COVID-19: Tax Policy Options to Address Medical Supply Chain Concerns

COVID-19: Tax Policy Options to Address Medical Supply Chain Concerns

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INSIGHTi
COVID-19: Tax Policy Options to Address
Medical Supply Chain Concerns
November 20, 2020
The outbreak of Coronavirus Disease 2019 (COVID-19) in the United States has drawn attention to the
ways in which the U.S. economy depends on global manufacturing and supply chains. Many Members of
Congress have expressed a strong interest in responding to U.S. shortages of medical supplies—
particularly personal protective equipment (PPE) and pharmaceuticals—as the United States steps up
efforts to contain and counter COVID-19.
This Insight summarizes the current state of U.S. reliance on foreign medical supplies and identifies
potential tax policy options Congress may consider to encourage domestic production of certain medical
goods. Changes to tax policies in combination with other economic policies and market forces could
encourage domestic production, particularly for companies that are already looking to reshore
manufacturing or diversify existing supply chains.
Current State of Reliance on Foreign Medical Suppliers
There is currently no definitive assessment of the degree to which the United States is dependent on
imports in industries considered by some policymakers to be essential to U.S. public health and national
security. Gaps in data on U.S. domestic industry and trade make determining the degree of U.S. import
dependence in particular product categories difficult, as the U.S. government does not track domestic
production of specific, individual items by quantity or value. CRS estimates based on government surveys
of U.S. manufacturers and U.S. trade statistics, however, suggest that the United States seems to be
heavily dependent on imports in certain product categories, particularly biological products such as
vaccines (Figure 1).
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Figure 1. Estimate of the Domestic and Imported Shares of U.S. Supply: Select Medical-
Related NAICS Categories
Share of U.S. Domestic Supply (%) in 2018

Source: CRS analysis with data from the U.S. Census Bureau, the U.S. Bureau of Economic Analysis, and the U.S.
International Trade Commission.
Notes: (1) Supply is calculated as domestic production minus exports plus imports. (2) For more detail, see Table 1.
NAICS = North American Industry Classification System. (3) Rough estimates calculated at the NAICS 6-digit subheading
level, which may cover products that are not for medical use. (4) 2018 is the most recent year for which annual data from
the Census Bureau’s Annual Survey of Manufactures are available.
In 2018, the United States imported many low-end and labor-intensive manufactured medical and
pharmaceutical products, primarily from China. Many higher-value-added and skil -intensive imported
medical products, on the other hand, came mainly from Europe.
China’s role as a global supplier of PPE and certain active pharmaceutical ingredients (APIs)—in
combination with escalating bilateral tensions—has caused many to raise concerns about the potential
risks of U.S. reliance on Chinese manufacturers for certain low-cost, but essential, medical supplies.
Although there are no international y agreed standards for classifying these products, overal U.S. imports
of pharmaceuticals and medical supplies from China are estimated to have been approximately $20.7
bil ion in 2019 (or 9.2% of U.S. total imports of these products), according to CRS calculations. This
number, however, likely understates U.S. reliance on Chinese manufacturers for pharmaceutical inputs
and medical products, as imported products from other trading partners, such as the European Union, are
also likely to contain intermediate components, such as API, sourced from China.
As the United States and other countries ramped up efforts to contain the spread of COVID-19, China
effectively nationalized its production of PPE and other critical medical supplies and placed restrictions
on the export of these products. Because China was the primary source of U.S. imports of certain medical
supplies, such as textile face masks and medical nitrile gloves, the resulting decline in its global exports
of medical supplies exacerbated critical PPE and medical supply shortages in the United States and other
countries.

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Selected Policy Options
A primary reason for international y diversified medical supply chains is the competitive pressure on
firms to improve operational efficiencies. One aspect of this pressure is seen in efforts by companies to
reduce the costs of production while maintaining flexibility. Factors including the availability of raw
materials, labor costs, workforce requirements, and the location of final markets also affect supply chain
decisions.
Current U.S. tax policy choices play a role in the cost of domestic versus foreign manufacturing in the
medical supply chain, as they affect the costs and flexibility in production. The 2017 tax revision (P.L.
115-97) was general y viewed as improving the business environment for manufacturing companies
through a shift toward a territorial tax system, a reduction in the corporate income tax rate, and the ability
to immediately expense many types of investments. Other aspects of the 2017 tax revision, including
limiting interest expenses and eliminating the carryback of net operating losses, were viewed as negative
factors for manufacturing (although losses may temporarily be carried back as a result of the CARES
Act).
U.S. companies attempting to reshore from China specifical y may face a heightened cost burden in the
form of Section 301 tariffs imposed on the capital equipment they import back into the United States from
China. The current list of U.S. imports from China subjected to additional Section 301 tariffs includes
multiple categories of capital equipment. Clarifying whether U.S. firms purchasing capital equipment
from China are subject to tariffs and including an exemption or refund process would potential y remove
an additional barrier to reshoring medical supply chains.
Several bil s have been introduced in the 116th Congress to reduce costs associated with locating medical
supply chains within the United States. Among the bil s are H.R. 6690 and S. 3945, which would al ow
accelerated depreciation of nonresidential real property acquired to relocate facilities for the manufacture
of pharmaceuticals and medical devices or supplies in the United States; H.R. 6930, which would provide
a tax credit for pharmaceuticals and medical devices manufactured in distressed communities; H.R. 7594,
which would al ow tax credits to companies that bring manufacturing equipment back to the United States
from China; and H.R. 7767, which would al ow a tax credit for income earned from the domestical y
produced medical supplies and pharmaceuticals.

Author Information

Donald J. Marples
Michael D. Sutherland
Specialist in Public Finance
Analyst in International Trade and Finance

Andres B. Schwarzenberg

Analyst in International Trade and Finance

Disclaimer

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This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
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as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
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