China tariffs are pushing the fentanyl trade back underground

Six years ago, I undertook a detailed assessment of the largest free trade zones (FTZs) around the globe. There was some legal and more illicit production of pharmaceuticals occurring in many zones, but more importantly there was extensive trade, some of it opaque, most run by Chinese nationals, through large FTZs, such as Colón in Panama and Jebel Ali in Dubai.

Boxes of Fentanyl Transdermal System made by Apotex Corporation sit on a shelf at a pharmacy, in Provo, Utah on May 9, 2019. REUTERS/GEORGE FREY

As I wrote at the time:

The majority of transshipment points revolve around contacts and facilities that are connected to the Chinatowns that stretch from Panama and Paraguay to Kuala Lumpur and Kenya. A century ago, most Chinese triads and tongs were insular and rarely cooperated outside their own dialect groups (and even then they were limited in scope to specific villages and clans). One side-effect of the Chinese unity cultivated after 1989 has been a pan-Chinese identity that has even infiltrated criminal syndicates, allowing them to scale up and staff their organizations. Meanwhile, China is able to run far-flung operations that are often staffed and even enforced by local ethnic groups under Chinese leadership. As one Malaysian security expert explained to me: ‘There are about five syndicates in the Klang Valley and they are all managed by the Chinese, even though they involve Indians and Malays at the lower levels.’”

Chinese origins

With Chinese middleman minorities thoroughly dominating legal and illegal commerce in Southeast Asia, Chinese manufacturers and traders are able to take full advantage of the geography that rings the South China Sea, which is ideal for moving goods in and out of tens of thousands of islands, inlets, and other shelters. These century-old networks allow illicit distributors to scatter and reform their shipments in any number of locations and configurations, sometimes even with the assistance of local governments and militaries. For shipments heading to Panama or Dubai, Latin and Arab syndicates are often the partners of choice for accessing their own markets or using paths and techniques perfected by narco-traffickers to enter North American and European markets.

But Chinese efforts are often tacitly and unwittingly aided and abetted by policies of entire nations, not just their FTZs. Take the Philippines, for example. The local priorities of the customs agents there are to interdict trade in rice. For reasons of protectionism, which has been rhetorically defended with the canard of food security, the Philippines are a great market for rice smugglers who can make vast amounts of money by illegal importation. The Philippines are made up of hundreds of islands, and as Ranier Ragos, a senior Philippines customs officer explains, it is a “full time job to prevent illegal smuggling of rice.” While Ragos and his colleagues are busy with such efforts, the far smaller but vastly more valuable shipments of more lethal products, like illicit pharmaceuticals (especially opioids) are rarely intercepted.”

China’s grey trade is even aided by the better FTZs

When convenience suits them, many countries treat their free trade zones as separate from the responsibilities of their own sovereign territory. Even in Singapore, one of the best run pro-capitalist nations of the world, there is disquiet amongst some US security officials that Singaporean officials will often wait a full week after a ship has left to review the documentation and other information; by this time, any perpetrators of frauds would be long gone and would  prove difficult to hunt down after the fact. Dubai levies severe penalties for illicit goods found inside domestic markets, but there are no similar penalties (let alone actual enforcement) for goods being exported. With small local markets that are easy to protect, massive revenues from their positions as major transshipment hubs, state-of-the-art transportation facilities and lax regulations, both these ports have enabled smugglers and counterfeiters.

According to Middle Eastern regulatory experts that I spoke with, over 70% of seized illicit products in the EU can be traced back to Dubai’s Jebel Ali FTZ, where many of the products are re-packaged and re-labeled. Many of these practices are perfectly legal and are carried out in other free trade zones along the way.

Producers of fentanyl and its precursor chemicals take advantage of these re-packaging sleights of hand. Six years ago I had never heard of fentanyl and when investigating mislabeling I was told of a repackaging “error” of “analgesic precursors” and I just jotted it down, without looking much further. But the product in question was 4-anilino-N-phenethyl-4-piperidine or ANPP, which is a key precursor for fentanyl. Looking at my notes, and those of Nick Slepko who visited some of the FTZs for me, it was a product made in China, that had arrived by ship at Jebel Ali and had been relabeled as made in Italy – Italy is one of the largest producers of pharmaceutical grade chemicals. We also came across unspecified analgesic chemicals from Vietnam, China and India, all of which could have been fentanyl or precursor chemicals. They were traded through Singapore, Turkey, Panama, Belize, as well as Rotterdam and Hamburg in the EU, and from there into US ports. It is clever to use EU ports before entering US since the assumption will be that labelling of products will be accurate if coming from EU ports.

