PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Beware of “Buy American” Policies: U.S. Small Businesses and Innovation Negatively Impacted

By at 12 June, 2020, 10:38 am

by Raymond J. Keating-

Impulses among politicians to impose some kind of “Buy American” regulations on pharmaceuticals amount to nothing more than protectionism that will cause serious ills for American consumers (i.e., patients), entrepreneurs, businesses (overwhelmingly small businesses), and workers.

Despite the current politics, free trade actually is not controversial – or at least it shouldn’t be. After all, reducing governmental barriers – such as tariffs and quotas – to trade is good news for expanding competition, economic cooperation, choice, and opportunities for American entrepreneurs, workers, businesses and consumers. By definition, when individuals and businesses freely trade with each other – whether across town, across the nation or across international borders – each party is better off. If not, the transactions would not take place.

Big Growth and More Household Wealth Through Trade

The numbers drive home the point. For example, a May 2017 study by the Peterson Institute for International Economics found that the benefits to the United States from expanded trade – thanks to trade liberalization – from 1950 to 2016 amounted to $2.1 trillion (measured in 2016 dollars), with per capita GDP and GDP per household increasing by $7,014 and $18,131, respectively.

The common-sense, pro-free-trade essentials of economics work across industries, including pharmaceuticals. Indeed, it’s worth keeping in mind that the United States (that is, businesses as a group across the U.S.) ranks as the second largest goods exporter among all nations, and pharmaceuticals exports in turn rank among the top 10 U.S. exports.

The U.S. also benefits from being able to engage in trade on the pharmaceutical front in terms of inputs and supplies. A wide array of cost savings and access to goods unavailable in the U.S. are critical in an assortment of industries, including pharmaceuticals.

Unfortunately, it has been widely reported that the Trump administration is considering an executive order that the federal government purchase medical goods only made in the United States. In addition, various “Buy American” measures have been proposed in Congress.

More than 250 economists signed a letter in May urging the White House and Congress not to engage in this kind of protectionism. The letter, in part, said:

“The United States has already imposed restrictions on the export of health and medical resources. Policymakers are considering the imposition of new Buy America requirements for medical goods and pharmaceutical products, either by executive order or legislation.

“Current shortages of critical medical goods in the Covid-19 pandemic have revealed to all the desirability of diversifying sources of supply and increasing inventory of storable medical goods. Diversifying supply sources and increasing inventories will be costly, but a broad Buy America regime will be more costly. The variety, supply, and price of goods available to Americans will suffer under a broad Buy America regime. Taxpayers and patients will pay more for drugs and medical supplies. Smart policies such as federal government stockpiling look more promising.

“A Buy America directive can also hamstring the ability of U.S. pharmaceutical and medical equipment manufacturers to meet our future needs if firms are denied access to essential foreign supplies. Moreover, we can expect our trading partners to adopt retaliatory ‘Don’t Buy American’ barriers targeting U.S. exports as this type of retaliation is already occurring between other countries.”

Indeed, the retaliation factor must be considered quite seriously. Whenever nations decide to take protectionist actions, such as a “Buy American” executive order or legislation, trading partners do not sit idly by, but instead, they retaliate with their own measures. So, U.S. pharmaceutical companies could get hit twice, by government trying to engineer an industrial policy via “Buy American” mandates, which serves to raise costs for businesses and consumers, and by having international opportunities limited.

REMINDER: The Pharmaceutical Sector is All About Entrepreneurs and Small Businesses

Another mistake committed by elected officials and people more broadly is to assume that pharmaceutical manufacturers are large businesses, i.e., the politically-driven “Big Pharma” label. In reality, the pharmaceutical industry is overwhelmingly populated by small businesses. Consider the following (2017 latest data from the U.S. Census Bureau):

Size of Firms by Number of Employees

  Percent of Total Employer Firms in Pharmaceutical and Medicine   Manufacturing Sector

Less than 10

    46.1%

Less than 20

    58.0%

Less than 100

    78.7%

Less than 500

    90.4%

Restricting trade in pharmaceuticals means imposing harm on the entrepreneurial firms that drive innovation forward in terms of creating new and improved life-enhancing and life-saving medicines.

COVID-19 and U.S. Pharmaceutical Leadership

In recent months with the coronavirus pandemic, many Americans have come to see the benefits of having a strong, robust pharmaceutical industry. In fact, due to key factors like not imposing price controls and the protection of intellectual property, the U.S. has the leading pharmaceutical industry in the world.

Protectionism dressed up by “Buy American” rhetoric certainly will not boost U.S. entrepreneurs, businesses and workers in the pharmaceuticals sector.

Instead, the U.S. should be looking to advance productive policy measures that would boost incentives for investment in the U.S., such as:

● allowing for permanent, full expensing for all capital investments (including non-residential structures or manufacturing facilities);

● rolling back useless and costly regulations;

● accelerating governmental approvals for manufacturing facilities;

● boosting incentives for investing in high-risk ventures like in the pharmaceuticals industry by either eliminating the capital gains tax, or by reducing the rate to 10 percent and indexing gains for inflation;

● doing more, both domestically and globally, to protect and strengthen IP;

● and finally, the U.S. must get back to being a global leader on advancing trade and trade agreements, including the reduction and elimination of tariffs and quotas, and the enhancement of property rights.

Innovation and America’s small businesses in the bio-pharmaceutical industry – not to mention health care consumers – all benefit from less restrictions and more incentives to sustain and accelerate U.S. global leadership in this critical sector. Erecting new costs and barriers through trade restrictions will only serve to erode U.S. competitiveness and slow the development of new and life-saving drugs that are needed now, and in the future.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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