The Globalization of China’s Life Sciences Industry: Flashpoints in Sino-U.S. Trade Relations
An Interview with Ka Zeng
By Claire Topal
April 4, 2014
China’s engagement with the global life sciences industry (including pharmaceuticals, medical devices, diagnostics, and biotech) has been rapidly increasing. In response, NBR has launched a research project on the Globalization of China’s Life Science Sector that examines Chinese government support for this sector and its implications for international scientific competition and innovation, as well as the broader impact on U.S.-China political and economic relations. In this expert interview, project scholar Ka Zeng (University of Arkansas) provides an analysis of Chinese government actions and policies that depart from international trade norms. She suggests that the country’s policies in life science R&D and drug commercialization may be as disruptive as they have been in clean technology.
China’s domestic life science sector is growing rapidly, bolstered by significant investment and incentives from the country’s government. Many find the ways this sector is growing in China to be disruptive for international trade. Do you agree?
The dynamics of growth that we have witnessed in the life science sector in China are not unique to this industry, but instead reflect a broader pattern of Chinese government support for a range of emerging industries—many of them high-technology sectors such as life science. Even though the Chinese economy has undergone substantial liberalization since the early 1980s, the Chinese government—far from abandoning industrial policy as a key instrument for managing the economy—has increased its reliance on this instrument during the past decade.
The 2008 global financial crisis, which led to a substantial contraction in China’s export markets, further reinforced the role of government stimulus spending in ensuring the country’s sustained growth and promoting the so-called strategic emerging industries. The rapid development of the country’s life science sector, made possible at least in part by strong government support, thus needs to be viewed in the context of China’s state-centric model of economic development and its recent emphasis on indigenous innovations.
This pattern of state-led growth in China has caused considerable disruption to the international trade structure and its underlying principle of free trade. To the extent that the multilateral trading system centered on the World Trade Organization (WTO) operates according to market principles, the substantial government support that has fueled the rapid growth of a wide range of strategic Chinese industries, including the life sciences industry, has also raised important questions about the impact of state involvement on trade flows and the ability of existing rules to cope with the challenges of integrating a hybrid economy into the liberal international economic order.
While the entry of nonmarket economies into the General Agreement on Tariffs and Trade (GATT) and WTO is not unprecedented,  what distinguishes China from other nonmarket economy entrants is its sheer size and the far greater potential for Chinese practices to cause significant disruptions to liberal international trading rules.  Chinese practices in the life science sector thus accentuate the need for the international community to develop effective rules to tame the impact of such disruptive forces.
What existing methods are most relevant for addressing disruptive forces in this sector?
Both multilateral and bilateral remedies and dispute-resolution processes exist to address disruptive forces in the life science sector. Among the most relevant multilateral protocols are the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Services (GATS). The TRIPS agreement, which most directly bears on pharmaceutical patent rights, strives to find an appropriate balance between the needs of the public and the rights of intellectual property holders.  GATT and GATS address barriers to trade in health goods (such as hospital beds, uniforms, essential medicines, computers, and X-ray equipment) and trade in health services (such as personnel, nursing services, hospital services, ambulance services, and physiotherapeutic and paramedical services).  The Technical Barriers to Trade Agreement and the Sanitary and Phytosanitary Measures Agreement are also relevant, given the growing use of technical standards, as well as health and safety standards, as justifications for instituting trade restrictions. Furthermore, the World Health Organization provides an important venue for global negotiations over public health issues.
Although China as a developing country is entitled to certain flexibilities embedded in the TRIPS agreement, some of its current practices in the life sciences pose potential challenges to the WTO’s key principles of nondiscrimination and national treatment. For example, in the most recent report to Congress on China’s WTO compliance, the Office of the United States Trade Representative (USTR) has identified a wide range of Chinese practices that are WTO-inconsistent, including the information-disclosure requirements for pharmaceutical patent applications; duplicative certification requirements for imported medical equipment; proposals by the National Development and Reform Commission to manage the prices of medical devices, avoid excessive mark-ups by distributors, and reduce healthcare costs; biotechnology regulations and implementing rules; and restrictions on pharmaceutical distributions by foreign companies.  These issues, which negatively impinge on the interests of key U.S. stakeholders, have the potential of becoming major flashpoints in U.S. trade relations with China.
