Draft:The Influence of China in the U.S. Fentanyl Crisis

China's involvement in the U.S. fentanyl crisis is multifaceted, involving state-owned and private pharmaceutical companies, small trafficking networks, and transnational criminal organisations. Alleged firms linked to fentanyl precursor production, such as Yuancheng Group and Gaosheng Biotechnology, benefit from government subsidies, notably higher value-added tax rebates. Despite some U.S.-China counternarcotics cooperation and regulatory advancements in China, transnational illicit trade of synthetic opioids continues to enable the ongoing public health burden in the United States of America. Once smuggled across the U.S. border, fentanyl is the major contributor to drug-related deaths, as a leading cause of death among adults aged 18 to 45.

Fentanyl' Primary Supply Chain: Manufacturing and Exportation

Fentanyl is a potent synthetic opioid with specific medical uses for pain, but its potential for abuse, addiction, and overdose sees it placed under United Nations (U.N.) international control since 1964. The Chinese pharmaceutical and chemical sector is the largest globally, serving as the primary source of fentanyl precursors essential for its synthesis and production. The International Narcotics Control Board (INCB), monitoring governments’ compliance with U.N. drug control statutes, identified the existence of 153 fentanyl-related substances with no currently known legitimate uses. The pharmaceutical industry operates on a large scale, but regulatory oversight for the chemicals used to produce fentanyl remains fragmented and underdeveloped.

Despite some regulations to increase monitoring, synthesis, and export restrictions, the presence of class-wide regulations allows for the legal manufacturing of chemical analogues of fentanyl that can be re-synthesized through chemical reactions, enabling exporters to continuously export chemicals like N-Phenethyl-4-piperidone (NPP) and 4-Anilino-N-phenethylpiperidine (ANPP). Chinese legislation, however, has limited synthetic opioid exports and often shifts the risks and regulatory burdens to importing countries, where these substances may be misused.

Exportation to Mexico

Transnational Criminal Organisations (TCOs) actively exploit the weaknesses in international regulatory frameworks to produce, traffic, and distribute chemical analogues of controlled substances. Exports from China reportedly reach Mexico in high volumes, using transshipment and intentional mislabelling to avoid customs detection. Mexico’s trafficking organisations reportedly use Chinese banking systems for money laundering of profits from operations – “layering” funds by using money brokers operating outside traditional financial oversight. The use of e-commerce channels and cryptocurrency serves to anonymise the trafficking process to evade financial trails, after which Chinese chemical firms have been linked to shipments to Mexican shell corporations operated by TCOs such as the Sinaloa Cartel and Jalisco New Generation Cartel— Mexico's Ministerial Federal Police (PFM) recently cracked down on pharmacy chains used as TCO shell corporations.

Exportation to the U.S and the Role of E-commerce

E-commerce is increasingly central to the distribution of fentanyl precursors from China. China’s e-commerce market is one of the fastest-growing globally, with an estimated 40.1 billion parcels in 2017—averaging nearly 30 parcels per capita. The U.S. Postal Service (USPS) saw a substantial increase of parcel imports from China. E-commerce facilitates the exportation of fentanyl precursors with low-cost or free shipping, challenging customs enforcement through the reduced cost of shipping narcotics. Fentanyl and its analogues are known to be available online, including the dark web, where sales are anonymous. Decentralized cryptocurrencies like Bitcoin connect small-scale Chinese suppliers directly to individuals as well as independent criminal networks in the U.S., Mexico and Canada Anonymity offered through e-commerce and crypto-currency is vital for traffickers in China, reducing the likelihood of severe legal repercussions.

Synthesis in Clandestine Labs

Chinese exports frequently reach Mexico, which primarily serves as a transit country to the more lucrative markets within the U.S.. fentanyl precursors are synthesised and analogues reverted to more chemically potent fentanyl using clandestine equipment linked to the same supply channels as the fentanyl. The cartels reportedly lace other narcotics with fentanyl to lower production costs because of its potency in small amounts. Due to its potency, smaller amounts are shipped in higher frequency, because small shipments are enough to supply high demand as a cheaper, low-risk form of trafficking. Cartels control the trafficking networks that lead into the U.S. and are known to use methods of concealing narcotics that exploit the large volume of U.S.-Mexico cross-border trade, smuggling their shipments amongst legitimate goods.

Chinese Drug Trafficking Networks

Chinese traffickers in known cases equally operate through small, family-based groups rather than major criminal syndicates, aiding in avoiding police enforcement. These networks operate outside the oversight of China's vast chemical and pharmaceutical sector, using e-commerce channels in order to supply fentanyl and its precursors abroad. Sellers often use numerical codes, scientific names, or technical jargon to obscure shipment contents of fentanyl. The shipments occur mainly through USPS and sometimes via express consignment operators (ECOs), UPS, FedEx, and DHL. While China announced class-wide regulation for all fentanyl-related substances in 2019 aimed at preventing illicit exports, The U.S. introduced measures like the STOP Act to prevent intentionally mis-labelled parcels, mandating advanced tracking data for Chinese imports. Enforcement struggles persist due to gaps in data and the volume of drugs routed through transit countries like Mexico and Canada.

