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Could Coronavirus Shortages Lead To Sec. 232 Tariffs For The Medtech Industry?

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Could Coronavirus Shortages Lead To Sec. 232 Tariffs For The Medtech Industry?

Section 232 of the Trade Expansion Act got a lot of attention in the early Trump years when the president invoked the passage to restrict steel and aluminum imports. The act allows officials to tax foreign products that are considered to be weakening national security.

The coronavirus pandemic has inspired recognition of a new national security risk: the outsourced medical supply chain.

What's In Short Supply?

The COVID-19 pandemic has exposed vulnerabilities in the U.S. medical supply chain.

A survey conducted by the U.S. Conference of Mayors found that 85% of mayors lacked enough ventilators for their hospitals, and 90% ran short on test kits, face masks and personal protective equipment used by medical workers and first responders.

“Despite their best efforts, most cities do not have and cannot obtain adequate equipment and supplies needed to protect their residents,” the late March report said.

“This is a life-threatening crisis that will continue unless the federal government does everything in its power to help us safeguard our first responders and health care workers — our first line of defense — and the millions of other public servants in our cities whose work today puts them at risk.”

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Where Are The Federal Government’s Response Limits?

Within weeks of their first cases, states began to call on the federal government to distribute resources from the Strategic National Stockpile.

At the beginning of the outbreak, the stockpile had 9,404 ventilators, and the Department of Defense had an additional 1,065, according to The Wall Street Journal.

By March 31, the Federal Emergency Management Agency said it had distributed more than 8,000 ventilators.

By April 1, the Department of Health and Human Services’ Strategic National Stockpile of masks, gloves and PPE was nearly exhausted.

“The stockpile was designed to respond to a handful of cities. It was never built or designed to fight a 50-state pandemic,” a DHS official told The Washington Post.

The government has long considered the national stockpile a temporary solution for emergency needs to give the private sector time to increase production.

“FEMA planning assumptions for COVID-19 pandemic response acknowledged that the Strategic National Stockpile (SNS) alone could not fulfill all requirements at the State and tribal level,” FEMA spokeswoman Janet Montesi said in a statement.

“The federal government will exhaust all means to identify and attain medical and other supplies needed to combat the virus.”

Since U.S. manufacturers have sent sizable shipments to Europe and other foreign purchasers, as trade records show, federal efforts include importing supplies from foreign producers in China, Malaysia and elsewhere.

“Not only are we buying what they have to sell, we’re buying their next batch,” a DHS official told Reuters.

In the meantime, states risk running out of critical supplies, another official told the Post.

How Reliant Is The US On Foreign Production?

Prior to the crisis, the U.S. imported nearly half of its PPE from China, according to the Peterson Institute for International Economics.

The FDA reports that about 63 medical device manufacturers rely on Chinese factories, 20 U.S. drugs are made or rely on ingredients made solely in China and another 370 essential medicines rely partly on Chinese inputs.

“If China cuts off our access to key medical ingredients, that would be devastating,” a Republican congressional aide told the Financial Times.

What Are The Proposed Solutions?

Some critics say the U.S. has become too reliant on medical imports — and U.S. Trade Representative Robert Lighthizer agrees. 

“Unfortunately, like others, we are learning in this crisis that over-dependence on other countries as a source of cheap medical products and supplies has created a strategic vulnerability to our economy,” Lighthizer said at a G-20 meeting on March 30.

“For the United States, we are encouraging diversification of supply chains and seeking to promote more manufacturing at home.”

White House trade adviser Peter Navarro said he is drafting an executive order to extend the federal procurement constraints of the Buy American Act to medical and pharmaceutical products. This would require federal agencies to purchase only U.S.-made goods.

A bipartisan Senate bill would force pharmaceutical companies to report active ingredients imports from China to the Pentagon. Congress is also considering issuing government-backed loans and tax breaks to shift supply chains back to the U.S.

What About Sec. 232 Tariffs?

Sec. 232 tariffs have not yet been mentioned as a lever to reshore pharmaceutical and medtech production, but they may be an option.

According to federal experts, pharmaceuticals qualify as a “critical infrastructure sector” — one necessary to preserve national security. In March, the FDA announced a drug shortage caused by COVID-19 manufacturing disturbances. The national drug shortage has not gotten nearly as much attention as the shortage in medical supplies.

In fact, federal policy responses seem to treat the latter commodity almost like critical infrastructure. By late March, more than 100 national security professionals signed a letter urging Trump to use his authority under the Defense Production Act to order private sector actors to produce ventilators. Days later, Trump invoked the emergency rule to commandeer production at General Motors Company (NYSE: GM).

Expert consensus is clear that access to medical technology is a matter of national security. Whether the determination will lead to Sec. 232 tariffs is yet to be seen.

 

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