(Bloomberg) -- President Xi Jinping’s stranglehold on rare earths will give China unprecedented leverage to win concessions from the US during talks this weekend in Kuala Lumpur. Sitting in Beijing’s reserve is control over an even more vital supply chain: medicine.

China’s power rests on its grip over the global supply of active pharmaceutical ingredients, or APIs, which are core components of commercial drugs. Beijing’s broad sway extends upstream to the raw chemicals, solvents and reagents known as “key starting materials” needed to make the APIs themselves.

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US officials, former trade negotiators and analysts say America’s dependence on Beijing for such exports creates a risk too big to ignore, even though China has not directly threatened drug supplies. The global backlash the Asian nation would face if it tried to interfere with life-saving therapies has deterred Beijing from wielding its dominance, for now.

That could change if President Donald Trump’s trade war escalated to maximum levels.

“China has shown it’s willing to weaponize economic leverage when it suits its interests. Medicines and their inputs are no exception,” Representative John Moolenaar, Republican chairman of the House Select Committee on China, told Bloomberg News. “We need to build resilience and secure supply chains.”

Xi has already unveiled export controls with the potential to impact the medical field. China’s curbs on seven metals in April covered powerful magnets for MRI scanners. Beijing followed that this month by targeting five elements including thulium and erbium, which are essential for medical lasers.

So far, China has been careful to emphasize its intent is to stop materials from going to defense industries. Recent rules have also set out exclusions for humanitarian-related scenarios, a sign Beijing is aware of the health sensitivities.

Sun Chenghao, a fellow at Tsinghua University in Beijing, said extending a trade war to this sector would undermine China’s credibility. “Pharmaceuticals concern human health and life itself,” he said. “Turning them into a geopolitical tool runs counter to China’s diplomatic philosophy.”

China’s Ministry of Commerce didn’t immediately reply to a request for comment.

US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng are aiming to tamp down tariff tensions in Malaysia this week, days before a high-stakes leaders’ meeting in South Korea. Ahead of that sit down with Xi, Trump has acknowledged the US vulnerability and vowed to bring pharmaceutical production home. “It’s all coming back,” Trump told Fox Business on Sunday. “I’m putting tariffs on pharmaceuticals unless they’re made here.”

While Beijing’s chokehold over global pharmaceuticals has some parallels with its rare earths, the nature of the production process and supply chains for medicines are somewhat different.

Still, Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations, sees a “real possibility” of weaponization. “Beijing has already demonstrated keen awareness of this leverage,” he said, citing threats published in Chinese state media during Covid to impose export controls on pharmaceuticals in retaliation for a US travel ban.

What gives Beijing reason to pause, Huang said, is the certainty of severe retaliation. An embargo would deny Chinese patients access to cutting-edge US cancer treatments and biologics, where America still dominates. It would also crash a lucrative income stream, as global customers scrambled for alternatives.

Generic Problems

A report last week from US Pharmacopeia, an industry standards body, found that nearly 700 US medicines are made using at least one key ingredient solely sourced from China. The synthesis of amoxicillin, for instance — one of the most used antibiotics in the US — ultimately depends on four separate key starting materials, each produced almost entirely in China.

While Trump’s tariffs may persuade big pharma to build facilities to ensure supply chains for best sellers, that’s not going to happen with generics, where China dominates. Beijing’s control poses the biggest threat to America’s dirt cheap, commonly used generics that account for about 90% of the drugs prescribed in the US.

API manufacturing is also highly polluting, and given the sector’s razor-thin margins it makes little sense to reshore this kind of production to places with stringent environmental regulations.

Still, awareness of trade vulnerabilities is on the rise in some countries, with mixed success in tackling the issue.

India launched a government incentive program in 2020 to support API production locally and set up API parks to incentivize manufacturing, though the consensus is those programs haven’t really taken off. Indian manufacturers still say Chinese firms are far more competitive, at prices half as costly for certain drugs.

Japan is funding manufacturers like Meiji Seika Pharma Co. and Shionogi & Co. to restore API production capacity at home. The latter is working toward making antibiotic APIs, while Meiji Seika opened a building in central Japan earlier this month to restart domestic production of ingredients for penicillin antibiotic for the first time in 30 years.

The European Union, home to some of the world’s largest drug makers, is also worried about an over-reliance on India and China. In March, the European Commission, the bloc’s executive body, proposed the Critical Medicines Act to boost supply-chain resilience and reduce dependencies on single sourcing.

India’s Links

For the US and other countries, measuring their dependency on China is notoriously difficult because the supply chain is opaque. Much of America’s finished generic drugs arrive from India, which sources the majority of its raw ingredients from China.

US Pharmacopeia previously estimated in April that China directly contributed 8% of the 2024 volume share of US prescription APIs. That figure rises to around 25% if broader parameters are applied, according to Marta Wosinska, a senior fellow at the Brookings Institution.

When it comes to trade dealings, the key is to identify — and strategically play up — the other side’s vulnerabilities.

“Negotiators come to the table with stuff in their back pocket — both things to give but also other leverage points to threaten or as a gentle reminder,” said Wendy Cutler, a senior vice president at the Asia Society Policy Institute and veteran US trade negotiator. “Chinese negotiators are well-versed in other chokepoints where they dominate, such as the pharmaceutical sector.”

The Trump administration needs to reduce US vulnerabilities, Cutler said, even if Beijing doesn’t look like it’ll act anytime soon.

“It would truly be the nuclear option,” said Melanie Hart, a former State Department official under President Joe Biden, who is now at the Atlantic Council’s Global China Hub. But “there is broad awareness the risk is there and it could manifest quickly in a true US-China crisis.”

--With assistance from Martin Ritchie, Kanoko Matsuyama, Ashleigh Furlong and Jing Li.

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