Sino-U.S. Relations Through a Life Sciences Prism
An Interview with Yanzhong Huang
By Claire Topal
May 6, 2014
NBR’s research project on the Globalization of China’s Life Sciences Sector examines Chinese government support for the life sciences and the implications of such support for international scientific competition and innovation. The project also assesses the broader impact of this support on U.S.-China political and economic relations. In this expert interview, project scholar Yanzhong Huang (Council on Foreign Relations) analyzes China’s policies toward its life sciences sector and considers their impact on political and economic relations with the United States, as well as other Asian countries, specifically India. He argues that China’s expanding healthcare and pharmaceutical market generates tremendous opportunities for innovation, but that pressures in China around market access, technology transfer, and intellectual property rights are growing.
Emerging economies appear to be placing increased value on the life sciences sector for both public health and economic reasons. In what ways are you seeing this manifest in China?
Emerging economies, especially BRIC nations (Brazil, Russia, India, and China), are making significant investments in the life sciences sector. China, for example, is determined to become a major player on the global life-sciences stage. In 2012, it spent $1.2 billion on promoting life sciences research, nearly ten times its spending levels in 2004. The twelfth five-year plan (2011–15) explicitly identifies the life sciences sector, and biotechnology specifically, as one of the strategic industries the state intends to develop domestically. It is expected that China will spend more than $1.64 billion on new drug development alone during 2011–15.
What is motivating such significant Chinese government investment in the country’s domestic life sciences sector?
An industrial policy targeting life sciences is driven in part by China’s growing healthcare and pharmaceutical market. With sales of $71 billion, China is the world’s third-largest pharmaceutical market, and with an annual growth rate between 15% and 20% (twice that of the United States), the country is poised to become the second-largest pharmaceutical market by 2015. Healthcare spending in China is projected to almost triple from $357 billion in 2011 to $1 trillion by 2020. At the State Council executive meeting in August 2013, Premier Li Keqiang made it clear that the healthcare service industry will be promoted to help ensure China’s sustained economic growth.
Government investment and policy support are the driving forces behind China’s domestic life sciences sector. Unlike in the United States, where private industry has outpaced government funding in R&D, China’s growth in this sector remains predominantly state-funded.
It is also worth noting that while censorship is clearly an inhibiting factor for innovation in China, Chinese life scientists are encouraged to research controversial topics such as cloning. Government officials are convinced that cloning is key to achieving “leap development”—i.e., catching up with developed countries in science and technology in a short period of time. With government support, Chinese scientists have been able to produce cloned animals on an industrial scale. The Beijing Genomics Institute, for example, has produced five hundred cloned pigs a year, making it the world’s largest center for animal cloning.
How does the Chinese government view foreign engagement in the development of its domestic life science sector? What has been China’s approach to compulsory licensing in the life sciences?
China still has strong incentives to create an environment attractive to foreign investment in the life sciences industry, showcased by examples of its protection and enforcement of pharmaceutical-related intellectual property rights. Driven by the need to join the World Trade Organization and attract FDI, China not only extended all patent coverage forpharmaceuticals to twenty years but also capitulated to U.S. demands on issues such as data exclusivity and patent linkage. It also maintains relatively lenient guidelines on patentability standards, for example by allowing foreign firms to extend the life of extant patents by making minor changes to drugs on the eve of the patent’s expiration. China’s patent law also limits the scope of compulsory licensing.
Thus far, there have been no successful applications for compulsory licensing of any patented drugs in China. The government even denied a Chinese manufacturer’s application to produce a generic version of Tamiflu during the 2009 H1N1 pandemic. While China has recently amended its patent laws to facilitate the approval of compulsory licensing for generic drugs, it remains too early to predict whether the government will act on compulsory licensing in the near future.
Nevertheless, as the 2013 Chinese investigation of Western multinational GlaxoSmithKline’s alleged involvement in commercial bribery illustrates  , China’s healthcare reform has also led to stricter government regulation of foreign pharmaceutical firms.
China’s need to rein in unbridled healthcare costs, in conjunction with population aging and the growing burden of noncommunicable disease, has generated strong demand for affordable, effective drugs. However, efforts to develop a robust, homegrown life sciences industry may lead to increased pressures to level the playing field and break the near monopoly of foreign pharmaceutical firms on the high-end drug market.
