When one buys a children’s toy or piece of clothing, its label will likely say whether it was made in China, but when one buys medicine the label most likely won’t. It’s extremely difficult to find out which household drugs come from China. A bottle of generic pain reliever I purchased recently, for example, is sold under the brand name TopCare. Its active ingredient, acetaminophen, is likely manufactured in China (as is the case with most acetaminophen), but there’s no way to tell. The bottle lists only a distributor, Topco Associates, based in Elk Grove Village, Illinois, and the company did not respond to my requests for information. This is not unusual. Companies selling medicines on American shelves aren’t required to list the manufacturers of their drugs’ active ingredients on their packaging.
While the US pharmaceutical industry makes expensive, patent-protected, brand-name drugs, China specializes in cheap generic drugs, which is why its legal, aboveboard chemical revenue is smaller than America’s, despite greater output. In 2017, Chinese companies received thirty-eight approvals from the US Food and Drug Administration for generic drugs, up from twenty-two the previous year.
China is trying to change this, however. A countrywide initiative called “Made in China 2025” seeks to upgrade the country’s manufacturing status, to move it up the “value chain,” using policy changes and government investment. The Chinese pharmaceutical industry is a major part of this initiative, and the government has moved to incentivize increased spending on research and development, and to promote industry consolidation. The goal is to produce higher-quality, more expensive medical drugs, for use at home and abroad. Already, Chinese medical scientists have developed promising new cancer drugs, and experts believe it’s only a matter of time before Chinese pharmaceutical companies are among the world’s biggest. “It’s not whether they are going to,” said Jonathan Wang, senior managing director of health-care fund OrbiMed Asia. “They are going to.”
One way China has sought to develop its industries and expand its exports is by offering tax reimbursements via the value-added tax, or VAT, rebate. Companies are reimbursed for tax money they have already paid in the process of making their products—for example, taxes they paid when they bought the ingredients needed to make a certain chemical compound.
The VAT rebates go as high as 16 percent; a 16 percent rebate means the exporters receive a full tax reimbursement. Not every exported chemical gets one, but thousands do, and the rebates vary wildly. According to China’s State Administration of Taxation website, aspirin and sildenafil (the drug in Viagra) get no VAT rebates. Melamine, the industrial chemical used to adulterate milk powder products that was linked to infant deaths in 2008—but which also has safe uses—gets a 10 percent rebate. Yuancheng products like the aforementioned cinnamyl cinnamate, and potassium cinnamate also receive a 10 percent VAT rebate. So does fentanyl. And beyond that at least ten fentanyl analogues—including 3-methylfentanyl, which is not used for legitimate medical reasons, anywhere—get a 13 percent rebate. The best-known fentanyl precursors, 4-ANPP and NPP, get 13 percent rebates, as does the John William Huffman-created synthetic cannabinoid JWH-018. In September 2018, China announced it would raise VAT rebates on about four hundred different products for export, from chemicals to semiconductors, in what Reuters described as “a bid to boost prospects for shipments amid its trade war with the United States.” Also in 2018, the VAT rebate for fentanyl was increased, from 9 percent to 10 percent. It was not one of the four hundred products from the September announcement, and it is unclear when exactly in 2018 this occurred—or whether it was also in response to Trump’s trade war—but the elevated rate remained in place as this book went to press.
China began issuing VAT rebates in 1985, to make its exports more competitive. The rebates are big business, having had “a large and significant positive impact on Chinese export growth,” according to an academic paper on the subject. China doesn’t explain why particular chemicals get the rebates they do; one possibility is that products with a “value add” get higher rebates, while generics get lower rebates or nothing.
VAT rebate rates go up and down regularly. This is, to other countries, a problem. Though China is far from the only country that gives VAT rebates, others have static rebate rates. The fact that China’s fluctuate makes some countries believe it’s unfairly promoting certain export products. The United States has been particularly concerned, despite the fact that China’s rebates do not violate World Trade Organization rules. In 2012, the US Department of Commerce announced that, in response to China’s VAT rebates policy, it would begin calculating certain duties differently, penalizing Chinese exports it believed benefited from subsidies, an approach that continues.
There is no doubt that if a particular chemical’s VAT rebate rate is higher, companies are more likely to export it. “Even small variations in these rebates can have a big impact in the profitability of exporting,” wrote researchers in the Oxford Review of Economic Policy.