In addition to multilateral trade remedies, the USTR regularly monitors China’s trade practices and engages in bilateral negotiations to address market access barriers in that country. The U.S.-China Strategic and Economic Dialogue (S&ED) provides yet another mechanism for leaders of the two countries to address a wide range of strategic and economic issues of mutual concern.
How can we address these concerns in ways that take into account the unique needs of the life sciences industry?
The needs of the life sciences industry involve the delicate question of how to effectively balance the rights of intellectual property holders and the need to provide access to essential medicines for public health reasons. While existing trade rules address this tension, it is not clear how effective such provisions are in improving public access to patented drugs, especially in developing countries.
As one possible improvement, multilateral trade rules need to come up with more determinant terms in compulsory licensing provisions. The Doha Declaration affirmed the right of a sovereign nation to protect public health by, for example, granting compulsory licenses during national emergencies, even at the expense of intellectual property rights.  However, subsequent amendments to the TRIPS agreement introduced ambiguities in determining valid circumstances for compulsory licensing. For example, the scope of eligible diseases, drugs, and nations has been left undefined. The algorithm for “adequate remuneration” that countries utilizing compulsory licensing have to pay remains unclear.  While these ambiguities were intended to provide developing countries with flexibility to meet their public health needs, they may ultimately have the unintended consequence of impeding efficient use of compulsory licensing. Greater clarity in the compulsory licensing provisions may therefore help address the uncertainties pharmaceutical companies face in emerging markets.
Bilateral negotiations through the USTR or the S&ED provide additional venues for addressing the concerns of the industry. Recently, concerns about China’s intellectual property rights protection relating to the pharmaceutical industry and other regulatory barriers affecting the life sciences industry have gained prominence in the USTR’s Report to Congress on China’s WTO Compliance.
Finally, since tackling market-access barriers abroad requires active public-private partnerships, industry has an important role to play in conveying concerns to government officials and elevating these concerns to the top of the U.S. negotiation agenda. More robust discussions and diplomatic engagement with the Chinese may help to contain potentially contentious issues early on and prevent them from flaring up into major crises in U.S.-China trade relations.
What are the consequences of having insufficient trade tools?
The lack of adequate trade tools and protocols for the global life science sector may deter foreign investment by exacerbating multinational corporations’ fears about the abuse of compulsory licensing specifically and the unpredictability of the host country investment environment more broadly. Confronted with the potential threat of compulsory licenses, foreign companies are often left with the unpalatable choices of dramatically lowering prices; offering voluntary, royalty-free licenses; or engaging in technology transfer.  There are also instances where a developing country has leveraged the threat of compulsory licensing to negotiate lower prices for certain drugs.  Since China is a large developing country and the fastest-growing market for the life science sector, market distortions and the lack of a level playing field between domestic companies and multinational corporations may also undercut global market competition and discourage key innovations that promise to enhance public well-being in the long run.
In addition, insufficient trade tools and protocols may frustrate the goal of promoting public health in the developing world. As mentioned earlier, while existing multilateral trade rules seek to address the tension between promoting innovation of new drugs and providing public access to them, significant challenges remain in the achievement of the latter goal. There is clearly scope for existing trade rules to better clarify the rights and obligations of the respective stakeholders in order to preserve the commercial interests of industry while maximizing the benefits of foreign investment to the host country.
What lessons can we learn from the evolution of China’s domestic clean-technology sector? 
The evolution of China’s domestic clean-tech sector shows that government intervention in strategic industries may well generate market distortions leading to major trade frictions. However, while the United States has exerted the most intense pressure on China in the clean-tech sector through both domestic trade remedies and WTO litigation (compared with other sectors involving trade-related investment measures, such as automobiles or semiconductors), China has not been very forthcoming in addressing U.S. trade concerns in this sector. That is due both to Beijing’s willingness to use industrial policy to foster economic competitiveness in nascent industries and to coalitional dynamics in the United States resulting from the global integration of production into clean technology. 
The U.S. experience in addressing trade concerns with Beijing in the clean-tech sector suggests that greater understanding of domestic support for or against retaliatory strategies in the United States is critical in order for the international community to effectively leverage existing trade protocols and to elicit positive responses from China. U.S. policymakers and other external stakeholders would also benefit from a deeper understanding of the sources of resistance in China to market liberalization. This understanding would enable them to more effectively navigate the Chinese landscape and come up with credible negotiation strategies that have the potential to win support from key domestic stakeholders, as well as mitigate against potential resistance to change within China.