How might China’s policies and financial investments in the life sciences affect Sino-U.S. political and economic relations?
China’s interest in promoting its domestic life sciences sector could have a mixed impact on Sino-U.S. relations. China’s expanding healthcare and pharmaceutical market generates tremendous business opportunities for U.S. biopharmaceutical firms, hospital groups, and insurance companies, but pressures on international pharmaceutical companies to trade market access for technology transfers will only grow. As a result, we are probably going to see growing disputes between the two countries over issues such as market access, technology transfer, intellectual property rights, and compulsory licensing. The tension is unlikely to derail Sino-U.S. relations, but it will contribute to the complexity and multifaceted nature of the bilateral relationship.
How is China’s approach to developing its life sciences sector affecting its political and economic relationships with other Asian countries—specifically with leaders in the field such as Japan and India?
China’s ambitions for developing its life sciences sector could certainly affect its economic relationship with other life sciences leaders in the region. The country’s huge market, rapid economic growth, significant human capital, and low manufacturing costs could open up marketing and investment opportunities for these countries. In addition, China and emerging economies such as India could cooperate through technology transfers to ensure affordable access to medicines for people in the developing world.
But China’s emergence as a leader in the life sciences may also place competitive pressures on its Asian counterparts. Today, China is still mainly an exporter of chemical raw materials. Through February 2012, it accounted for more than 53% of India’s total imports of active pharmaceutical ingredients and intermediates. As China upgrades its industrial structure and becomes a significant exporter of medicines and vaccines, its growth will challenge the status of Japan and India as leading nations in Asia’s pharmaceutical manufacturing industry.
India is ahead of China in terms of domestic manufacturing capabilities for generic medicines. Today, India supplies 80% of all donor-funded HIV therapies in the developing world and is the largest global provider of inexpensive, high-quality vaccines. Unlike its Indian counterpart, the Chinese pharmaceutical industry has not taken full advantage of the flexibilities provided by the World Trade Organization’s intellectual property regimes to produce low-cost generic versions of patented drugs. While China has recently amended its patent laws to facilitate the approval of compulsory licensing for generic medicines, it remains too early to predict whether China will follow in India’s steps and act on compulsory licensing in the near future.
What are the implications of China’s approach to the life sciences industry for international scientific competition and innovation?
China’s investments do not automatically make the country an innovation center in this industry, and a lack of indigenous innovation is increasingly viewed by Chinese leaders as constraining China’s development. Many of China’s achievements in the life sciences, such as cloning, are based on technologies that are very familiar to scientists in the West. It is also premature to conclude that political, economic, and legal systems in the West slow scientific research compared with systems in China. Democracy contains many essential elements for innovation, such as a robust private sector that is the major source of funding for R&D, an educational system that encourages critical thinking, and a political system that promotes different views without government censorship. By contrast, China is still dominated by a system and culture that lack clearly defined intellectual property rights, suppress creativity, and sustain censorship. The state-led innovation drive may make China a global leader in R&D spending, but it will not fundamentally displace the United States and the West as true innovation centers.
Additionally, China has a great deal of unrealized potential in contributing to global health governance. For example, it is the world’s largest vaccine manufacturer and consumer, but so far it has only one vaccine prequalified by the World Health Organization (for Japanese encephalitis). Once China obtains a competitive edge in the global drug market, it could redefine the term “affordable drugs” and become a game-changer for global health. China’s advancement in the life sciences industry could also introduce new R&D and business models, enriching the ideational foundations of global health governance.
 Nils Pratly, “Inquiry into alleged GlaxoSmithKline bribery in China has led to pay fudge,” The Guardian, February 27, 2014, http://www.theguardian.com/business/2014/feb/27/glaxosmithkline-alleged-bribery-china-pay-fudge.
Yanzhong Huang is a Senior Fellow for Global Health at the Council on Foreign Relations. He is also Associate Professor and Director for Global Health Studies at the School of Diplomacy and International Relations at Seton Hall University. Dr. Huang is the founding editor of Global Health Governance: The Scholarly Journal for the New Health Security Paradigm and the author of Governing Health in Contemporary China (2013). He was a Research Associate with NBR’s National Asia Research Program.
This interview was conducted by Claire Topal.