For about 80 years, the United States has aggressively pursued a policy of expanding overseas markets and lowering domestic tariffs and other non-tariff barriers. This process was achieved through a series of bilateral and regional free trade agreements (FTAs), as well as multilateral agreements through the World Trade Organization (WTO) and its precursor system, the General Agreement on Tariffs and Trade (GATT). Liberalizing international trade in this manner increased the U.S. Gross Domestic Product per capita by about $7,000 and by more than $18,000 (in 2016 dollars) per household. Not only that, the poor benefitted disproportionately because they tend to “concentrate spending in more traded sectors.” Through these agreements, American firms also were able to establish the certainty they needed to invest abroad, foreign firms invested here and a system of complicated supply chains quickly developed that lowered prices for consumers and enhanced the competitiveness of American firms in globalized markets.
Despite these successes, protectionist opponents on the left and right have long criticized the prevailing consensus for its effect on the domestic manufacturing base. “Offshoring,” critics contend, has favored multinational corporations at the expense of the working class. Critics also argue that, as a services-heavy economy, the United States is too dependent on imported products from hostile countries and that the U.S. “doesn’t make anything anymore.”
But, these charges are largely untrue. Today, the United States is the second-largest exporter in the world. And, although manufacturing employment (as a percentage of the overall workforce) in the United States has declined, its peak occurred shortly after World War II and began declining in the late 1970s—“long before the North American Free Trade Agreement existed or Chinese imports were more than a rounding error in U.S. GDP.” In fact, before the outbreak of COVID-19, manufacturing output was near record highs. Instead, it is productivity gains and technological improvements that are the primary drivers of America’s shift away from labor-intensive manufacturing, not import competition or offshoring.
Despite this reality, American politicians are increasingly interested in reshoring supply chains of various products, especially those deemed “strategic” or required for U.S. national security. Hawkish politicians are concerned about U.S. reliance on imports from China and have pushed the United States to embrace a new era of industrial policy. Such arguments have intensified since the outbreak of COVID-19, particularly with respect to pharmaceuticals and other products necessary to combat the pandemic. The justification is that non-allies may withhold exports of these critical products, particularly when we need them most. And, accordingly, the administration and Congress are currently considering ways to re-shore some or all of the pharmaceutical supply chain, including a blunt protectionist requirement for the federal government to purchase only pharmaceutical products that are made in the United States.
Such “Buy American” proposals recently drew a stern rebuke from over 250 leading economists, including Nobel laureates and officials from previous presidential administrations, who warned in a letter organized by the National Taxpayers Union that: “The variety, supply and price of goods available to Americans will suffer under a Buy American regime. Taxpayers and patients will pay more for drugs and medical supplies.” And, in fact, any such risk is unnecessary, as there are ways to responsibly increase domestic manufacturing of various pharmaceuticals and active pharmaceutical ingredients (APIs) without resorting to misguided protectionism.
What’s more, to exploit this crisis as a way to radically overhaul pharmaceutical supply chains could be disastrous, especially if done in a haphazard way. For this reason, the present study first explains the costs of re-shoring pharmaceutical supply chains and the benefits of diversity. It then dispels the dubious national security arguments made by politicians, and makes concrete recommendations for the consideration of policymakers who wish to ensure a secure U.S. pharmaceutical supply chain, including steps to responsibly increase domestic production.
