What policymakers need to know about China’s role in US drug supply chains and what to do about it

Introduction

Policymakers are increasingly concerned that a major geopolitical conflict with China could disrupt U.S. drug supply chains, affecting both public health and national security through widespread drug shortages.

These are legitimate concerns, but thus far policymakers seem to focus too narrowly: on making active ingredients but not chemicals that produce them, on U.S. production only without collaboration with allied nations, on a fixed list of drugs that does not adjust with budgetary realities, and on lowering barriers to entry for domestic production without consideration for market reforms necessary to sustain that entry.

In this paper, I first explain why and how drug shortages happen and how U.S. drug supply chains are most exposed to China. I then discuss the extent to which policymakers can de-risk those supply chains through onshoring. While onshoring downstream pharmaceutical production can reduce some risks, de-risking requires a comprehensive strategy at all manufacturing stages, including upstream chemical manufacturing. Given limited funding, policymakers must focus government support where domestic production is strategic, allied partnerships are practical, and trade-offs are unavoidable. To ensure government investments are sustainable, reforms to generic drug reimbursement mechanisms will also be necessary.

How and why drug shortages arise

What triggers a specific drug shortage may vary, but there is a common dynamic: a shortage results when the supply chain cannot quickly adjust to a supply disruption or demand increase.

The extent to which a meaningful shortage results depends on the size of the supply chain shock and the amount of slack in the system. Examples of system slack include high inventory levels of finished product or inputs, and the existence of spare or backup capacity, which in turn depends on manufacturing lines being fungible enough to accommodate different drug types.

Generic drugs are particularly vulnerable to supply-side shortages, primarily due to the economic incentives embedded within the reimbursement framework. By design, generic drugs are copycats of branded products, making them fully interchangeable in clinical settings. With that in mind, payers structure reimbursement to favor the manufacturer offering the lowest-price version. This approach has delivered significant savings to the U.S. healthcare system—Americans use more generics and pay less for them than in other developed countries. However, the same incentives lead manufacturers to depend on cheaper suppliers, lower overhead (including quality control), and operating with little slack.

This economic dynamic sets the stage for generic drug shortages. Manufacturing quality, the most common cause, arises from the combined effect of imperfect Food and Drug Administration (FDA) oversight and economic incentives that result in antiquated or under-resourced manufacturing quality systems. Permanent product discontinuations are an explicit economic decision that can trigger shortages, as is offshoring to potentially geopolitically volatile regions. The push to eliminate slack also makes supply chains more vulnerable to shocks, even those unrelated to economic factors, such as natural disasters.

Reliance on China is part of the economic dynamic to seek the lowest cost. Although no drug shortages in the last 20 years appear to have been caused by export restrictions, COVID-19 created some close calls, reminding policymakers across the globe that geopolitics could lead to supply disruptions, potentially affecting a much broader set of drugs than the ones that have historically experienced shortages.

China’s role in US drug supply chains

To understand China’s role in U.S. prescription drug supply chains, it is important to distinguish stages of drug production. Most small molecule drugs are chemically synthesized, starting with key starting materials (KSMs) transformed into intermediates using multiple reagents and solvents. Some begin with organic processes like fermentation. Multiple intermediate steps, not always done in the same facility, often precede the synthesis of the active pharmaceutical ingredient (API). The API is then combined with inactive but essential excipients to produce the final dosage form (FDF) sold to hospitals and pharmacies.

The common, but incomplete, narrative is that the U.S. has a great reliance on Chinese API. But as I delineated in a recent analysis, the more complete picture is that reliance is greater for inputs than the final API. For raw materials, exposure is not only great for KSMs but also for reagents and solvents. Further downstream, China controls the making of many critical intermediates, including those for antibiotics and statins. There are some drugs for which API is fully or primarily sourced from China, and there are signs that China is aggressively moving into the final API production stage. But in aggregate, probably no more than a quarter of drug units currently sold in the U.S. have API fully manufactured in China.

Chinese firms maintain a strong cost advantage in upstream (and increasingly downstream) drug supply chains by leveraging lower labor, energy, and transportation costs. The Chinese government has stated an explicit strategy to expand their position in global pharmaceutical supply chains, especially KSM production, driven by economic and national leverage goals. Government subsidies—including tax breaks, subsidized loans, and infrastructure investment—further reduce expenses. Historically, a lax regulatory framework allowed Chinese producers to operate with higher environmental and workplace risks than Western and Indian competitors, enabling their cost advantage. More recently, China has begun raising standards and investing in safer, more sustainable manufacturing with ongoing government support to sustain competitiveness.

