President Trump announced plans last month to impose tariffs of at least 25% on pharmaceuticals. The administration says it will reveal in early April the precise steps it intends to take to implement such tariffs. Despite the potential for price hikes and shortages, Trump has asserted that imposing tariffs will facilitate reshoring or bringing manufacturing back to the United States. The problem, however, is that even where reshoring is possible it tends to be difficult to achieve in the short term. And this particularly applies to products such as pharmaceuticals.
Should tariffs be imposed on pharmaceuticals by the U.S. it will mark a clear violation of World Trade Organization rules, which exempt pharmaceutical products from tariffs. Also, practically any time tariffs are imposed, regardless of the types of goods in question, this results in a tit for tat exchange of tariff penalties which ultimately affect the end-user. In the case of pharmaceuticals, this means hospitals, insurers and patients.
Tariffs on finished goods are essentially import duties levied on top of the price consumers pay. As such, they’re a consumption tax. And at least in the short term, tariffs could also heighten the risk of drug shortages or exacerbate already existing problems.
The extent to which price hikes and deficient supply of certain pharmaceuticals would occur will depend on the kinds of medicines involved. Brand name medications originating from European countries, for instance, often have sufficient gross margins built into their pricing, so an additional 10% or 25% tariff wouldn’t necessarily get passed on to hospitals, insurers and patients. In addition, the relatively large margins coupled with tariffs could make it attractive for some branded drug makers to reshore production.
For generic drugs, on the other hand, tariffs are more likely to be passed on to end-users because lower gross margins make it less feasible for manufacturers to absorb the added cost. Additionally, the thinner margins imply that generics are less likely to be reshored. Accordingly, with no viable domestic production alternative, prices for end-users would increase.
The U.S. imports roughly 36% of its pharmaceuticals, branded and generic. Also. 47% of active pharmaceutical ingredients—material used during the manufacturing process finished products—comes from outside the U.S. Together, China and India supply more than 70% of APIs used in American drug manufacturing. And Chinese imports account for 90% of the API needed for some antivirals and antibiotics.
When the U.S. levied 10% tariffs against China last month, some in the biopharmaceutical industry expressed concern as their supply chain is invariably globally integrated. It needs to source raw materials, including active pharmaceutical ingredients.
At the same time, the drug maker Eli Lilly recently announced a $27 billion commitment to manufacture products in the U.S. This will undoubtedly be viewed favorably by the Trump administration and possibly as a model for others to adopt. However, the decadeslong trend has been for pharmaceutical manufacturers to gradually relocate outside the U.S., mainly owing to lower operating and labor costs.
Theoretically, tariffs could incentivize building increased manufacturing capacity at home. But this takes time and is logistically complex. And for generics, in particular, it may require complementary measures such as volume purchase guarantees. Moreover, a public-private partnership may be needed to further bolster investment in infrastructure, regulatory compliance and workforce development. Whether the Trump administration is prepared to co-invest in a long-term strategy remains to be seen.
The international pharmaceutical supply chain is complex. From the base ingredients to the finished products, most U.S. medicines rely to some degree or other on a globally interconnected network of suppliers and manufacturers. The Trump administration’s threatened tariffs could substantially disrupt this ecosystem. And under these circumstances, transitioning to domestic manufacturing would be challenging.
