that Tier 2 companies demand. The 25% tariff paid by Tier 3 companies can only be passed entirely onto Tier 2 firms if the supply of Tier 3 steel is perfectly elastic or the demand for steel by Tier 2 firms is perfectly inelastic. The same is true for Tier 2 firms selling to Tier 1 firms and so forth. Therefore, at every level, for the tariff to be fully passed through to final consumers, each Tier must have a perfectly inelastic or elastic component. Either case is hard if not impossible to imagine.  It is more realistic that each level has different market dynamics and therefore at each Tier the 25% tariff gets shared along the way.

Figure 1 shows that at every level of the supply chain, the tariff that gets carried through depends on the tariff incidence in the previous level. So for instance, if the original tariff is 25% but Tier 3 firms pay 10% of the tariff, then the prevailing rate that is facing the next level is 15% (this is not exactly correct but for simplicity the idea that a smaller tariff gets passed through to the next level is). This means that every level absorbs some of the tariff so that the final tariff incidence faced by consumers cannot be equal to the full amount of the original tariff.  The only way this is possible is if at every level the entire tariff gets passed through—in the case of a perfectly elastic supply or inelastic demand, neither of which is characterizes the automotive supply chain.

 

The Evidence Suggests Consumers Did Not Pay the Full Steel Tariff

The Section 232 steel tariffs took effect in March 2018. They have been repeatedly criticized for raising the price of steel.[1] However, after a brief runup in the price as steel service centers and steel users scrambled for product, the steel tariffs were introduced, and the price (for hot rolled steel?) actually fell.

 

Figure 2 shows that both producer prices and the import price of steel fell following the 2018 tariffs. Between December 2017 and December 2019, the price of imported steel fell by 2% and the domestic producer price fell by 2.6%. A fall in the import price following the tariff is a terms of trade gain, suggesting that the tariff is shared between importers and exporters of steel.

 

Figure 2: Steel Import Price, Producer Price, 2017-2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Why would exporters pay part of the steel tariffs? A part of the answer is that the U.S. is a major buyer of steel in relation to the global market. This buy-side market power provides the ability to push back against attempts by foreign steel sellers to fully pass the tariffs on in the form of price increases. America is the world’s largest importer of steel. The largest suppliers to the U.S. are very dependent on our purchases because we are their dominant customer.

For instance, the U.S. gets 18% of its steel imports from Canada, while those imports represent 83% of all Canadian steel exports. In simple language, Canada needs U.S. steel customers more than those customers need Canada. This means that a tariff on steel would likely be shared as the US has considerable market power as Canada’s largest buyer of steel.

Another part of the answer is that the U.S. is a major producer of steel, allowing buyers a choice to substitute domestic or foreign supply. If domestic suppliers did not exist in significant quantities, foreign sellers would have more power to pass the tariffs on to buyers.

While the U.S. consumes about 100 million tons of steel a year, it produces most of that amount, about 75%, domestically. In a market where the U.S. produces most of what it consumes, tariffs on any imports of steel should not lead to a dramatic increase in domestic prices because domestic producers can raise their production to fill the gap. [2]

 

Automobile Price Effects from the Steel Tariffs

How did steel price changes affect domestic production of steel intensive goods, such as automobiles? The short answer is that the steel price change did not lead to any visible price increase to end consumers of cars and trucks. Figure 3 shows that regardless of steel price changes, caused by tariffs or other factors, the price of new automobiles remained relatively unchanged. That is, steel tariffs did not lead to an obvious increase in the price that consumers pay for automobiles. Even past changes in the steel price, irrespective of tariffs, did not cause proportional changes in the price of automobiles.

 

Figure 3: Producer & Consumer Price Index for Automobiles & Intermediate Input Costs

 

The relatively unchanged price of automobiles reflects at least three things. First, automotive manufacturers do not buy steel. Rather they buy parts and components made from steel. There are several supply chain levels between the steel companies and the auto manufacturers including those manufacturing parts and components. The market interfaces at each level must be perfectly respond to price for tariffs to be fully passed on.  They are not.

Imperfect competition in the market for automobiles limits price changes. The automobile market is relatively concentrated market with few suppliers. Further, these suppliers are limited globally not just in the US market. This means that despite a large U.S. consumer market, input price changes in the U.S. market are not likely to have a major effect on auto prices, which is consistent with the data shown in figure 2 above.

Further, companies will often internalize cost increases before they raise prices. A company can take cost-saving measures or accept slightly lower profits. Further, the automobile market is concentrated globally, losses in one market does not change their overall cost considerably and therefore neither would their market price.  Steel is a small part of the total cost of a vehicle (on the order of 3%-5%) and auto producers set vehicle prices based on competitive dynamics as much or more than cost.

