Will China's tariff exemption lead to increase in India's pharma exports?

Chinese Ambassador to India Luo Zhaohui's recent tweet on his country's decision to remove import duties on 28 medicines, including all cancer drugs, has created flutters in India. The fact that it came within a week of Prime Minister Narendra Modi's two day informal summit with Chinese President Xi Jinping in their country on April 27-28 made it look sweeter.

"China has exempted import tariffs for 28 drugs, including all cancer drugs, from May 1. Good news for India's pharmaceutical industry and medicine export to China. I believe this will help reduce trade imbalance between China and India in the future," is what Luo Zhaohui said in a tweet.

The tweet itself signified its importance. India's trade deficit with its biggest bilateral trade partner and biggest source of import had touched $ 51 billion in 2016-17. One of the consistent demands from India in recent years has been to fix this growing imbalance by increasing its share of exports to China. Being a global player in generic pharmaceutical manufacturing, India had reasons to believe that it has the ability to export low cost, high quality medicines to China. Luo Zhaohui seemed to suggest that one of the major hurdles before India to increase its share of medicine exports to China - high tariffs - is gone now.

It is far from true. First of all, it is not an India-specific exemption. Any company, from any country, can avail this concession. The tariff exemption has more to do with China's increasing demand for such medicines than any sop to any country. Secondly, tariff barrier was hardly the major problem that so far prevented Indian companies from making their presence in the world's second biggest pharmaceutical market after the United States.

CHINESE MEDICINE MARKET

According to the International Trade Administration (ITA) of the US Department of Commerce, Chinese pharmaceutical market is forecasted to grow from $108 billion in 2015 to $167 billion by 2020. Total public and private healthcare expenditure reached $640 billion in 2015 and is expected to almost double to $1.1 trillion by 2020. It also points out that pharmaceutical sales amount to 17 percent of total health expenditure with generic or off-patent medicines enjoying 64 percent share.

The Chinese government's decision to remove import duties on key medicines is an attempt to bring down this healthcare cost. Chinese newspaper People's Daily makes it very clear. It states that the exemptions given to import tariffs will bring down drug prices on cancer drugs, cancer alkaloid-based drugs etc by at least 20 percent. It says that the market for antineoplastic drugs, used to fight tumors, in China is about $ 19.1 billion.
"Since 2016, the government has reached agreements with pharmaceutical companies on the prices of 39 drugs -- including 17 cancer medicines -- on the medical insurance list", the daily quoted a Chinese official, adding that 3.5 million new cancer patients are diagnosed in China annually.

Where does India stand in terms of its medicine exports to China?

Commerce Ministry data shows that India exported $ 37.44 million worth of pharmaceutical products to China during the April 2017-February 2018 period. It was better than the previous year ($ 27.11 million in 2016-17), but was nothing when compared to the size of China's medicine imports. Even among the list of products that were exported to China in 2016-17, pharmaceutical products came at the 30th position. For the record, India exported $ 10.17 billion worth of goods to China, 3.69 percent of India's total exports and imported $ 61.28 billion worth of goods, 15.97 percent of India's total imports in 2016-17.

Pharmaceutical Export Promotion Council of India (Pharmexcil) says that 90 per cent of its $ 16.84 billion worth of exports in 2016-17 were to North America, Africa, European Union (three accounting for 68.55 percent), ASEAN nations, Latin America, Middle East and CIS countries (another 21.05 percent). In terms of value, India's pharmaceutical exports to Nepal, Myanmar and Bangladesh was more than what it exported to China during the year.

ENTRY BARRIER

Tariffs can be a barrier, but removal of tariff alone cannot ensure smooth market entry to China. The market analysis report of ITA of 2016 says that domestic manufacturers of China can sell directly to consumers, while those exporting medicines to China face a daunting, complex and highly fragmented distribution system made up of thousands of local distributers and wholesalers. "Transportation quality and regulations vary by locality, and markups at various stages push up a product's final cost", the 2016 ITA Pharmaceuticals Top Markets Report notes. It does mention about high import duties, along with regulatory delays, and a host of other problems some of the most commonly cited barriers to better penetration of the Chinese market by foreign producers.
"Product approvals, timelines, fees, penalties, analytical procedures are all posing problems for Indian drug companies that are keen to penetrate Chinese market", says an industry expert. According to him, China's priority is not to encourage import of generic medicines. The idea is to attract MNCs to import and also manufacture innovative products in China. Tariff reduction may not provide a clue to its intentions, but another decision, taken last month does.

In March, Pharmexcil informed its member companies that it has received a communication from the Embassy of India, Beijing stating that the General Office of the State Council, China has released a set of guidelines meant to encourage innovation in drugs and medical equipment in that country.
 
According to the new guidelines, China will now accept data collected from clinical trials conducted outside the mainland for applications to register drugs and medical equipment. The review and approval for urgently needed drugs and medical equipment will become faster, including those that can be used to treat severe life-threatening diseases lacking effective treatment or are urgently needed for public health. Measures were also announced to promote drug innovation, including setting up of a catalog of marketed drugs, building a system linking the review and approval of drugs with their patents, and improving the protection of drug trial data. The guideline also supported the clinical use of new types of drugs and asked local medical authorities to include new medicines in the coverage of basic medical insurance and the scope of centralized procurement by public hospitals.
 
If these guidelines are of any interest to Indian drug manufacturers, we could see an improvement in Indian pharmaceutical exports to China in the coming years. Tariff exemption alone, won't.