Every month there are many thousands of tons of chemicals passing through FTZs and only a tiny fraction would have to be for opioids to make life very hard for those trying to interdict them before they make it to US. In spring of 2019 I contacted all the experts I had met with in 2013 to ask them about opioids and precursor chemicals transiting FTZs. Many were unable to comment but a few noted that some FTZs had come under pressure from US and EU authorities to better oversee chemical trade. But two knew of mislabeling and even illicit production of analgesic chemicals in some locations, especially in Asia — most undertaken by ethnic Chinese.

Countries with capability to make fentanyls to my knowledge include Bangladesh, Cambodia, India, Pakistan, Malaysia, and Vietnam as well as Russia.

As experts at the RAND Corporation put it: “Other countries besides China have the capacity to supply America’s insatiable appetite for opioids. Assuming China effectively regulates synthetic opioids, India or others could meet demand. Arrests for illicit manufacture and exportation of fentanyl were reported in India in 2018.”

Such production and intentional mislabeling of products is just one reason why I’m skeptical that China, or frankly any emerging nation, can effectively clamp down on fentanyl production. Chemical producers are important employers and hence have political backers, making action against them more problematic. Furthermore, many chemicals have multiple uses, so to switch a few hundred pounds of a chemical from a legitimate use to a troubling one is simple for manufacturers. And such a change is very hard for regulators to spot, even if companies maintain complete paperwork, and if they don’t it is nigh on impossible, and may only be found through spot inspections or whistleblowers, neither of which is frequent in emerging markets. After all, a few hundred pounds of key chemicals is all that is required to make millions of doses of fentanyl.

As the Rand Corporation scholars noted, China is overly reliant on the criminal justice system to address drug regulatory problems: “Given China’s recent decision to ban the unauthorized manufacture of fentanyl, authorities there appear to recognize a growing problem. China might have more success dealing with it if it worried more about independent oversight and regulatory adherence rather than banning the production of specific substances.”

Trade Talks… and a trade deal?

President Trump’s disputes with China over intellectual property violations, currency manipulation and trade deficits have resulted in tariffs and the threats of more tariffs to pressure China to change policy. One area demanded of Beijing was Chinese action against fentanyl production. Many commentators, including myself, thought that US pressure might get China to act against such production. And on the surface, changes in Chinese oversight rules meant that action appeared to have been taken.

But one of the results of US tariffs on Chinese goods is that Chinese businessmen have tried to avoid the tariffs by transshipping their wares through other nations. The WSJ describes how Vietnam’s sales into US have skyrocketed recently and much of this is due to Chinese transshipment via Vietnam.

Not only does this blunt the impact of the tariffs and probably lowers the likelihood of a trade deal, it also weakens Beijing’s efforts against fentanyl production. First, more production is being undertaken by the large Chinese diaspora in other Asian nations not subject to tariffs, and Beijing legitimately has no control over this. Second, Beijing will not be as concerned about fentanyl and precursor chemical production within mainland China that is not destined, at least at first, for the US. It also has plausible deniability since the products are destined for Vietnam or Cambodia or elsewhere. Third, while President Trump may push for tariffs against other Asian nations as a result, this will weaken efforts against China. Right now, other Asian nations benefit from tariffs against China, as companies relocate and they make money from transshipments through their trade zones. Many Asian nations are therefore tacitly supportive of US-China tariffs, but obviously if they come to be targeted by the US they will be more supportive of Chinese opposition, and that may well include not cooperating as effectively with the US against the opioid trade. Additionally, the EU and other democratic nations may not like President Trump’s aggressive stance, but they agree that China follows unfair trade practices, as a result they also tacitly and sometimes overtly support the China tariffs. But they will be hostile to tariffs on other Asian nations, especially if their businesses operating their and selling into US are affected by these tariffs.

There are obviously wider concerns here than fentanyl, but Trump’s tariffs are now pushing fentanyl production back underground, undoing many of the advances the US had made over the past few years. Treasury Secretary Mnuchin repeatedly tells us that 90% of the trade deal is done. The other 10% must be agreed soon or the opioid trade will once again disappear underground.