 

Earlier U.S. tariff experience shows tariff cost shared by producer and consumer

Economic studies of the evidence of past tariffs suggest a wide range of tariff pass-through rates onto consumers. For instance, consider the tariffs on imported sugar in the late 1800’s and early 1900’s. During this time, the U.S. was a major consumer of global sugar production. A study by Douglas Irwin showed that sugar tariff increases were paid 60% by producers and only 40% by U.S. consumers. Most interesting about this paper was the asymmetry found in the effect of raising or lowering tariffs: tariffs are absorbed by buyers more when they increase but passed more onto the consumer when they decrease. The reason is the asymmetric response in quantity demanded to tariff induced price changes: domestic buyers anticipate changes in tariffs and will buy more today when they anticipate an increase in tariffs and will buy less if they believe tariffs will decline.[3]

Another example is tariffs on Japanese trucks.[4] Prior to 1980, Japanese trucks were generally imported in parts, as cab or chassis, a classification with a tariff rate of 4%. This rate of 4% was significantly smaller than the 25% chicken tax imposed on all imported trucks since 1964.  Political attention and an ITC investigation led to a reclassification of cab or chassis to complete trucks, and consequently a higher tariff rate of 25%. A study by Robert Feenstra in 1988 showed that this new higher tariff on Japanese truck imports only raised their consumer price in the U.S. by 13%, for a pass-through rate of 60%.

The higher tariff on Japanese trucks was only partially passed onto the consumer because of the increased competition that followed the new trade protection. Before the 25% tariff, Japan dominated the market for lightweight trucks. After the 25% tariff, market competition in lightweight trucks increased. Instead of buying from Japanese producers, U.S. auto producers introduced their own lightweight trucks. Further, Japanese firms like Mitsubishi began selling trucks independently. A more competitive market means that Japanese truck makers are in less of a position to raise prices and therefore less able to pass the tariff onto consumers.

 

Conclusion

Tariff incidence depends on the economics of, and elasticities in, a particular market. There are several empirical studies that show how tariffs are not wholly shared by consumers for different products. These studies show that tariffs should be assigned in markets where we have relatively more market power. Just like other taxes, tariffs are not a universal tax wholly paid by consumers; tariff incidence depends on the relative elasticity of supply and demand in both the foreign and domestic markets. Further, only under extreme and highly unlikely circumstances will tariff incidence be passed through entirely along all channels of a supply chain. The evidence discussed here shows why the 25% tariffs on imports of foreign steel were not or could never be wholly passed through to the final consumer.

 

 

[1] Trump’s steel tariffs cost U.S. consumers $900,000 for every job created, experts say, The Washington Post, May 7 2019

[2] US International Trade Administration, 2017, CPA Calculations

[3] Douglas Irwin, Tariff Incidence: Evidence from U.S. Sugar Duties, 1890-1930, N. 20635

[4] Robert C. Feenstra, Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test, Journal of International Economics, Vol 287, Issue 1-2, pg 25-45, August 1989

The post Tariff Incidence in the Real World: Why Consumers (Mostly) Didn’t Pay the Steel Tariffs appeared first on Coalition For A Prosperous America.

New CPA Report Documents How Hatch-Waxman Act Loophole Led to Offshoring of Generics Production, Price Gouging, and Shortages

Share Tweet Share

WASHINGTON — The Coalition for a Prosperous America (CPA) today released a new academic report that details how a loophole in the Hatch-Waxman Act has led to generic drug shortages in the U.S., offshoring of America’s domestic production of generic pharmaceuticals to China and India, and price gouging by foreign companies in the U.S. The report, titled “Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman,” documents specific generic medicines and foreign companies that have slashed prices or acquired their American competitors to gain a monopoly over the production of one drug, only to gouge U.S. patients by raising prices as much as 2,000 percent once they eliminate their competition.

“For decades, opponents of manufacturing essential generic medicines in the U.S. have falsely claimed that generic competition from foreign manufacturers lowers prices for Americans,” said Rosemary Gibson, author of China Rx and Chairwoman of the CPA Healthcare Committee. “This groundbreaking new report from CPA provides clear evidence that purported competition from some foreign manufacturers can increase the price Americans pay for their generic medicines.”

The new CPA report outlines how reliance on foreign manufacturers, particularly those in China and India where manufacturing quality and oversight standards are poor, has proven to be a major factor in causing shortages, offshoring of U.S. production, and price gouging by foreign producers.

“Authors of the Hatch-Waxman Act intended to create competition, increase innovation, and lower prices for U.S. patients,” continued Gibson. “Instead, a race to the bottom in price triggered offshoring of America’s domestic production of essential generic medicines, widespread illegal price manipulation, shortages of life-saving medicines, and poor quality, unsafe generic drugs. The COVID-19 pandemic revealed that America’s dependence on Chinese and other foreign drug manufacturers is a serious national health security risk that must be addressed. Congress and the Biden administration should implement the policies outlined in this new report to bring generic drug manufacturing back to America.”

“Washington must be laser focused upon achieving a quantitatively defined minimum domestic production capacity for each essential medicine,” said Michael Stumo, CEO of CPA. “This will eliminate the price and supply variability, protect us in times of crisis, and achieve the homegrown manufacturing innovation and capacity that is necessary to ensure American patients get the drugs they need at a reasonable cost.”

