Yves here. This article repeats the canard that the US should be worried about the prospect of China selling US Treasuries. First, na ga happen, because selling Treasuries would mean selling dollars and buying renminbi, which would drive the renminbi up against the dollar, the last thing that China wants. It would have an impact similar to increasing the tariffs. Second, the US does not depend on China to finance its deficits. Issuing Treasuries is a convention that is a holdover from the gold standard days. And look at how the effect of the tariff tantrum has been to send yields even lower, with the Wall Street Journal speculating tonight about the prospect of negative yields in the US.

However, this article is on solid ground in suggesting that China could make life difficult for the US on other fronts. The US has recklessly allowed China to become a dominant or even monopoly provider of key medications and/or their key components. We’ve posted on this topic before as experts have raised warnings about quality control shortcomings as well as the lack of alternative suppliers, at least in any reasonable time frame. From a 2018 post, China Rx: How the US Depends on China for Its Drugs:

A recent book, China RX: Exposing the Risks of America’s Dependence on China for Medicine by Rosemary Gibson and Janardan Prasad Singh, appears not to have gotten the attention it warrants…. You can also listen Gibson describe some of the key points from her book in the interview below. The big message of Gibon’s and Singh’s book is that the US relies on China for the production of active ingredients in drugs and in many cases, of the medications themselves, to the degree that we would have a public health crisis if supplies were interrupted. As Gibson said on C-SPAN: Many people that we spoke to, both former government officials and some in industry said that if China shut the door on exports, within months, pharmacy shelves in the United States to be empty, and hospitals would cease to function. And don’t assume generics king India would step into the breach. India gets many of the active ingredients for its pharmaceuticals from China. Gibson forecasts that China will overtake India in generics manufacture within a decade.

By Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at SafeHaven

Beijing has more than one powerful ace up its sleeve in the trade war theater, and drug manufacturing is a foreboding one. Over the past week, the ongoing conflict between the world’s largest economies took a turn for the worse after President Trump threatened to slap tariffs on virtually all Chinese imports into the country. Washington has a clear advantage when playing the tariff trump card since the country imports nearly 4x as many goods (dollar value) from China as China does from the U.S.

But China has repeatedly refused to be the first to blink.

Its immediate response was to allow the yuan to devalue to an 11-year low–effectively nullifying some of the effects of the tariffs–and also threatened tostop buying U.S. agricultural products.

If push finally comes to shove, China might decide to stop playing passive aggressor and resort to even deadlier measures.

The two most frequently mentioned ‘nuclear options’ at its disposal are dumping it’s trillion-dollar cache of U.S. Treasuries and cutting off rare-earths supplies to U.S. manufacturers.

Yet, another oft-ignored risk is Beijing’s potential disruption of vital drug supplies to the U.S. or, worse still, willfully contaminating the drugs with harmful compounds.

Drug Supply Dominance a Security Threat

According to Bloomberg, Trump’s administration has become increasingly wary of China’s dominance in the global drug supply chain and now sees it as a genuine national security threat. China has grown into the world’s largest supplier of active pharmaceutical ingredients (APIs)–useful drug-making compounds supplied to drugmakers.

A year-long recall of blood pressure and heart medication such as losartan, valsartan and irbesartan after discovering they contained trace amounts of cancer-causing impurities has turned attention to this real or perceived threat even as the trade war escalates to unprecedented proportions.

What has rung the tocsin for the authorities, including the Pentagon, is the fact that millions of civilians and military staff take drugs whose active ingredients are made in China.

For instance, Larry Wortzel, a military retiree and member of the U.S.-China commission, has told Bloomberg that four versions of his blood-pressure lowering medication valsartan were recalled over a three-month period after it was discovered that they were laced with rocket fuel. Specifically, the drugs contained NDMA, a manufacturing by-product and potential carcinogenic that was once used to make rocket fuel. The drugs were manufactured in India but had active ingredients sourced from China.

“They were contaminated with rocket fuel,” he revealed. “I imagine active people have the same problem. This affects the readiness of our troops.”

Catch 22

Just like the rare earths dilemma, the U.S. healthcare industry is finding itself in a Catch 22 situation since it cannot easily cut off all drug supplies from China.

The Trade Agreements Act of 1979 requires the Defense Health Agency and other federal agencies to only use pre-approved drugs that are made in the U.S. or from a compliant country.

As you might imagine, China is not on the approved list; however, the agency has waivers for nearly 150 drugs from the country because it would not be able to procure them from anywhere else. Moreover, the TAA only covers finished products and not their components–though that’s more of a legislative issue that can probably be fixed.

Yet, quality is just one of the concerns here. China can potentially cut off actual drug supplies to the U.S. thus crippling the industry. Rosemary Gibson, the author of China Rx, highlights this dilemma:

“If China shut the door on exports, our hospitals would cease to function, so this has tremendous urgency,” she has told Bloomberg.

The potential solution is definitely not short-term. As Christopher Priest, a Defense Health Agency director, told a U.S.-China advisory panel last week, the federal government should compel pharmaceutical companies to build and maintain the necessary infrastructure to manufacture drugs without relying on unfriendly countries like China.

That might sound like another bad case of American jingoism yet the end might, in the end, justify the means.