Prioritizing which supply chains to support

A chain is only as strong as its weakest link, which means that securing a given drug supply chain requires identifying and securing all the weak links, not just some. But how does one overcome the Chinese cost advantage for the over 2,000 different drugs sold in the U.S.? And how likely is Congress to appropriate sufficient funds when it has shown little willingness to date to fund supply chain resilience efforts despite persistent drug shortages? Together, these challenges mean prioritization is essential.

The idea of prioritizing drug supply chains to support only select ones is not new: the Trump administration directed FDA in 2020 to develop a list of essential medicines needed to address pandemics as well as threats involving chemical, biological, radiological, and nuclear hazards. The Agency for Strategic Preparedness and Response (ASPR) then largely narrowed down the much longer FDA list to 86 medicines critical to the operations of acute care hospitals. Under a new executive order, ASPR will now further whittle down the list of 86 to 26 drugs that will then have their APIs stockpiled in case of shortages.

Identifying top targets is key, but so is a broader strategy that includes revisiting which drugs are critical (relative importance to patient outcomes), what their reach is (how many patients are affected), and how vulnerable they are to disruption (and not just geopolitical disruption). It is not clear the extent to which the recent executive order will consider these three elements when winnowing the list of 86 to 26, but the FDA and ASPR lists only consider criticality, and only in the acute setting, omitting, for example, many baseline chemotherapy drugs.

Understanding vulnerabilities is complicated by the complexity of drug supply chains and the variety of risks involved. The weakest-link approach suggests tracing all inputs and steps—from KSMs, reagents, solvents, and intermediates to APIs, excipients, and finished drugs. A true vulnerability assessment calls for weighing geopolitical risks and other prominent shortage risks that repeatedly trigger shortages. A vulnerability assessment should also be relative: for example, while China dominates antibiotic fermentation, a final vulnerability assessment should also consider what capacity exists among European and Japanese sites relative to their own national needs.

Aside from mapping, ASPR should consider moving away from a fixed list of essential drugs. Instead, it should rank a broader set of drugs by criticality and reach, followed by comprehensive vulnerability assessments. Ranking or at least organizing drugs in tiers matters because funding limits how many supply chains can be properly secured, yet a fixed list risks encouraging policymakers to spread money thinly and secure none. A longer list, stratified by criticality, reach, and vulnerability, would enable tying resilience efforts to actual funding levels and demarcating where to work with allies.

Shifting demand away from Chinese chemicals

Current policy proposals under consideration, such as tariffs, payment incentives, or Made-in-America mandates, target the making of final drug formulation and the late or final API synthesis steps. But these proposals will do little to de-risk U.S. drug supply chains from reliance on China unless they also address upstream reliance on Chinese KSMs, reagents, solvents, intermediates, and inactive ingredients.

Given China’s cost advantage and U.S. budgetary constraints, policymakers intending to shift to an alternate supply chain of chemicals, especially to one in the U.S., will be helped greatly if they prioritize which supply chains to de-risk. Policymakers then must ask: what is the alternative to switch to, and how does one ensure that there is sustained market demand for that alternative?

Standing up alternate supply chains

Few in the industry would argue that there are readily available alternatives to all the Chinese inputs, and even more so, ones that are priced anywhere near what the Chinese offer. This lack of alternatives goes beyond inputs made in the U.S.—many other countries have also increasingly ceded to Chinese firms the supply of low-margin chemicals whose production often comes with environmental risks.

Domestic manufacturing advocates might argue that creating a price differential between U.S. and foreign products can create enough of an incentive for such manufacturing to arise. This is the argument behind tariffs. However, tariffs apply to what crosses the border, and few chemical inputs do for generic drugs, making tariffs particularly ineffective for upstream supply chain incentives (other than API, as explained elsewhere). Furthermore, the long-time horizon necessary for major capital investments is not favorable for what is a low-margin, undifferentiated product.