Read “Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman.

Key Findings:

  1. The unfortunate reality is that the hollowing out of America’s public health industrial base is largely a result of a loophole in the Hatch-Waxman Act, a 1984 law designed specifically to create more competition in the generic drug market. While the law rolled back some regulatory barriers in order to make it easier for new companies to enter the market, the law’s original intent was never to create a race to the bottom that forced companies to cut corners in order to manufacture drugs for less than the price of a cup of coffee in order to remain competitive. This loophole has been exacerbated and actually eliminated competition in certain cases – leading to these problems. 
  2. The U.S. is reliant on imports for at least two-thirds of its generic medicines, and nearly 90 percent of generic Active Pharmaceutical Ingredient (API) facilities are overseas. The majority of those supply chains run through China and, to a lesser extent, India, leaving Americans in a vulnerable position.
  3. Nearly half of all generic pharmaceuticals on the Food and Drug Administration’s (FDA) newly created essential medicines list appear in some form on the FDA’s drug shortage list.
  4. Reliance on foreign manufacturers, particularly those in China and India where manufacturing quality and oversight standards are poor, has proven to be a major factor in causing shortages.
  5. The FDA itself notes that two-thirds of drug shortages are caused by quality issues, and China and India have established themselves as world leaders when it comes to evading FDA regulations and getting deadly, ineffective drugs to American patients.
  6. Restricting imports from these manufacturers will likely lead to a drug shortage; failing to do so will embolden the manufacturers to continue selling substandard, unsafe products that can potentially kill American patients.
  7. Foreign manufacturers have a long history of slashing prices or acquiring their American competitors to gain a monopoly over the production of one drug, only to gouge customers by raising prices as much as 2,000 percent once they eliminate their competition

Policy Recommendations:

  1. The U.S. government must create a reliable source of demand for domestic manufacturers.
  2. The U.S. government must use trade remedies to defend domestic manufacturers from predatory policies by foreign governments and manufacturers.
  3. Because America’s pharmaceutical industrial base has been so thoroughly depleted, there needs to be some direct financial support to re-establish America as a global pharmaceutical manufacturing leader. 

Read “Generic Drug Shortages and How a Race to the Bottom in Price has Upended 30 years of Hatch-Waxman.

The post New CPA Report Documents How Hatch-Waxman Act Loophole Led to Offshoring of Generics Production, Price Gouging, and Shortages appeared first on Coalition For A Prosperous America.

China Tech & Industry Official Wants U.S. as Clean Tech, Pharma Partner

Share Tweet Share

China’s Minister of Industry and Information Technology wants the U.S. to be its tag team partner on electric vehicles and pharmaceuticals. Translation: let us make all of your EV batteries and their required materials and forget India and Europe and do R&D on the latest biotech with us.

This idea might be enticing for some in Washington who do not want to treat all Chinese businesses like members of the Communist Party.

If the decision is to be made by Washington, however, then it is best to assume that objects in the rearview mirror are not just in the past, but more of a sign of what’s ahead.

Following a trade war that began with Section 301 tariffs due to unfair trade practices and intellectual property theft, any officially sanctioned partnering of American companies with China on key future tech – be it battery-powered cars or new medication – would be an own goal for the Biden Administration.

Xiao Yaqing, China’s Minister of Industry and Information Technology, made the comments about partnering up with the U.S. during a conference call with the chairman of the U.S.-China Business Council, according to a statement posted on the ministry’s official WeChat account.

Xiao also said China welcomes U.S. companies to expand their investment in China. This should also be seen through the lens of Beijing not wanting to take on any more financial risk, and wishing to “offshore” more of that risk to foreign, private businesses. In other words, be skeptical of this latest “opening up” from Beijing.

Still, China is wise to ask for partnerships.

Beijing is well aware of Washington’s climate agenda and knows that EVs are a key part of that agenda. Beijing also knows the U.S. is still battling back Covid-19, a virus that took the world by storm after leaving Wuhan at some point in late 2019, early 2020, and wants to make peace by joining forces to fight future disease together. This appeals to rational minds. But China is not a rational trade partner.

Partnering hasn’t always worked in the U.S.’s favor.

The U.S. cooperated with the Wuhan Institute of Virology via grant funding to third parties from the National Institutes of Health. That surely did not stop the latest pandemic out of China.

General Electric has had a long-standing partnership with China on steam and gas turbine engines.

In 2019, Xiaoqing Zheng, a GE employee in upstate New York, and Zhaoxi Zhang of Liaoning Province in China, were indicted on charges of economic espionage and conspiracy to steal GE trade secrets surrounding turbine technologies. Those stolen trade secrets would be sent to China, to be used in Chinese companies later on.

At the time, New York Assistant Attorney General John C. Demers said that the scheme was “a textbook example of the Chinese government’s strategy to rob American companies of their intellectual property and to replicate their products in Chinese factories, enabling Chinese companies to replace the American company first in the Chinese market and later worldwide. We will not stand idly by while the world’s second-largest economy engages in state-sponsored theft.”

