Prospect of China trade war sends chill through Minnesota med-tech

U.S. hospitals and distributors will likely absorb the brunt of the new import taxes hitting Chinese-made medical devices and components next month, but jobs and research in Minnesota's bustling medical-technology sector could be threatened if a full trade war with China breaks out.

"That's when things get scary," said Shaye Mandle, CEO of the Minnesota health technology trade group the Medical Alley Association.

The Trump administration included about $800 million worth of imported medical devices and components in a wide-ranging group of tariffs on $34 billion in Chinese imports to the U.S., slated to begin July 6. For now, higher costs for items like Chinese X-ray machines and anesthesia devices are likely to be borne directly by U.S.-based device importers or their hospital customers.

The tariffs are designed to persuade the Chinese to halt practices that U.S. trade officials say are unfair and coercive, including the "forced transfer" of American technology and intellectual property. China reciprocated with a similar tariff package, causing President Donald Trump to threaten new tariffs on an additional $200 billion in goods.

That rapid escalation is causing anxiety for some med-tech executives because tit-for-tat responses can lead to a damaging trade war that could target medical devices directly.

"That is what we are most concerned about," Mandle said. If a trade war develops, "to [get] access to that market, the cost is going to go up, and the push to absorb it is then going to be on companies that are exporting to China."

Medical technology is an important industry in Minnesota, from well-known employers like Medtronic PLC and Coloplast A/S to the teeming ecosystem of smaller device firms around the state. More than 30,000 Minnesotans work in the industry, creating a $7.5 billion market for the state.

China is the largest single buyer of medical devices and optical supplies from Minnesota, with exports up 14 percent to $192 million in the first three months of this year.

China is among the four largest sales markets for Medtronic, as well as a key manufacturing center. The world's largest med-tech company now has nearly 1 million square feet of manufacturing and research space in China — slightly more than it has in Minnesota.

"The China market is perhaps going to be, at some time in the future, the biggest market in med-tech," Medtronic CEO Omar Ishrak told investors in November. "We expect to participate and work with stakeholders there and are confident that we can continue our performance there of delivering double-digit revenue growth."

Ratcheting up tariffs could make that more difficult.

Although the costs to Medtronic aren't expected to be "material" to a company with $30 billion in total sales, many Minnesota companies rely on components made in China, like batteries and LEDs, that will become 25 percent more expensive starting July 6.

Trump announced March 22 that the United States would take a series of punitive steps against China in response to what he called that nation's "discriminatory and burdensome" practices, especially its custom of coercing American companies into sharing technology and intellectual property as a condition of doing business in China's state-run economy.

"The Chinese, so far, have been very careful not to escalate — they talk about matching, but not escalating. And I think they're going to be pretty careful about how they move forward," said University of Minnesota Prof. Robert Kudrle, whose expertise includes international economic policy. "But if it does escalate, there is simply no way to predict where it's going to end."

A tariff is a tax levied on a product when it arrives at a port of entry or border crossing. Critics say tariffs slow down trade and drive up costs on both sides, but the Trump administration says strong actions are needed to curb China's long-standing unfair practices.

"We must take strong defensive action to protect America's leadership in technology and innovation against the unprecedented threat posed by China's theft of our intellectual property," U.S. Trade Representative Robert Lighthizer said in a June 15 statement.

China has made no secret of its intentions to create a world-class high-tech medical device sector.

About 15,000 med-tech manufacturers operate in China, many of which are owned by foreign corporations or run as joint ventures. Twenty years ago such plants mainly produced low-tech exports with smaller profit margins, like bandages and rubber gloves, according to a January article in the Journal of International Commerce and Economics based on research by International Trade Commission staff.

Today, medium- to high-value products like pacemakers and dialysis systems make up a majority of China's medical exports. In 2015, China overtook Germany as the No. 2 exporter of MRI devices to Japan, making it second only to the U.S. in terms of MRI machines sold into that lucrative market.

Lighthizer's office is taking direct aim at Beijing's "Made in China 2025" plan, designed to advance China's goals of creating stronger domestic manufacturing capabilities in 10 high-tech strategic industries. Pharmaceuticals and advanced medical devices are among those, along with robotics, aircraft, alternative-energy vehicles and agricultural equipment.

"China's government is aggressively working to undermine America's high-tech industries and our economic leadership through unfair trade practices and industrial policies like 'Made in China 2025,' " Lighthizer said in a statement.

Skeptics of med-tech tariffs note that the U.S. and China import about the same value of medical technologies from each other — roughly $5 billion — undercutting any notion that tariffs are needed to correct a med-tech trade imbalance.

Even without a full-blown trade war, tariffs that make imported Chinese components more expensive may end up diverting money from jobs and research at some companies in the U.S.

"Imposing higher tariffs on medical technology imports from China will not help U.S. competitiveness or achieve the president's objectives for our industry," AdvaMed Executive Vice President Ralph Ives wrote in a May 10 public comment on the tariffs proposed at that time.

The higher costs will have to be borne by someone. Med-tech companies have only limited ability to transfer their increased costs to their customers, like hospitals and group-purchasing organizations, though they're likely to try.

The Premier Inc. health care alliance, which runs a purchasing network with 3,900 hospitals and health systems as members, says tariffs on Chinese goods will translate into a direct loss to providers' bottom lines as med-tech companies work to pass along costs, similar to when the Affordable Care Act's medical-device excise tax was enacted.

Mandle noted that adding costs to health care through tariffs works against the larger goal of transforming it from a system where hospitals and devicemakers get paid regardless of whether patients get better to one that is "value-based," where patients' health outcomes help determine payment rates.

"Value is improved outcomes and lower cost," Mandle said. "If some component of medical products tomorrow just simply becomes 25 percent more expensive, there is no outcome improvement involved. ... This inserts added cost with no impact on outcomes. So it harms that path to value."

Joe Carlson • 612-673-4779