U.S.–China Trade Tensions and Strategic Economic Leverage
In the high-stakes trade game the United States is playing with China, each side holds powerful trump cards. (No pun intended.) On the American side is the ability to deny China crucial technologies, most especially advanced computer chips that China needs for its artificial intelligence effort. Washington also has power to deny China access to what has been its largest and most lucrative export market. On China’s side are two near monopolies on products that the United States and the rest of the developed world urgently needs: rare earth elements crucial to all advanced technologies and perhaps even more significant, a big part of the world’s pharmaceutical supply chain.
Rare Earth Elements: China’s Well-Known Pressure Point
Beijing has more than once threatened to withhold the first of this duo. The prospect of losing these critical imports so affected Washington that at a recent face-to-face parley between President Trump and President Xi, Trump reduced tariffs on Chinese goods entering the country in return for Xi’s promise to sustain shipments of these critical elements for at least a year. A recent column in this space took up some of this negotiation and the West’s efforts to reduce Chinese leverage by developing non-Chinese sources of rare earth materials.
The Pharmaceutical Supply Chain
The pharmaceutical threat—thus far unvoiced—is far more complicated and potentially more dangerous. China has become dominant in every one of the intertwined links of the world’s pharmaceutical supply chain. During the Covid pandemic, the West got a taste of what could happen should China withhold its supplies. In the panic of that time, all counties, except perhaps China, suffered an immediate shortage of masks and ventilators, and when Beijing only briefly withheld exports of iodinated contrast media, the world’s hospitals lost some 80% of its supplies and had to ration diagnostic imaging for ten months. Though Beijing has not even hinted at a repeat performance of its pandemic behavior, what statistics exist testify to the extent of the damage Chinese authorities could do should they decide to limit exports.
Europe, for instance, depends on China for almost half its generic drugs. At a recent Politico Europe Healthcare summit, Sandoz’s Chief Information and Growth Officer, Simon Goeller, pointed out that his firm’s plant in Kundl, Austria is the only fully integrated penicillin site left in the Western world. A study by the Atlantic Council notes that even The Pentagon depends on China for 27% of its drug procurement. China accounts for over 90% of all penicillin and streptomycin imported into the United States and almost 95% of imported first-aid kits.
China is also critically important elsewhere in the global supply chain. Some 40% of U.S. imports of active pharmaceutical ingredients (APIs)—the part of medicine that makes it effective—come from China. Over 40% of imported chemicals and solvents used to integrate the APIs into drugs come from China. At least one key chemical used in some 700 crucial medicines depends on a Chinese input. China has also developed a crucial role in medical licensing and clinical trials. Not too long ago, China claimed a mere 5% of new drug filings globally. India, at some 19%, was far more important. By 2024, however, Chinese sources dwarfed Indian efforts, accounting for 45% of all global drug filings, valued at nearly $40 billion and up some 66% from 2023.
National Security and Public Health Risks of Supply Disruptions
Even though these figures are incomplete, it should nonetheless be clear that a loss of Chinese supplies could greatly injure the United States and the West generally. Supplies would not disappear completely, of course, but the shortages created by a loss of Chinese goods and services would impose rationing, cause a huge rise in costs, and otherwise threaten the health of Americans, Europeans, and people across the world.
Beijing has hesitated to make even a threat, no doubt because it would surely elicit a huge pushback on humanitarian grounds. Even when the Chinese authorities made threats about cutting off the flow of rare earth elements, they made an exception for medical needs. Nonetheless, the threat on pharmaceuticals is implicit. Beijing knows that it has a powerful card to play should push come to shove. Indeed, it has enshrined the power to control pharmaceutical exports in its 2021 Biosecurity Law.
Why the West Cannot Easily Reduce China’s Pharmaceutical Leverage
Nor does the United States or any other western country have a clear path to neutralize China’s pharmaceutical leverage. With rare earth elements, the answer is a more or less straightforward development of alternative sources and that is well underway, though it will take time. But as should be clear, things are much more complicated with pharmaceutical supply chains. As the U.S.-China Economic and Security Review Commission recently told Congress, it is impossible at present even to know the full extent of China’s or any other nation’s role or what materials are involved. Some pharmaceutical firms, the Commission pointed out, do not know the ultimate point of origin of the materials they buy. It begged Congress to make such information mandatory so that this country and others can understand where the vulnerabilities lie and begin efforts to reduce them. Even then, it will take a considerable time to end the West’s presently precarious position.