Worth noting, but perhaps unrelated, Bloomberg data on wind power – which requires turbine engines to generate electricity — had GE and China’s Goldwind as the top two turbine suppliers in 2020, following a surge in installations in the U.S. and China.

Goldwind installed 44 wind turbines in the U.S. in 2020, according to the Global Wind Energy Council.

Most of GE’s wind turbines and rotor blades are made in Europe. GE Renewable Energy, which is the main wind energy business of GE, is actually based in Paris. So, technically, European companies are the top two wind turbine makers with Vestas in the No. 1 spot and China’s Goldwind is No. 3.

“American companies like GE want to be in China because they want to sell engines to its airline industry or turbines to its power stations. But this is the problem with the short-term mindset of big multinationals – they will eventually be replaced,” says Michael Stumo, CEO of CPA. “Private companies can, and will, take the risk in partnering with China on electric vehicle supply chains, biotech, and other new technologies. That’s their risk. The U.S. government should not be in the business of covering for that risk, or taking it on themselves.”

 

The post China Tech & Industry Official Wants U.S. as Clean Tech, Pharma Partner appeared first on Coalition For A Prosperous America.

CPA, Human Rights Organizations Urge Secretary Yellen to Use Capital Markets Sanctions Against Chinese Companies Aiding the CCP’s Campaign of Evil

Share Tweet Share

WASHINGTON — The Coalition for a Prosperous America (CPA), along with human rights groups, urged Secretary of the Treasury Janet Yellen to protect American retail investors and U.S. national security by implementing capital markets sanctions against Chinese companies pursuant to President Joe Biden’s Executive Order (EO) 14032. Fight for Freedom. Stand with Hong Kong., Hong Kong Watch, and Victims of Communism Memorial Foundation joined CPA in sending the letter. Read the full text of the letter here.

CPA supported this executive action, which established the OFAC Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List) and expanded capital markets sanctions to include Chinese defense and related materiel sector companies, as well as Chinese companies that develop or use Chinese surveillance technology to facilitate repression or serious human rights abuses. However, since President Biden signed EO 14032, the Treasury Department has not added one Chinese company to the NS-CMIC List. Out of the 440 Chinese companies on the Department of Commerce’s Entity List, only four—less than 1 percent—appear on the NS-CMIC List.

“We are writing to bring to your and your Deputy’s attention the very troubling fact that since June 3, 2021 — the date that President Biden issued Executive Order (EO) 14032 — not one Chinese company has been added to the OFAC Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List),” the letter states. “This is nothing short of astounding, as there have been many Chinese companies – a number of them already sanctioned by the U.S. via being placed on the Commerce Department’s Entity List or other designations – which have committed, or enabled, egregious human rights and national security abuses and urgently warrant being added to the NS-CMIC List.”

In June, CPA welcomed action by the Biden administration aimed at Chinese solar companies’ use of forced labor in Xinjiang that included the Department of Commerce’s Bureau of Industry and Security (BIS) adding five Chinese companies to the Entity List in connection with participating in the practice of, accepting, or utilizing forced labor involving Uyghurs and other Muslim minority groups in Xinjiang.

“Take the case of the five Chinese polysilicon companies that were added to the Entity List on June 24, 2021, for engaging in forced labor against Muslims in Xinjiang,” the letter continues. “These Chinese companies were placed on the Entity List for trafficking in slave labor, and hence are, in effect, denied access to American equipment, technology, components and services. How can it then be judged as acceptable by the Treasury Department to have these same companies funded by unwitting American investors and imbued with the marketable prestige of being traded in the world’s deepest and most voluminous capital markets?”

“Madame Secretary, the protection of American retail investors, our national security, and the fundamental values of our nation are all at stake here,” the letter urges. “We understand the pressures you and your team face from Wall Street. However, the Treasury Department cannot put the profits and well-being of Wall Street and the Chinese Communist Party above the interests of American economic and national security. Capital markets sanctions are arguably the most fearsome and effective non-military deterrent and penalty vis a vis the Chinese Communist Party ever devised by our country.”

“We can no longer watch in good conscience as this exceptionally powerful policy tool languishes under your stewardship,” the letter concludes. “The hard-earned retirement and investment dollars of a large percentage of the American people are unwittingly underwriting genocide-enablers and other Chinese corporate human rights and national security abusers aiding the Chinese Communist Party’s campaign of evil. This is an empirically provable fact happening on your watch. You must take action to put an end to this now.”

Read the full text of the letter here.

The post CPA, Human Rights Organizations Urge Secretary Yellen to Use Capital Markets Sanctions Against Chinese Companies Aiding the CCP’s Campaign of Evil appeared first on Coalition For A Prosperous America.

