As the US has been seeking to check China in the chip and related tech arena by restricting restricting exports of our purportedly security/defense related products, the Chinese have not been idle. The Western press has not reported much on a series of Chinese new restrictions, under the umbrella of anti-espionage laws.
Needless to say, espionage is a show-stopper as far as threats go, as the treatment of Julian Assange, Gonzalo Lira, and detailed Wall Street Journal reporter Evan Gershkovich illustrate. No one with an operating brain cell wants to fall into the hall of mirrors of its notions of abuses and due process.
Yet despite the severity of potential punishments, and the worry among the many affected parties, there has been perilous little reporting. Reader Dr. Kevin sent a couple of links but a search on Twitter came up empty. This is particularly surprising, as we’ll discuss soon, due to the existing and soon to get worse situation for drug exports, where the US is heavily dependent on China. We long though this was a prime leverage point for China against the US, and it looks like China is staring to make use of it.
It is not clear whether the near silence by non-Chinese media on this topic is due to press reluctance to report on what sure looks like retaliation, and pretty bloody-minded at that, and potentially also some self-censorship among affected companies. Remember that during Brexit, businesses were stunningly silent about the many negative consequences of Brexit, particularly the super-hard version the Tories increasingly favored.
The limited recognition of these new Chinese policies, which have the potential to limit trade, not just various forms of regulatory and contractual compliance, is striking given that the US is continuing to escalate against China. As Politico.eu reported yesterday:
U.S. Secretary of State Antony Blinken will head to Beijing this week, with a warning for China to curb its technical support for Russia’s military — or else…
“We’re prepared to take steps when we believe necessary against firms that … severely undermine security in both Ukraine and Europe,” a State Department official told reporters ahead of Blinken’s trip. “We’ve demonstrated our willingness to do so regarding firms from a number of countries, not just China.”
An account below reports that China is expected to further tighten its anti-espionage laws this week. That may be a coincidence of timing, but it could be a warning to the US about what might happen were the US to try to deliver on Anthony Blinken’s threat mongering. But the Anglosphere media has barely registered that this is happening. Is the State Department so clueless as to be missing a potentially pretty serious message?
Due to the spotty English-language reporting, yours truly is very much in blind man and the elephant mode. So any reader corrections and fillings-in of gaps are very much welcome.
Par for the course, one of the best short-form versions of what is happening came in the comments section of one of these new stories, Pharma groups warn of supply crunch over China spying law in the Financial Times:
Martin Berg
The new data protection laws in China effectively declare company data to be of national interest, if not national property. By doing so, it has effectively taken a further step in weaponising the economy, and turning economic competition into a battle between states, rather than private enterprises.
This might answer the question that many of you likely had: what could outsourced drug manufacture have that would even rise to the level of being protectable intellectual property, let alone a state secret? As we will see soon, these compounds are either patented (nearly always in the US or EU) or off patent. Perhaps the Chinese companies have developed some better mousetraps in the form of better or faster manufacturing processes. But again, abuses in that arena would seem to fall in the realm of intellectual property theft, and not a threat to the Chinese state.
Wellie, as we are now seeing, it can be if the government takes an expansive view of what state interest amounts to.
A story today in Nikkei warns that China is tightening its espionage laws. Key sections:
China is preparing to restrict transfers of any information related to national security under an updated counterespionage law, raising fears of a stepped-up crackdown on foreign individuals and companies here.
The Standing Committee of the National People’s Congress began deliberating the changes Monday. The legislation, which will broaden the definition of espionage, is expected to pass Wednesday.
This will mark the first time since 2014 that the law has been amended.
The measure will expand the scope of the law — now limited to state secrets — to cover all documents, data, materials or items related to national security and interests. It does not provide further details on what constitutes national security and interests.
A greater focus will also be put on cybersecurity. Discussions of a system’s vulnerabilities to cyberattacks could run afoul of the new rules.
Security authorities will be granted more power, including in inspecting baggage and electronic devices of those suspected of espionage.
Notice that this plan sounds much less than what pink paper reader Martin Berg reported. Perhaps practice is already more aggressive than current law? It would seem so. Nikkei says later:
In March, a Japanese employee of drugmaker Astellas Pharma was detained for allegedly violating the existing counterespionage law. The man is believed to have had interactions with Chinese government and industry officials as part of his job.
Relevant authorities have solid evidence that the man engaged in espionage and will handle the matter in accordance with Chinese law, said Wu Jianghao, the Chinese ambassador to Japan, on April 7…
Foreign workers in China are on edge, given ambiguities about what would be considered illegal under the updated law. Activities that are part of regular business operations are seen potentially becoming an issue, and some Japanese companies have warned expatriate workers in China to be especially cautious when entering into new business deals in the technology sector, which Beijing considers a national security priority….
The proposed changes are seen giving Chinese authorities justification to monitor foreign companies involved in artificial intelligence, semiconductors and other key fields in the name of national security. This could extend to their communications with their headquarters back home.
The Nikkei story does not give a clear idea of when and how the the crackdown began, although it does say that President Xi increased his “focus” on security in recent months.
In fact, the pink paper pointed out last July that China was putting informational screws on foreign companies operating there:
Global companies are accelerating their push to decouple China data in response to the country’s increasingly stringent data and anti-espionage laws, as relations between Washington and Beijing deteriorate.
The drive for full localisation of data in China and separation of information technology systems from the rest of the world has accelerated over recent months as Beijing strengthens its control and regulation of data….