Among the beneficiaries of these rebates are legitimate Chinese companies legally manufacturing fentanyl for medical use. Though only five are permitted by the government to do so, it’s big business. In addition to selling the drug to Chinese hospitals—where fentanyl is a dominant painkiller—some also export. The largest of these five companies, Renfu Pharmaceutical, based in Hubei province, sells more than 2 billion yuan (US$290 million) worth of fentanyl per year. It exports to countries including the Philippines, Turkey, Sri Lanka, and Ecuador. (None of these companies export fentanyl to the United States.) US President Donald Trump’s December 2018 meeting with Chinese President Xi Jinping in Buenos Aires—in which China first promised to control all fentanyls—was big news in China, and it was the first time many citizens there learned about the American fentanyl crisis. It also stirred panic within China’s pharmaceutical-fentanyl industry, causing Renfu to issue a statement saying that the company did not sell fentanyl to the United States. The company’s chairman, Wang Xuehai, noted that the illicit fentanyl used in America “is illegally processed and smuggled by underground factories, and has nothing to do with the five regular manufacturers.”
Only three types of fentanyls are legally permitted to be manufactured in China for domestic medical use or export: fentanyl, sufentanil, and remifentanil. It’s unclear why at least eight other fentanyl analogues get VAT rebates. And while it’s also unclear how many Chinese companies exporting fentanyls or fentanyl precursors for illicit use are receiving these tax rebates, Yuancheng is included among them. Ye Chuan Fa said his company takes advantage of VAT rebates for every chemical it sells.
There is little doubt that China is undercutting its publicly stated goal of stopping the export of dangerous drugs for illicit use. That’s because the country actively encourages the export of fentanyls and fentanyl precursors—and even synthetic cannabinoids—through its tax code and high-tech subsidies. Further, it has been ineffective at ensuring such exports don’t end up in the wrong hands.
“If China had a subsidy on lead, you’d probably see a lot more bullets coming out of China, and that’s what’s happening here with the precursors. They’re just subsidizing whatever is a high-value commodity, and in this case it just happens to be really potent synthetic opioids or opioid precursors,” said RAND’s Bryce Pardo. “The Chinese government doesn’t have a good capacity for regulating its own industry. At the same time, it wants to export and make as much money as possible. They’re getting ahead of themselves and causing a lot of harm in the process.”
What’s unclear is if China realizes its policies spur the international drug trade.
“As with many of China’s policies, the aid in fentanyls export is myopic,” said Justin Hastings, an associate professor of international relations and comparative politics at the University of Sydney, whose areas of expertise include China and drug trafficking. He speculates that these policies were developed to encourage chemicals and industries deemed important to the country’s national development. “It’s also a lackadaisical approach to enforcement of Chinese companies’ behavior outside of China and in doing business with foreign companies that are not explicitly on sanctions lists,” he went on, adding that “some genuine corruption” of Chinese officials may be at play as well.
Appointed by former Senate Democratic leader Harry Reid, Katherine Tobin served as a commissioner on the US–China Economic and Security Review Commission until the end of 2018. The bipartisan panel advises Congress on matters including drugs, and Tobin said my findings fit with a pattern of Chinese government activities that the commission has long been tracking.
“The primary incentive, particularly for local-level Chinese government officials, is to support economic growth,” Tobin said. “Therefore, it is likely Chinese regulators and policymakers have chosen to look the other way regarding the production and export of fentanyl products. This incentive structure persists despite the Chinese government’s repeated promises to crack down on narcotic flows, a sign that Beijing is guilty of gross negligence in enforcing its chemical regulations, bad faith in its negotiations with the United States, or both.”
Tobin added that the government’s promises to control fentanyls are meaningless until regulatory reforms and rigorous inspection systems are implemented. “The Chinese government’s promises have not been fulfilled until US officials and law enforcement on the ground in China—such as the DEA and FDA—observe these controls being implemented in a manner consistent with Beijing’s pledge to crack down on flows of fentanyl, as well as fentanyl analogues and precursors.”
Occasionally, Chinese officials have spoken candidly about the country’s out-of-control drug industry. “My feeling is that it’s just like a race and I will never catch up with the criminals,” said Yu Haibin, of China’s National Narcotics Control Commission, in 2017. It’s clear to see that, whatever one thinks of China’s efforts, reigning in such a large chemical industry is extraordinarily difficult. It might be easier to stymie a small company like Chemsky—one clearly focused on making illicit chemicals for recreational use—than a large one like Yuancheng, which employs many people and wields a great deal of local influence. “For them to shut down an entire legal pharmaceutical company comes with many, many problems,” said Vanda Felbab-Brown, an expert on illicit economies, of the Brookings Institution.