Worker-Centered Trade Means Reshoring U.S. Industries

Share Tweet Share

In June, U.S. Trade Representative Katherine Tai gave a speech in which she outlined her vision of worker-centered trade, a popular phrase among Biden administration officials. According to Tai:

“Build Back Better starts by growing the economy from the bottom up and the middle out and putting workers at the center of our economic plans…In the United States, real wages have stagnated for decades and the wealth gap—particularly between Black and white workers—has widened significantly…President Biden is leading us on a new path. He wants an economic policy, including a trade policy, that delivers shared prosperity for all Americans, not just profits for corporations.”

Trade policy reform is important for worker-centered economic policies because of harmful trade deals and naïve trade policies that have decimated many U.S. manufacturing sectors, costing millions of good jobs, and increasing dependence upon imports for so many product categories. Policy makers often don’t realize that manufacturing jobs tend to pay more than service sector jobs. So income inequality worsens when we shift from industrial production to tourism, home health care and food service employment.  However, the best way to begin rebuilding U.S. industry is not through more trade negotiations with foreign countries, but by taking direct action here at home to rebuild U.S. industries, even if some of those actions are inconsistent with legacy trade deals.

The COVID-19 pandemic, the shortages in the aftermath, and the strategic competition with China has made many Americans more receptive to new industrial rebuilding strategies. As it happens, one industry group, the American Mask Manufacturers Association (AMMA), has put forward a set or proposals which showcase a thoughtful reshoring plan for masks, aimed at building up U.S. production and reducing our dependence on Chinese imports. Rebuilding our mask-making industry would have economic benefits as well as health security benefits. The economic benefits stem from the fact that the average annual income of a worker in the medical equipment industry, at $60,770, is 8% above that of the average U.S. worker. Manufacturing industries also generate a substantial number of support jobs, creating more income and prosperity in surrounding areas. On the health security side, the U.S. must have a plan to avoid a recurrence of the desperate shortage of masks our health care professionals suffered from last year.

The AMMA includes 26 small companies, most of them founded last year during the pandemic by individual entrepreneurs. Expanding this sector would bring good-paying jobs to some depressed regions and to minority groups that have suffered from U.S. manufacturing decline. Most of them were self-funded and rushed into production to meet the huge demand at the height of the pandemic. A typical example is Premium-PPE of Virginia Beach, Virginia, founded by Brent Dillie and three others. The four men put up $5 million of their own money to launch the company. At its peak, it employed 300 and was churning out thousands of masks a day for hospitals and other customers. Together, the member companies of AMMA employed 7,800 workers at their peak last year. Now many of those companies are laying off hundreds of people and facing bankruptcy.

According to the AMMA, the prime cause of their members’ impending failure is that China has resumed shipping face masks at below-cost prices. The AMMA points out that the raw materials in a surgical mask cost 3 to 6 cents per mask yet Chinese masks are selling at a penny each. How can China do this? Chinese industry is funded with multibillion-dollar government subsidies, typically delivered via the state-owned Chinese banking system. In addition, China’s provincial governments provide support for many businesses often in an uncoordinated fashion, competing with each other to boost their local loss-making businesses at the expense of others, leading to global oversupply in many industry sectors.

The AMMA also points out that many of the Chinese-made masks do not meet U.S. health standards. One study found that 31% of masks imported from China did not meet U.S. standards and another found a stunning 70% of Chinese masks provided to U.S. hospitals failed to meet U.S. standards.

The solution is to rebuild the U.S. industry. The AMMA proposes a simple plan. The linchpin of the plan is to require all hospitals and similar organizations that receive federal funds to purchase 40% of their masks from U.S. manufacturers by 2023. They also propose that the federal government review the Strategic National Stockpile of masks. They suggest that all foreign-made masks be discarded and replaced with masks manufactured in the U.S. Their members are currently sitting on an inventory of 260 million masks.

The effect of this plan would be to throw a lifeline to the 26 small U.S. manufacturers, and allow them to regain profitability and begin hiring again. This reshoring plan would be a step towards Ambassador Tai’s “shared prosperity for all Americans.” It would also restore competition to the industry. Many in Congress, on both left and right, have criticized the decline of competition and the dominance of many sectors of our economy by a handful of huge, highly profitable multinationals. With more companies in the mask industry, there would be more competition, more innovation, better customer service, and more modest profits, which also leads to more evenly shared prosperity.

Opposition to the AMMA plan would come from the major multinationals who manufacture masks offshore, mainly in China. The two largest U.S.-based mask producers are 3M and Honeywell, both of whom do some manufacturing in the U.S. but the majority in Asia. This is where the Biden administration needs to take a firm position and show some leadership. The tradition, notable at the Commerce Department, of listening to U.S. corporate interests and then trying to arrive at a consensus, is not the same thing as pursuing the national interest. Today, our national interest lies in pursuing “shared prosperity for all Americans,” greater economic and national security, and reduced dependence on hostile nations. This is very different from the consensus views of the multinationals (and their lobbying organizations) that visit Commerce and other government agencies every day.