On July 1, Beijing put into effect an expanded anti-espionage law to strengthen national security. A series of raids and sanctions on US consultancies such as Bain & Company and Mintz Group, along with semiconductor giant Micron Technology, have put more pressure on companies operating in China.
Roberts said the wording in the updated anti-espionage law unveiled in April introduced the possibility of criminal sanctions and being policed by the country’s state security agency for sharing information deemed sensitive.
The revised law and the raids “have businesses scrambling to understand their current compliance footing”, he said.
In the past, western companies were concerned about taking electronic devices into the country over fears that China could access their data. Now they are equally concerned about sensitive data leaving China for fear of violating Beijing’s rules.
Now let us circle back to the new account at the Financial Times, Pharma groups warn of supply crunch over China spying law:
Western pharmaceutical groups are warning of worsening disruption to supply chains because of problems certifying manufacturing sites in China, with some factory inspectors refusing to visit the country over fears of arrest for spying and others denied entry to facilities.
China is one of the world’s largest makers of active pharmaceutical ingredients and antibiotics and a major supplier of drugs to the EU and US. However, a tightening of anti-espionage laws by Beijing has led to concerns that foreign citizens gathering data on Chinese sites could be deemed spies.
Let’s pause here. “One of the world’s largest makers of active pharmaceutical ingredients and antibiotics and a major supplier of drugs to the EU and US” understates the stranglehold China has as a meds supplier to the US. Even though the particular percentages may have shifted in the intervening years, the general picture from these archival pieces remains the same: the US is massively dependent on China for finished drugs and pharma components. The first, a 2018 post, also shows China has long been playing hide and seek with the FDA:
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…
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.
As Gibson explains, the US no longer makes its own penicillin, in part because China dumped penicillin in 2004, driving the last US plant out of business.
The medications where the US relies on China include heparin, a blood thinner that among other things is used for IV drips. No heparin, no IV treatments. Due to the difficulty in tracing the source of drug company ingredients, the authors could make only case by case investigations, but they China production to be critical for treatments for Alzheimer’s HIV, depression, schizophrenia, cancer, epilepsy, and high blood pressure.
Dependency is not the only risk. US drug companies shifted production to China not just to save cost but to escape regulation. The FDA has only limited access to Chinese factories, with the Chinese having well over 700, yet the FDA able to inspect only 15 a year on average. As Gibson said on C-SPAN:
The FDA is trying to get inspection on site in China. The Chinese have severely restricted the number of inspections that they will allow and the whole program has become completely ineffective.
And the Chinese are often less than cooperative. Gibson describes even then how the agency has been directed to a Potemkin facility, as in the goods were made somewhere else…and the FDA was not able to figure out where. Similarly, reports presented by the health authorities to the FDA is understood to be as reliable as Chinese economic data….Gibson again:
In 2015, the FDA inspected a plant in China. It did that because it was getting a lot of customer complaints, presumably industry complaints, about the active ingredients that they were getting from this plant. There was bacterial contamination, some of the products. They did not have full therapeutic value. If that’s an antibiotic or chemotherapy, that could be devastating.
So the FDA went in and they found what they called systemic data manipulation. This is a plant that had passed muster by the FDA, the Chinese FDA and other inspections over many years. So the FDA banned 29 different products from coming into the United States. But because the United States is so dependent, the FDA had to exempt 14 of those products from its own ban. Some of those included antibiotics or ingredients for antibiotics and ingredients for chemotherapies, because the FDA was concerned about drug shortages in the United States. That is how dependent we are as a country.
And from a 2019 post from SafeHaven that we republished:
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.
The article concluded by saying it would take a long time to solve this problem, as in reshore.
Now back to the Financial Times report:
…official data seen by the Financial Times shows some US Food and Drug Administration inspectors have been refused entry to Chinese production sites since the pandemic.
This has led to western pharmaceutical regulators struggling to enforce oversight of Chinese manufacturers. Drugs made in third countries and imported into the EU or US require certification by government inspectors and audits of production sites…
During the pandemic, some audits of Chinese sites were carried out online or certification was prolonged without inspection — meaning there is a large inspection backlog with many certifications due “to expire by the end of this year”, according to Fatima Bicane, manager of pharmaceutical technology at BAH.
Disruption to inspections increases the risk of Chinese production sites losing their certification for western markets, exacerbating an already strained supply chain for generic pharmaceuticals…
“Adrian van den Hoven, director-general of Medicines for Europe, an industry body representing European pharmaceutical companies, said that ambiguity around the new anti-espionage law had led to concerns that “an inspector . . . in China could be accused of espionage”….
“When you talk about antibiotics, the Chinese are in a very critical position as most of the starting materials for antibiotics are made in China,” said Jim Miller, an industry consultant who advises on pharma manufacturing in the US. “The world is very dependent on China for antibiotic ingredients and active ingredients.”
Now admittedly, the number of FDA inspections in China was more than two times higher in 2023 than 2022. But the new espionage crackdown and the detention and espionage accusation against the Japanese drug company employee has had a chilling effect on the willingness of drug industry foreign inspectors and business partners to visit China. And it’s easy to see if the final law is vague that it will allow Chinese officials to greatly toughen enforcement at any time. And that could translated into a crippling reduction of essential medicine supplies.
But the US lets its multinationals sell out our own interests and did nothing to stop them. So if worst case scenarios come to pass, we have no one but ourselves to blame.