China’s President Xi Jinping has sought tighter regulations in drug production and increased penalties for rogue actors, and in March, 2018, it was announced that the Chinese FDA was once again being reorganized to strengthen its oversight capabilities, which involves being absorbed into a new overarching organization called the State Administration for Market Regulation. Yet whether China is putting forth its best effort in this herculean task remains a matter of some dispute.
“If the Chinese government pursued drug smugglers the way it crushes dissident Christians, labor activists, lawyers or feminists, those drug exports would end,” wrote New York Times columnist Nicholas Kristof, who has reported on China extensively.
On the other hand, Reiner Pungs, of the secretariat of the International Narcotics Control Board, feels China has been reacting quickly to the NPS crisis. “Every time a new substance falls under international control, they put it under control nationally,” he said, noting that in 2017 China scheduled 116 NPS at the same time. Martin Raithelhuber, an illicit-synthetic-drug expert with the UN Office on Drugs and Crime, concurred, saying he believes China is playing a very active role.
If that’s true, it was perhaps not always the case. Roumen Sedefov of the European Monitoring Centre for Drugs and Drug Addiction believes China was likely shielding its illicit chemical industry in the past. “I think they used to turn a blind eye for quite some time,” he observed.
In 2015 the former Mexican ambassador to China, Jorge Guajardo, said the Chinese government had been actively undermining Mexico’s efforts to control synthetic drugs. “They just didn’t see what was in it for them to look into their own industries exporting these chemicals,” said Guajardo, who served as ambassador from 2007 to 2013. “In all my time there, the Chinese never showed any willingness to cooperate on stemming the flow of precursors into Mexico.” The Chinese foreign ministry denied failing to cooperate. In 2016 the Wall Street Journal paraphrased an anonymous “Mexican official” as saying that Mexico’s government “was hesitant to press China too aggressively on the fentanyl trade as leaders there seek greater Chinese investment to boost the Mexican economy.”
China has undoubtedly stepped up its efforts since then. Narcotics-control officials have installed thousands of machines at shipping companies to check for drugs in outbound parcels to “high-risk” locations, and they have targeted those who import magnetic resonance spectrometers, which are often used by drug labs.
Despite the recent blanket ban of fentanyl analogues, China still doesn’t have an analogue law for other drugs, including fentanyl precursors, and thus it is forced to prohibit most new drugs piecemeal. This can be a slow, bureaucratic process, and it is often not accomplished until long after the new drugs have been popularized on the Internet.
Some experts say that, although China doesn’t want to be directed by the United States—and told whom to arrest—the country cares deeply about its image and doesn’t want to be seen as the world’s drug pusher. “The drugs … exploit the differences in drug policing in different countries, in turn severely affecting our national image,” reads a 2017 report about NPS, entitled “Third Generation Drugs—New Psychoactive Substances,” published by a police department in Sichuan province.
Ultimately China is no “narco-state,” like the small West African country of Guinea Bissau, where cocaine-related corruption reached the top levels of government in the 2000s. Corruption is certainly common in China, but drug-related bribery is less tolerated than other types. Being convicted of drugs sales—along with arms dealing—is among the rare crimes that could get a public official executed. For this reason Chinese officials, particularly high-level ones, are less likely to enrich themselves through drug production and trafficking, though they are often successfully bribed by drug traffickers seeking to receive lesser sentences.
And those quick to blame China should bear in mind that the American government doesn’t have its hands clean. Decades of War on Drugs practices have failed to promote policies experts believe will help addicted users break their habits, all while resulting in the needless incarceration of generations of nonviolent offenders.
But there is no doubt that China has made grave errors in its haste to promote its pharmaceutical and chemical industries. Whether or not the intention was to do harm, China’s manipulations of its tax code and the launching of incentive programs have directly fueled the rise of companies making NPS for export.
Just like Britain’s East India Company two centuries ago, today the world’s two biggest superpowers are producing opioids by the ton. The U.S. generally does so legally, as medicine, while China also does so illicitly, as drugs, but the damage from each country fuels the other. Neither is taking sensible means to stop it. While they focus on blaming each other, the contagion continues to spread around the globe.