The number one U.S. supplier of masks today, 3M, is a huge, sprawling business with hundreds of product lines. Last year, 3M booked $32.2 billion in revenue. It claimed in its year-end statement that it fought the pandemic “from all angles, making and delivering more personal protective equipment than ever before.” This is doubtless true. However, because of 3M’s dominant position in many markets, it sees less opportunity to invest for the future. Investment is the most critical ingredient in economic growth. Investment makes workers more productive and enables companies to pay them higher wages. 3M’s financial statements for 2020 show that its capital investment last year was $1.5 billion. (It is not required to disclose how much of that investment was in the U.S. and how much abroad.) But last year it also returned $3.8 billion to shareholders, in the forms of dividends and share buybacks. That’s more than twice as much as it invested in the future of its business. Like many large American companies, it can’t find enough ways to grow, so it returns cash to shareholders, aiming to boost its share price, which increases the bonuses payable to senior management.

3M management is already doing pretty well. Last year, CEO Michael Roman’s pay was $20.7 million, or 308 times the pay of the median 3M employee ($67,109). While the 26 members of the AMMA do not disclose their chief executives’ pay, we can be sure it is not 300 times that of their median employee. I would hazard a guess that the multiple is nearer 3, or in some of those struggling companies, zero.

So far the Biden administration has done a lot of talking about “Build Back Better” and “shared prosperity” but not taken enough action. On Oct. 19th, Ambassador Tai reiterated that she would like to reorient the U.S.-China relationship in a way that helps American workers.  The administration should take what I would call a Rooseveltian approach to the challenge, commissioning multiple small experiments in a variety of industries to find a formula that works. Too many in Congress think talking about a problem is solving it.

The mask industry is a great place to start taking action. The U.S. has a national interest in a reliable health care system that is not dependent on China. It has an interest in rebuilding U.S. production to rebuild our economy, create jobs that pay above the average and reduce income inequality.

 

 

 

The post Worker-Centered Trade Means Reshoring U.S. Industries appeared first on Coalition For A Prosperous America.

CPA Letter to Treasury Secretary Janet Yellen Regarding Capital Markets Sanctions Against Chinese Companies

Share Tweet Share

CPA, along with human rights groups, sent the following letter to Secretary of the Treasury Janet Yellen urging her to protect American retail investors and U.S. national security by implementing capital markets sanctions against Chinese companies pursuant to President Joe Biden’s Executive Order (EO) 14032. Fight for Freedom. Stand with Hong Kong., Hong Kong Watch, and Victims of Communism Memorial Foundation joined CPA in sending the letter.

Dear Secretary Yellen,

We are writing to bring to your and your Deputy’s attention the very troubling fact that since June 3, 2021 — the date that President Biden issued Executive Order (EO) 14032 — not one Chinese company has been added to the OFAC Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List).

This is nothing short of astounding, as there have been many Chinese companies – a number of them already sanctioned by the U.S. via being placed on the Commerce Department’s Entity List or other designations – which have committed, or enabled, egregious human rights and national security abuses and urgently warrant being added to the NS-CMIC List.

It should be obvious by now that American retail investors, numbering over 100 million, should not be – and generally do not wish to be – holding in their Exchange-Traded Funds (ETFs) and other passive investment products, the equities and debt of Chinese companies that can be proved to be associated with, or tied to, the genocide underway against the Uyghurs and other religious minorities in Xinjiang; internationally-recognized human rights violations throughout China; trafficking in slave labor; equipping concentration camps; manufacturing advanced Chinese weapons systems designed for use against American forces; militarizing illegally-claimed islands in the South China Sea; and several other malevolent activities which undermine America’s national security and fundamental values.

Take the case of the five Chinese polysilicon companies that were added to the Entity List on June 24, 2021, for engaging in forced labor against Muslims in Xinjiang. Two of the five – Hoshine Silicon Industry (Shanshan) Co., Ltd. (SHA:603260) and Xinjiang Daqo New Energy Co., Ltd. (SHA:688203 – are traded on U.S. exchanges via passive investment products. In the case of the latter, its parent company, Daqo New Energy Corp. (NYSE:DQ), is listed directly on the New York Stock Exchange. A third, Xinjiang GCL New Energy Material Technology Co., Ltd., is a subsidiary of publicly traded GCL Energy Technology Co., Ltd.

These Chinese companies were placed on the Entity List for trafficking in slave labor, and hence are, in effect, denied access to American equipment, technology, components and services. How can it then be judged as acceptable by the Treasury Department to have these same companies funded by unwitting American investors and imbued with the marketable prestige of being traded in the world’s deepest and most voluminous capital markets?

Moreover, why is it that, according to EO 14032, Chinese surveillance technology “used to facilitate repression” is deemed a “national emergency,” while Chinese corporate use of forced labor gets a free pass in our capital markets? This is even more troubling in the case of Chinese solar companies which are raising large-scale funds from unwitting American retail investors to be used to further savage our domestic renewable energy industry.