More broadly, trade frictions in the clean-tech and life sciences industries are likely to reflect broader national rivalries over industries with significant commercial implications. While multilateral and bilateral mechanisms of trade-dispute resolution provide basic frameworks for addressing market-access concerns with China, it is important that the United States, European Union, and other governments back up aggressive trade-negotiation strategies with effective domestic policies in order to ensure the viable development and competitive positions of these industries in the long term.
 For example, Poland, Romania, and Hungary acceded to the GATT in 1967, 1971, and 1973, respectively. WTO, “The 128 Countries That Had Signed GATT by 1994,” http://www.wto.org/english/thewto_e/gattmem_e.htm.
 Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994).
 WTO, “Agreement on Trade-Related Aspects of Intellectual Property Rights,” http://www.wto.org/english/docs_e/legal_e/27-trips.pdf.
 Chantal Blouin, Nick Drager, and Richard Smith, eds., International Trade in Health Services and the GATS: Current Issues and Debates (Washington, D.C.: World Bank, 2006).
 USTR, “2013 USTR Report to Congress on China’s WTO Compliance,” December 2013, http://www.ustr.gov/sites/default/files/2013-Report-to-Congress-China-WTO-Compliance.pdf; and USTR
, “2012 USTR Report to Congress on China’s WTO Compliance,” December 2012, http://www.ustr.gov/webfm_send/3620
 WTO, “Declaration on the TRIPS Agreement and Public Health,” November 14, 2001, par. 4 http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm.
 WTO, “Doha Work Programme: Ministerial Declaration,” December 18, 2005, http://www.wto.org/english/thewto_e/minist_e/min05_e/final_text_e.htm#public_health.
 Many dramatic price cuts have taken place since 2001, when the Doha Declaration first proposed cross-border compulsory licensing. See Kevin Outterson, “Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets,” Yale Journal of Health Policy, Law, and Ethics 5, no. 1 (2005).
 For example, Brazil was one of the first developing countries to successfully negotiate price reductions for AIDS drugs with U.S. pharmaceutical companies through the threat of compulsory licensing. See Roger Bate, “Threats to Patents, Threats to Health,” Ideas in Action, TCS Daily, July 21, 2005, http://www.ideasinactiontv.com/tcs_daily/2005/07/threats-to-patents-threats-to-health.html.
 For background on China’s clean-technology sector, see NBR’s interview with Benjamin Shobert from October 2013: “In clean-tech, policies developed by the central government have resulted in China becoming the most attractive geography globally for clean-tech research and commercialization. Good questions about whether China’s approach is economically sustainable or not can be asked specific to their clean-tech strategy, but over the last several years there is no question that China’s clean-tech policies have served to reallocate where global R&D and production take place, where the most modern installed clean-tech capacity can be found, and where the largest public- and private-sector investments are being made. I am not sure that the policies traditional life sciences leaders (i.e., the United States and EU) have in place to encourage the continued success of their domestic players in R&D, intellectual property protection, and market access are adequate in today’s shifting life sciences landscape. China’s efforts to move up the value curve and develop high-technology sectors such as life sciences come at a vulnerable moment in globalization’s most recent era. In the aftermath of the 2008 financial crisis, U.S. and EU economies remain uncertain about where they can create new jobs. The idea that they will face competition from China not only in low-wage industries but also in high-wage areas such as life sciences adds a new and complex wrinkle to these regions’ relations and trade policies with China.” Benjamin Shobert, “Disruptive Forces in the Global Life Sciences Sector,” interview by Claire Topal, October 22, 2013, http://nbr.org/research/activity.aspx?id=364.
 Jean-Marc F. Blanchard, “China, Foreign Investors, and TRIMS: Bulking Up, but Not Fully Compliant,” in China and Global Trade Governance: China’s Ten-Year Experience in the World Trade Organization, ed. Ka Zeng and Wei Liang, (London: Routledge, 2013), 43–68; and Ka Zeng, “Domestic Politics and U.S.-China Trade Disputes over Renewable Energy,” unpublished manuscript.