To address the unfavorable economics for fine chemicals infrastructure, the U.S. should consider funding chemical industrial parks to make ingredients for prioritized drugs. Such parks are used in Europe, India, and some U.S. states like Virginia, either with direct government support or a regulatory framework that encourages them. The parks share infrastructure for industrial wastewater treatment, utilities, and product testing, all of which lower overhead, improve logistics, and help meet regulatory standards. Such parks also protect government investment in that a new company can step in if another one fails.

For some API, synthetic biology may offer a viable alternative. Synthetic biology is a technology where APIs are engineered in living cells, akin to how biologic drugs are made. The technology may only work for some APIs, and there are important cost considerations. In non-crisis times, the marginal cost of production will likely be higher than through traditional means, creating questions around sustainability. In crisis time, the heavily patented nature of the technology may become fiscally challenging because pricing is outside the Defense Production Act authorities, and therefore, pricing should be worked out in advance with any initial investment support.

Either way, the expenditures required here, especially when coupled with market reforms discussed below, will likely quickly run against Congressional spending constraints. For this reason, it is necessary to think about ways to de-risk from China indirectly, including leveraging international cooperation and partnerships from non-adversarial nations.

Statins, widely prescribed for cholesterol, are a great example of drugs where indirect engagement makes sense. Statins are not on any of the U.S. government essential medicine lists, but with perhaps as many as 90 million Americans taking them, a major shortage would become a significant disruption to care for many, likely with political repercussions. The Indian government is acutely aware of its manufacturers ceding a specific statin intermediate step to China, so it has added atorvastatin to the list of drugs for which it will subsidize China de-risking efforts. This subsidy indirectly benefits American patients, so U.S. policymakers would be wise to support, not vilify, such initiatives, considering U.S. budgetary realities.

Sustaining demand for alternative supply chains

Alternative supply chains will only succeed if there is sufficient demand to sustain them. Sustaining demand for more expensive inputs will require counteracting some of the principal forces that have made generic drugs a resounding health care cost control success.

By emphasizing price competition, the current system undervalues supply chain reliability. Generic manufacturers face price pressure from a consolidated buyer base, and unless Congress acts, some generic drugs, including those made domestically, will continue to be limited in their ability to pass on legitimate cost increases.  

Many of the drugs on the ASPR list of 86 are at high risk of shortage, and because most are generic sterile injectables sold in hospitals and clinics, policy solutions can leverage the Medicare program to shift purchasing decisions from an emphasis on lowest price toward reliability of supply. The Senate Finance Committee has put forward a bipartisan proposal of add-on payments for purchasing from more reliable sources, as a way to lower the risk that the drug goes into shortage. Further work needs to be done to refine and advance what is likely the most consequential market reform proposal to address drug shortages.

The inability to pass on legitimate price increases is another stumbling block for many supply chain resilience reforms, including the Senate Finance add-on payment proposal. Currently, generic drugs used by Medicaid patients face an inflation cap equal to the rate of inflation, and the same cap then extends to the outpatient hospital settings through the 340B program, for which most hospitals qualify. Some clinically important drugs, such as chemotherapy agents, have large exposure to such caps. But such caps limit the ability of manufacturers to pass on cost increases from sourcing inputs outside of China.

Addressing the competition dynamics for finished‑dose drugs is essential, but it must be paired with reforms that counter the persistent incentive to source cheap ingredients. The way to achieve this is to tie government support for APIs or FDFs to a requirement that inputs be sourced outside China.

A word of caution here about Made-in-America mandates. The current environment does not support full supply chain Made-in-America mandates, given the lack of U.S. alternatives for many inputs. A move limited in scope to the military only, if given enough of a runway, could work because it would not require broader inflation rebate reforms. But even a narrow focus on military supply chains needs to build in additional quality assurance steps because domestic facilities have not been immune to shortage-causing manufacturing quality problems.

Conclusion

Drug supply chains are complex, with many vulnerabilities, including a significant exposure to China. Policymakers are rightly interested in making drug supply chains more reliable.

But as a long-time observer of the industry and policy in this space, I fear that policymakers will take the limited funding opportunities and either misdirect them (e.g., focusing only on final API production) or spread them too thin, failing to de-risk any supply chains and wasting taxpayer dollars. Only a strategic approach—one that prioritizes where to engage, considers the full supply chain, and addresses economic incentives that underpin the problematic market dynamics—can ensure that limited funding strengthens resilience. This is the only path to turn vulnerability into security for American patients.