Think back a little over four years ago in the late Spring of 2020. Covid was taking off and nobody really knew how to stop it. Everyone was advised to stay home and when you had to venture out you were required to wear a mask. Masks were hard to find. Latex gloves were hard to find. Hand sanitizer was difficult to find and toilet paper was too.
A major problem during Covid was not just that demand had skyrocketed for protective gear (called PPE) but also protective gear was mostly made overseas in China. Global transportation ground to a halt making it hard to access PPE from abroad even if there was the capacity abroad to manufacture it. The government wanted to boost capacity the U.S. The Wall Street Journal has the story:
As overseas supply chains faltered in early 2020, the federal government doled out an estimated $1.5 billion to companies building U.S. plants to make synthetic rubber gloves, N95 respirators, surgical masks and other protection gear, according to government and industry reports.
U.S.-made masks and gloves became a national priority during the Covid-19 pandemic. Now the manufacturers need a lifeline of their own.
Domestic production of protective medical equipment that was in short supply during the pandemic is now collapsing as hospitals and other healthcare buyers return to foreign-based suppliers.
There was a good reason U.S. companies imported protective gear from abroad. It was cheaper, and more efficient to import protective gear than manufacture is locally. Companies that sprung up to make gear in the United States found ready markets early on but that has long since dried up.
Many of those plants now sit idle, unfinished or operating at far below their capacity, underscoring the challenges of reshoring manufacturing that mostly left the U.S. years ago.
About 70% of the 100 or so U.S. mask companies launched during the pandemic have closed, according to industry estimates. U.S. production of N95 and surgical masks fell by more than 90% in 2023 from 2021 levels after elimination of masking requirements knocked out consumer demand.
Hospitals, wholesalers, retailers and anyone who uses protective gear is not willing to pay the premium for U.S. made protective gear.
“As soon as Covid ended and the supply-chain disruption ended, all the hospitals in the U.S. went right back to buying from overseas. They’re not doing anything to protect themselves,” said Tony Gadzinski, president of New York-based Medegen Medical Products.
When I took courses on economic development theory there was an old, debunked theory called import substitution. That’s where small countries would subsidize producing imports domestically until the firms were ready to compete globally. The problem was (and is) that it doesn’t work. Firms subsidized domestically rarely become competitive. Instead, they rely on continued government subsidies or tariffs to make competing imports more expensive. The calculus is often such that a dollar invested in lobbying for more subsidies or tariffs gets a better return on investment than a dollar invested in modernizing and boosting efficiency. Thus, the following should not come as a surprise.
U.S. makers of gloves and masks are calling on the Biden administration to help preserve domestic production capacity as a hedge against future pandemics and cross-border supply disruptions. The Department of Health and Human Services has asked Congress for $400 million to maintain preparedness programs started during the pandemic, including expanding domestic production of protection gear.
Government spending on the national stockpile of personal protection gear for emergencies accounts for about 3% of the total annual spending in the U.S. on masks, gloves and other protection items. Domestic manufacturers said hospitals—the nation’s biggest spender—haven’t been willing to accommodate the manufacturers’ higher costs and smaller production volumes in the aftermath of the pandemic.
Hospitals claim they’re tied into multiyear contracts that require them to purchase from vendors selling imported equipment. Hospitals are probably correct but it’s a constraint of their own making. Hospitals buy from group purchasing organizations (GPOs) because they get kickbacks for agreeing to sole source contracts. There’s an important story there about the need to abolish GPOs (or at least abolish their kickback safe harbor) but I don’t have the space to discuss it here.
Any economist who has studied economic development theory could have predicted attempts to reshore protective gear would falter. Let’s hope the federal government doesn’t waste too many resources trying to rescue what is a failed program.