Lou Dobbs on Outsourcing Production of Pharmaceuticals

My Thursday channel-surfing led me to make the mistake of listening to the latest outsourcing tirade from Lou Dobbs and crew:

LOUISE SCHIAVONE, CNN CORRESPONDENT: Add pharmaceuticals to the long list of products increasingly manufactured overseas and sold to U.S. consumers.

ALAN TOMELSON, U.S. BUSINESS AND INDUSTRY COUNCIL: U.S.-based pharmaceutical producers have been steadily losing market share to pharmaceutical imports since 1992, and, in fact, the market share held by imports in the U.S. market has risen from just over 4 percent in 1992 to just under 18 percent in 2002.

SCHIAVONE: In search of a well-educated but cheaper workforce, plus foreign government enticements, the U.S. pharmaceutical industry has been shipping production jobs overseas only to reimport their goods back to the United States. The most prolific source of pharmaceutical imports, Ireland, which shipped around $16 billion worth of pharmaceutical products to the U.S. in 2003, up from about $2 billion in 1997. Irish workers produce most of Pfizer’s Lipitor and the active ingredient in Viagra. Just behind Ireland is Britain, home of flu vaccine maker Chiron. Britain shipped about $6.5 billion worth of pharmaceuticals to the U.S. in 2003, up from $2.5 billion in 1997. For its part, the pharmaceutical industry notes that research and development dollars are actually growing in the United States.

Checking the web for a little information on this issue, this document from the European Federation of Pharmaceutical Industries and Associations was very useful. They note that U.S. consumers purchases $233 billion of pharmaceuticals in 2001 (just over $800 per person). Over half of worldwide sales were to consumers in North America whereas European sales were less than 26% of the world market. Since this document focused on the EU, it noted that exports and imports of the member nations showing the EU nations had a trade surplus near 34 billion Euros.

The U.S. pharmaceutical trade balance by nation can be found here. It appears that we may import over $50 billion in pharmaceuticals, while exporting less than $40 billion this year. That we have bilateral deficits in this product group with France, Germany, and Sweden is not surprising given our high consumption relative to theirs and given the past R&D successes their pharmaceutical companies may have been lucky enough to have achieved. The European Federation of Pharmaceutical Industries and Associations notes: (1) R&D not only is risky (a few gushers and lots of dry holes) and requires a substantial period of time; and (2) the U.S. is spending more in R&D than the EU and Japan combined.

It is true that we have pharmaceutical trade deficits with Ireland and the Singapore. Ms. Schiavone explains the outsourcing of production by U.S. developers by noting lower labor costs and foreign enticements. She could have mentioned the tax deferral enticement from subpart F where U.S. based multinationals abuse transfer pricing to make it look like most of the value-added comes from production in low-tax-jurisdiction production subsidiaries whereas economic reality suggests more the profits should be attributed to the value created by U.S. R&D (we could add the value of marketing but the tax director of Glaxo and the IRS are disagreeing on this in an upcoming Court litigation). But I guess Lou Dobbs would have cut her off had she mentioned that our comparative advantage is in R&D and not general production.

Also, someone remind this CNN crew that Chiron is based in Emeryville, California and not the UK. Of course, Chiron purchased UK-based PowderJect Pharmaceuticals, which makes the vaccine in question. So this was not outsourcing American jobs. Lou Dobbs and crew might have known this had they bothered to read Chiron’s 10-K.