The federal government should pursue a combination of three policies to support American manufacturers:
Create a reliable customer base for domestic manufacturers.
Use trade remedies to defend domestic manufacturers from predatory policies by foreign governments and companies.
Invest in re-establishing America’s depleted industrial base using new, greener technology, and bolster America as a global leader in generic manufacturing.
How does it work?
1. Create a Reliable Customer Base for Domestic Generic Manufacturers
The federal government spends billions of Americans’ taxpayer dollars each year on generic drugs. That money should be leveraged to rebuild domestic manufacturing.
Medicare and Medicaid
The federal Centers for Medicare and Medicaid Services (CMS) in the Department of Health and Human Services spent nearly $300 billion on drug expenditures in 2019, making it a larger market than any other country in the world. Generic drugs account for 20 percent of CMS total drug spending. The federal government should provide an incentive — even a 10 percent price premium — for generic drugs fully made in the U.S. to dramatically strengthen domestic production.
More than eighty million Americans are enrolled in Medicare, Medicaid, or the Child Health Insurance Program (CHIP). Medicare and Medicaid beneficiaries account for more than 60 percent of all care provided by hospitals nationwide, and nearly every major hospital must accept Medicare and Medicaid patients and comply with CMS requirements. In this way, these programs can be leveraged to support domestic manufacturing of essential generic drugs.
Departments of Health and Human Services, Defense, and the VA
The federal government should give priority to domestic manufacturers when departments procure drugs directly. The Department of Health and Human Services, Department of Defense, and the VA should all prioritize signing long-term contracts with domestic manufacturers to give them the confidence that they will have customers for multiple years. Congress should create working capital for each of these departments to allow them to enter into long-term contracts without relying on their current year’s funding to finance procurements several years into the future.
2. Use Trade Remedies to Defend Domestic Manufacturers
The U.S. government must use trade remedies to defend domestic manufacturers from predatory policies by foreign governments and manufacturers. American companies do not receive the same government support to withstand extended periods of illegal trade practices. Consequently, they are vulnerable to foreign companies that sell products below cost to dominate market share, and then immediately raise their price exponentially.
The U.S. government has a wide range of trade remedies available to stop this predatory behavior and thereby combat shortages of life-saving medicines. Fully utilizing these authorities would significantly reduce overall health care costs and support resilient domestic manufacturing.
During the height of COVID-19, many countries banned exports of key medicines to assure they had enough for their own people. Globalization was quickly replaced by nationalism as a matter of life and death. To address this situation, Section 232 duties and quotas should be phased in on all medicines on the FDA’s essential medicine list to stimulate domestic investment in manufacturing. A benefit of a Section 232 approach is that it provides the federal government a great amount of flexibility to adjust rates and exempt specific products or countries when such changes are needed. They are also less prone to litigation risk than traditional antidumping and countervailing duties cases.
The U.S. government should make active use of Section 301 of the Trade Act of 1974. Section 301 exists to authorize the president to deploy duties and quotas in response to unfair trade practices by foreign governments. The term “unfair trade practices” is defined quite broadly and captures a wide swath of foreign government activity happening today in the generic industry. If a foreign country deploys policy tools to reshore generic manufacturing, the best approach is to wish them no ill-will, but not stand idly by while they dump excess capacity on our market. Section 301 is the mechanism to advance this policy.
The United States could impose Section 201 safeguards to support domestic manufacturers. Section 201 involves some practical implementation challenges, however, considering that Section 201 safeguards are typically requested by domestic manufacturers and usually are requested for one product at a time. Implementing Section 201 safeguards also requires an affirmative finding from the United States International Trade Commission (ITC).
3. Invest in Domestic Generic Manufacturing
Federal investment can help rebuild America’s depleted industrial base. A top priority is investment in advanced manufacturing for commercial-scale production of generic medicines, fully made in the U.S. Faster, cheaper, and greener, this technology can jumpstart a new era of self-sufficiency for generic medicines.
Congress should establish a permanent program run by the Department of Defense or Department of Health and Human Services to award contracts to U.S. companies with demonstrated capability to manufacture fully in the U.S. the most critical generic drugs – that often have slim profit margins — necessary to advance America’s national security.
The Defense Production Act (DPA) has successfully incentivized domestic investments in a number of sectors and could be expanded. Also, tax credits for new investments in generic manufacturing, and tax credits on the sale of generic drugs that cut the tax rate for domestic manufacturers, could be beneficial. American manufacturers would also benefit from a “first to file” preference which would allow them to become the first entrants in new generic markets.
Similarly, tax incentives to support reshoring to the island of Puerto Rico, which already has much of the infrastructure and workforce in place from when it was previously a global pharmaceutical manufacturing powerhouse, may increase investments on the island. Senator Marco Rubio and Representative Jenniffer González-Colón have introduced legislation that would encourage companies currently producing medical devices and pharmaceuticals abroad to relocate to the United States. The bill would enact a tax credit applicable to federal income tax liability for wages and eligible pharmaceutical manufacturing facilities, with enhanced benefits for repatriated facilities in economically distressed zones, including Puerto Rico.