Indeed, of the 440 Chinese companies (including those Hong Kong-based) on the Entity List, only 4 also appear on the NS-CMIC List. That represents less than 1%. This is simply unconscionable. If the reasons for this scandalous disparity include such excuses as “forced labor” not being covered by EO 14032, then this Executive Order needs to be broadened forthwith to include it and other Chinese corporate human rights abusers.

Congress has made clear in overwhelming bipartisan fashion that it believes China must be held accountable for its genocide, egregious human rights abuses, and use of forced labor. Democrats and Republicans alike will surely be concerned and demand corrective action by the Treasury Department once these and other facts are placed before them — as they surely will be — not to mention retail American investors, including state public employee retirement systems. After all, it is their money that is being subject to epic fiduciary malfeasance.

Moreover, verifiable subsidiaries of companies already on the NS-CMIC List that serve as the parent companies’ funding vehicles on U.S. exchanges should have been added to the NS-CMIC List months ago. The Administration has claimed that the NS-CMIC List is dynamic and designed to “live and breathe.” If so, the Administration needs to change course and strengthen the List’s vital signs that are rapidly fading.

With regard to capital markets sanctions, we urge you to implement the following measures:

  • Place all companies listed on the DOD 1260H Chinese Military Companies Report list on the NS-CMIC List.
  • Place all companies on the Department of Commerce’s Entity List onto the NS-CMIC List, and vice versa.
  • Add more companies to the NS-CMIC List pursuant to the surveillance technology and broader human rights requirements, including forced labor.
  • Expand and clarify the language of the EO to include covering subsidiaries of parent companies which are raising funds for the parent company and/or participating in the odious activities that justified the parent company being sanctioned.

In addition to numerous new Chinese military and surveillance companies being placed on the NS-CMIC list, as well as the inclusion of Entity List companies, we urge that you also coordinate with the SEC immediately with the intention of: 1) instituting new disclosure requirements for the thousands of Chinese A-share companies (a significant number of which are U.S.-sanctioned), drawn directly from Chinese domestic exchanges and placed into American passive investment products (notably ETFs), that are held by scores of millions of unknowing U.S. investors; 2) demanding similar disclosure requirements for the hundreds of Chinese companies traded on the Over-the-Counter market; and 3) eliminating altogether the unreformable, scandalously deceptive Variable Interest Entities served up to American investors by Chinese shell corporations domiciled in the Cayman Islands and perhaps elsewhere, with no real equity ownership rights or investor protections whatsoever.

Madame Secretary, the protection of American retail investors, our national security, and the fundamental values of our nation are all at stake here. We understand the pressures you and your team face from Wall Street. However, the Treasury Department cannot put the profits and well-being of Wall Street and the Chinese Communist Party above the interests of American economic and national security. Capital markets sanctions are arguably the most fearsome and effective non-military deterrent and penalty vis a vis the Chinese Communist Party ever devised by our country.

We can no longer watch in good conscience as this exceptionally powerful policy tool languishes under your stewardship. The hard-earned retirement and investment dollars of a large percentage of the American people are unwittingly underwriting genocide-enablers and other Chinese corporate human rights and national security abusers aiding the Chinese Communist Party’s campaign of evil. This is an empirically provable fact happening on your watch. You must take action to put an end to this now.

Please let us know your thoughts and action plan concerning these urgent matters at your earliest convenience.

Sincerely,

Coalition for a Prosperous America

Fight for Freedom. Stand with Hong Kong.

Hong Kong Watch

Victims of Communism Memorial Foundation

 

Cc:      The Honorable Antony Blinken, Secretary of State

The Honorable Lloyd Austin, Secretary of Defense

The Honorable Gina Raimondo, Secretary of Commerce

The Honorable Marty Walsh, Secretary of Labor

The Honorable Katherine Tai, U.S. Trade Representative

The Honorable Avril Haines, Director of National Intelligence

The Honorable Jake Sullivan, National Security Advisor

The Honorable Brian Deese, Director of the National Economic Council The Honorable Jerome Powell, Chairman of the Federal Reserve

The Honorable Gary Gensler, Chairman of the Securities and Exchange Commission

 

 

 

 

The post CPA Letter to Treasury Secretary Janet Yellen Regarding Capital Markets Sanctions Against Chinese Companies appeared first on Coalition For A Prosperous America.

Tainted Blood Pressure Medication from India Can ‘Change Someone’s DNA’

Share Tweet Share

The latest example of tainted medicine from an Indian lab can change a person’s DNA and was flagged by the Food and Drug Administration as having a faulty process in making a key ingredient for the blood press medication known as valsartan.

The tainted compound in question was an impurity in azidomethyl-biphenyl-tetrazole (AZBT). It is known to damage DNA, and long-term exposure to an azido impurity in blood press pills can increase cancer risks.

FDA inspectors said that Hetero Labs Ltd in India had a flawed process for controlling these impurities, Bloomberg reported on October 13.

The FDA visited Hetero Labs over 10 days in August, according to Bloomberg. The plant sells key starting materials for valsartan to other pharmaceutical companies to make the finished pill, which then gets shipped to the U.S. Valsartan production can form azido impurities by AZBT, and Hetero ran into a problem with that.

