Written by Jeff Crowther
Shanghai – Last week I saw an interesting article from NutraIngredients-USA.com entitled, “Concern verges on panic in supplement industry over Trump’s China trade stance“. If you haven’t yet read the above, do check it out because it brings up some potential issues that may affect trade in general not just the dietary supplement industry. However, until actual trade policies are revealed by the Trump administration, we can only speculate on the possible outcomes.
Trade with China for consumer driven economies has always been a difficult act to balance. On one hand governments want balanced trade, but on the other consumers want low cost products. Global corporations follow consumer demand, which means they gravitate towards sourcing and/or manufacturing in a country like China that offers lower cost labor and comparatively inexpensive raw materials. Furthermore, it helps tremendously when the importing country has a no or low cost import tax system in place, so as not to inflate the cost of finished goods beyond the consumer’s expectations. This formula represents the current state of supplement trade relations between the U.S. and China. The U.S. offers low barriers to entry and a large consumer base. In turn, China offers its services as “The World’s Factory and Raw Material Supplier”.
For the most part, the world has been content with China positioning itself as “The World’s Factory”. However China has used this position to rake in great sums of money quickly tipping the balance of trade out of sorts. Moreover, government subsidized industries and alleged currency manipulation has removed many would be global competitors, which has resulted in gaining further wealth for the country. So much so that we are now seeing the results of this 30 plus year export driven economic endeavor. China is now home to a consumer base the size of the entire U.S. population and includes countless multi-millionaires.
In the article I mentioned above, Chinese suppliers of dietary supplement ingredients are worried that the Trump administration is going to levy tariffs on imported Chinese goods (ingredients) resulting in two outcomes. First, this will make Chinese goods / materials less competitive and second it will increase the costs of finished products, which will hurt the overall industry. These are valid concerns, which no one wants to see played out.
Strictly keeping a focus on the dietary supplement industry and its trade between the U.S. and China, I want to put forth a solution. Although simplistic in nature, it is really the only way to go to ensure both sides return to equilibrium. In order to examine this solution, we need to first look at the current trade situation in relation to the dietary supplement industry.
It is estimated that China supplies the global dietary supplement industry upward of seventy percent of its raw materials and ingredients. These products flow out of China and in the case of the U.S. are not heavily taxed or taxed at all. Barrier to entry is nil. Global supplement manufacturers are now completely or at least seventy percent reliant on China for its raw materials and ingredients. Without China there is no global supplement industry.
Now that China is bursting at the seams with consumers all of which are focused on increasing their quality of life mainly in the areas of health; it would make sense that dietary supplements would be sought after by consumers. Unfortunately the domestic supplement market is fragmented, untrusted by many and not well developed. Global brands are generally preferred by most consumers over domestic ones. However to gain access to consumers, international brands are faced with enormous barriers to trade. Dietary supplements must be registered with China’s Food and Drug Administration, which takes about three years to complete and costs approximately $150,000 per product (SKU). If that wasn’t enough, food supplements entering the country are subject to a twenty percent import tax, seventeen percent Value Added Tax and a variety of other customs clearance fees including sanitation testing.
This regulatory environment has been detrimental to the overall development of China’s dietary supplement industry. To quantify the impact on U.S. supplement exports to China, the U.S.-China Health Products Association conducted its “Export Potential Report” in 2014. The results showed a potential loss of over US$8.3 billion. What made the results even more astounding was the fact that this number only represented the potential lost exports of only eleven U.S. supplement companies.
To avoid any trade issues as the result of Trump administration’s tariffs or other trade measures, China should strongly consider opening up the market and lowering its barriers to trade. This would not only benefit international companies, but also the domestic industry. In fact recently there have been a number of global companies acquired by Chinese companies, which just like their global counterparts also want access to the China market.
Moving forward, the industry waits for China to move the regulatory environment towards one conducive to true industry development, which will increase consumer access to high quality dietary supplements. In advance, I wish you all Health and Prosperity in the coming New Year of the Rooster.