China's Domestic Policy and the Dynamics of Fentanyl Export

VAT Tax Rebates for the Manufacturing and Exports of Illicit Fentanyl Materials

Investigations in recent years have revealed the involvement of certain Chinese companies in the production of synthetic narcotics, including fentanyl analogues, who have allegedly benefited from government tax incentives. Specifically, it was found that value-added tax (VAT) rebates were accessible to businesses manufacturing at least 14 analogues of fentanyl. Notably, the subsidy is only granted for the sole purpose of exporting. Tax rebates have a significant impact on the volume of exports. Evidence suggests that for every one percent increase in tax rebate, there will be a 13% increase in the export volume, further underlining the indirect involvement of the Chinese government through its influence over the profitability of fentanyl exportation. While most of China's VAT rebate rates for various commodities range from 3% to 9%, fentanyl and other synthetic narcotics receive a higher rate, sitting at 13%. Despite this elevated rate, the exact volume of these exports remains undisclosed, as Chinese authorities have not released data on the volume of synthetic narcotics exported under this rebate policy.

Government Grants and Awards

Several Chinese companies linked to the trafficking of illicit fentanyl materials online have reportedly received government grants, awards, and official commendations. Ruizheng, a chemical technology company and known manufacturer of fentanyl products, received rewards from the Chinese government and an invitation to participate in provincial events, including a discussion in 2021 on how small-medium-enterprises contribute towards the 14th Five-Year Plan. Similarly, Gaosheng Biotechnology, allegedly facilitated fentanyl sales across over 98 websites targeting markets in the U.S., Mexico, the United Kingdom, Germany, and Russia—and received both awards and visits from government officials. High-ranking representatives, including the Secretary and Deputy Director of the Guangzhou Development Zone, visited Gaosheng, praising its role in strengthening the provincial economy. This highlights a troubling intersection of government support for economic growth when confronted with illicit drug trade.

Chinese Government Ownership in Companies

The Chinese government consistently holds a small ownership stake known as a ‘special management share’ in private companies, known to establish party cells within all major companies, and has at least one CCP member on the board of directors. The antecedent factors allow the state to keep companies in line with its objectives. Evidence proved existence of the 'special management share' system in a series of major companies engaged in fentanyl materials trade, such as Zhejiang Netsun, Yuancheng Group, and Gaosheng (which states in its corporate records of being wholly state-owned). The policy of holding ownership stakes in companies involved in the production and export of fentanyl analogues and synthesis equipment provides the government with significant influence over their operations. This influence, alongside government approval, facilitates the export of fentanyl precursors by reducing legal challenges and oversight within China. For example, the director of Yuancheng Group— a major company involved in selling fentanyl materials, openly acknowledged the company's role in the exportation of numerous fentanyl analogues, in an interview with Ben Westhoff. Government stakes in such companies are known to provide protective advantages in regards to regulatory oversight. Chinese authorities reportedly delayed U.S. law enforcement requests to inspect potential sites of illegal synthetic opioid production.

U.S.-China Cooperation on Fentanyl Regulation

The U.S. and China are working to enhance cooperation in monitoring and regulating pharmaceutical and chemical manufacturing to combat the illicit fentanyl trade. The lethal effects of fentanyl have made it a priority in U.S.-China relations, prompting efforts to prevent Chinese fentanyl precursors from entering the U.S. supply chain. Historically, the U.S. has used various diplomatic strategies to pressure China on fentanyl regulation, including sanctions on firms, indictments of drug networks, visa denials for officials, and the formation of international coalitions to combat fentanyl trafficking.

Timeline of the U.S.-PRC Counter-Fentanyl Cooperation

2013-2015: Emergence of the Fentanyl Epidemic

The fentanyl opioid epidemic emerged in the U.S., with officials identifying China as the primary source. During this period, both nations began initial discussions on managing the supply chain of fentanyl and related substances.

2017-2019: Cooperation and Regulatory Action

In January 2017, U.S. Drug Enforcement Administration (DEA) Acting Administrator Chuck Rosenberg visited China to enhance collaboration. Hosted by China’s Ministry of Public Security (MPS), Rosenberg engaged with officials on issues like fentanyl trafficking, precursor chemicals, and anti-money laundering efforts. Meetings in Beijing, Guangzhou, and Hong Kong aimed to strengthen the DEA-MPS partnership and improve coordination on synthetic drug regulations.

In October 2017, U.S. authorities issued the first-ever indictments against two Chinese nationals for conspiracy to "distribute large quantities" of fentanyl and other opioids.

In May 2019, China scheduled all fentanyl and its analogues under regulatory control, requiring special permits for production, sale, and export. This fulfilled a commitment made by General Secretary Xi Jinping to then-President Donald Trump in December 2018. The move, widely praised by U.S. officials, marked a critical step in reducing direct shipments of fentanyl from China to the U.S.

2020-2022: Breakdown of Cooperation

This period witnessed a deterioration in U.S.-China counternarcotics collaboration, primarily due to rising geopolitical tensions.

June 2020: The U.S. Department of Commerce placed the Institute of Forensic Science under China's Ministry of Public Security on the Entity List, citing human rights concerns in Xinjiang.

August 2022: China suspended bilateral counternarcotics cooperation following Nancy Pelosi’s controversial visit to Taiwan.

2023-Present

In late 2023, President Joe Biden and General Secretary Xi Jinping met in San Francisco, agreeing to resume counternarcotics efforts, including the establishment of a U.S.-China counternarcotics working group.

On January 30, 2024, a U.S. delegation led by Deputy Assistant to the President Jen Daskal traveled to Beijing to initiate the working group, aimed at rebuilding cooperative efforts against the opioid crisis.

On April 16, 2024, a House committee report revealed that China is subsidizing the production of fentanyl precursors, contributing significantly to the ongoing drug crisis in the U.S.