It is unclear if Bloomberg’s mention of “10 days in August” means this August, or August 2017.

This date is important because that is when the FDA sent its first Warning Letter to Hetero following visits of the facility in January.

That letter did not mention blood pressure medication, or valspartan, or any impurities at all. But said that the “firm does not have an adequate ongoing program for monitoring process control to ensure stable manufacturing operations and consistent drug quality.”

Warning Letters are fairly standard. The FDA inspector highlights where the problems are, where the foreign lab is running afoul of the best practices required of U.S. manufacturers and issues their “warning” which says that until the process problems are completely corrected and the FDA confirms that is the case, then the FDA can withhold approval of any new applications to be part of the American drug supply chain.

Four years later, Hetero was still part of the American drug supply chain.

This story is a part of a long pattern. The FDA, with its hands full in the United States, is hard-pressed to properly inspect plants in India and – increasingly – China. Worse yet, most plants that produce key starting materials for drugs are not inspected at all. These are the companies that supply the startup materials Hetero uses, for example.  FDA Warning Letters do not frighten off foreign labs, as there is little to no punishment for complying to the fullest.

While this may be because the overseas lab views the FDA’s inspection as too nit-picky and not a violation, there are enough examples out there of companies whose processes for drug making were called out, only to run into problems with tainted drugs sources from those same labs later on.

The FDA is aware of the need to produce more critical drugs here at home.

Last year, they ran a list of hundreds of basic medicines that the U.S. is currently dependent on foreign sources for supply.

The Biden Administration has made reshoring those critical medicines a priority.

The American Rescue Plan dedicated $10 billion in the local pharmaceutical sector, but Biden’s American Jobs Plan, released yesterday, proposes $30 billion over four years to “create U.S. jobs” and make investments “to shore up our nation’s strategic national stockpile.”

Elizabeth Warren (D-MA) and Tina Smith (D-MN) introduced legislation on this in July 2020.

“We need to make sure we’re able to produce the life-saving medicine Americans need here at home, so we don’t have to rely on other countries for the critical drugs we need,” said Senator Smith at the time.

Warren and Smith were a few months behind Congressmen (R-FL-8) and Tim Ryan (D-OH-13) who introduced the Safe Medicine Act in February. They said it was designedto protect Americans from defective or contaminated foreign pharmaceuticals.”

Congressman Posey and Ryan focused on one drug in particular: heparin.

Heparin is one of the oldest drugs currently still in widespread clinical use as an anticoagulant. It is a natural product made, but a lot of it comes from – get this – Chinese pigs.

In 2008, a Chinese-based pharmaceutical company sold tainted heparin here that resulted in the death of 81 people, with 785 severely injured. Posey and Ryan said that the FDA was worried about shortages at the time so they allowed Chinese-made heparin to continue to enter the country without inspecting it because there were no other supply options.  

An alternative method of controlling and regulating heparin, for example, is urgently needed.

Still the President’s words, and two bills ready to go, all of it languishes in gridlock, often held hostage to other pieces of legislation. Meanwhile, people are served up with tainted medication.

Little has changed since the early 2000 heparin crisis.

Americans continue to depend on China, India, and European countries to supply the ingredients needed to manufacture the generic medicines they take each day.

This is especially problematic when it comes to antibiotics, since China now controls roughly 90% of the global supply of inputs needed to make many generic antibiotics, Rosemary Gibson noted in a recent op-ed.

The United States imports nearly 80% of the active pharmaceutical ingredients (APIs), the requisite component of drugs, used in generic drugs. Warren said over a year and a half ago that “overreliance is an alarming national security and public health risk. Foreign manufacturers could restrict or completely cut off the supply of pharmaceutical products during a period of heightened geopolitical tensions or after a natural disaster. Bad actors could tamper with drugs or APIs, rendering them ineffective or even weaponize them.”

Congress should at least move to provide domestic generic drug makers with trade remedies against price gouging and fund long-term contracts for the FDAs critical medicine list for stockpiling.

Major buyers of medication, namely hospital chains, will also have to consider drug safety and supply security when considering who to order from.

On October 14, Fresenius Kabi USA, a healthcare company that specializes in lifesaving medicines and technologies, partnered with generic drug manufacturing Phlow Corp., on essential medicines utilizing advanced manufacturing processes based in the U.S.

Back to the blood pressure medication made by Hetero Labs of India, drug regulators in Canada announced recalls of valsartan back in May due to elevated levels of azido impurities.

Over the next few months, other drugs in the same class, losartan and irbesartan, were also recalled for the same impurities. All of them imports.

Companies implicated include French multinational Sanofi (has a subsidiary in India), Novartis of Switzerland’s generic-drug unit Sandoz (which has a lab in India), as well as Teva Pharmaceutical Industries from Israel.

The post Tainted Blood Pressure Medication from India Can ‘Change Someone’s DNA’ appeared first on Coalition For A Prosperous America.