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REGIONS AMERICAS


INCENTIVES ARENOT LIKELY TOOUTWEIGH THE BENEFITS OF OFFSHORE TAX STRUCTURES


BidenaddressesUS supplychainresilience O


POTENTIAL INCENTIVES TO RESHORE US SUPPLY CHAINS HAS PRICKED THE EARS OF FOREIGN INVESTORS. PHILIPPA MAISTER REPORTS


n February 24, US president Joe Biden issued an executive order to strengthen the resil-


ience of America’s supply chains in vital sectors thrown into turmoil by the Covid-19 pandemic. “The US needs resilient, diverse and secure supply chains to ensure our common economic prosperity and national security,” he proclaimed.


Within days, an irony of fate added punch to


this view, as the giant container ship Ever Given, wedged on a Suez Canal sandbank and blocking all cargotraffic,addedsymbolicandliteral proof ofhoweasily global supply chains can be thrown into chaos, before it was refloated a week later. MrBiden’sannouncement was greeted with


cautious optimism and some scepticism by industry groups. If the resulting plan succeeds, it is also likely to encourage shifts in both inbound and outbound foreign investment. The executive order has two components.


First, it launches a 100-day risk and policy review of supply chains in four key industries: semiconductor and advanced packagingmanu- facturing; electric vehicle batteries; strategic raw materials; and pharmaceuticals and active pharmaceutical ingredients (APIs). Simultaneously, there will be a one-year


policy review of supply chains in other impor- tant sectors, including defence, public health and biological preparedness, information and communications technology, energy, transpor- tation and agriculture. The reviews must identify the US manufac-


turing capacities needed for national and eco- nomic security andrecommendways to address them, including finding foreign allies to work with. This includes gaps in domestic capacity and workforce, points of failure or limited resil- ience, research and development needs, and cli- mate risks. They can also propose needed execu- tive, legislative, regulatory or policy changes. Federal officials stated that the government will use “a mix of incentives” to encourage pro-


56


duction in the US, including using its procure- ment authority. Solutions will be tailored to the needs of each industry, and there will be con- sultation with stakeholders like business and labour, aswell as anewcommitment to public– private partnerships.


Hardpill toswallow One potential driver is the fact that the federal government has floated ideas for legislation to incentivise companies that onshore and penal- ise companies that offshore, notes Derron R. Stark, managing director for transaction strat- egy with EY Parthenon in New Jersey and an expert on pharmaceuticals. These include reduced tax benefits for US companies that off- shore or subsidies to promote onshoring. Mr Stark also thinks the Biden order fails to


take into account the complexity of pharma- ceutical supply chains. He cites statistics show- ing 85% of APIs and 65% of finished dosages are sourced from Asia — particularly China and India. “Even if you bring API manufacturing back to the US, you would still depend on [Asia] for raw materials and other formulation com- ponents,” he notes. Furthermore, he says essential medicines


tend to be generics with low profit margins that drive production out of the US, and are unlikely to be onshored without subsidies. Mr Stark also cites the high cost and time


requirements to build new drug manufactur- ing facilities, with high hurdles for regulatory approval.


Optimising incentives One solution would be for drug companies to find contract manufacturers in the US and avoid the expense of greenfield investment. In addition,MrStark says foreigncompanies


thatmarketandproduce non-critical medicines in the U.S. might choose to invest in these exist- ing facilities to add capacity for essential or criti- cal medicines they currently buy or make over- seas to avoid penalties and optimise incentives.


www.fDiIntelligence.com April/May 2021


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