Introduction to Pharmaceutical Tariffs
President Donald Trump has imposed tariffs on products from almost every country on Earth, targeting specific imports including autos, steel, and aluminum. However, he isn’t done yet, as he has promised to impose hefty import taxes on pharmaceuticals, a category of products he’s largely spared in his trade war. For decades, imported medicine has mostly been allowed to enter the United States duty-free.
That’s starting to change, with U.S. and European leaders recently detailing a trade deal that includes a 15% tariff rate on some European goods brought into the United States, including pharmaceuticals. Trump is threatening duties of 200% more on drugs made elsewhere.
Impact of Tariffs on the Pharmaceutical Industry
“Shock and awe” is how Maytee Pereira of the tax and consulting firm PwC describes Trump’s plans for drugmakers. “This is an industry that’s going from zero [tariffs] to the potentiality of 200%.” Trump has promised Americans he’ll lower their drug costs, but imposing stiff pharmaceutical tariffs risks the opposite and could disrupt complex supply chains, drive cheap foreign-made generic drugs out of the U.S. market, and create shortages.
“A tariff would hurt consumers most of all, as they would feel the inflationary effect … directly when paying for prescriptions at the pharmacy and indirectly through higher insurance premiums,” Diederik Stadig, a health care economist with the financial services firm ING, wrote in a commentary last month, adding that lower-income households and the elderly would feel the greatest effect.
Stockpiling and Tariff Delays
The threat comes as Trump also pressures drugmakers to lower prices in the United States. He recently sent letters to several companies telling them to develop a plan to start offering so-called most-favored nation pricing here. But Trump has said he’d delay the tariffs for a year or a year and a half, giving companies a chance to stockpile medicine and shift manufacturing to the United States — something some have already begun to do.
Leerink Partners analyst David Risinger said in a July 29 note that most drugmakers have already increased drug product imports and may carry between six and 18 months of inventory in the U.S. Jefferies analyst David Windley said in a recent research note that tariffs that don’t kick in until the back half of 2026 may not be felt until 2027 or 2028 because of stockpiling.
Effects on Generic Drug Manufacturers
Moreover, many analysts suspect Trump will settle for a tariff far lower than 200%. They also are waiting to see whether any tariff policy includes an exemption for certain products such as low-margin generic drugs. Still, Stadig says, even a 25% levy would gradually raise U.S. drug prices by 10-14% as the stockpiles dwindle.
Brand-name drug companies have fat profit margins that provide flexibility to make investments and absorb costs as Trump’s tariffs begin. Generic drug manufacturers do not. Some may decide to leave the U.S. market rather than pay tariffs. That could prove disruptive; generics account for 92% of U.S. retail and mail-order pharmacy prescriptions.
Building Pharmaceutical Factories in the United States
In recent decades, drugmakers have moved many operations overseas to take advantage of lower costs in China and India and tax breaks in Ireland and Switzerland. As a result, the U.S. trade deficit in medicinal and pharmaceutical products is big, nearly $150 billion last year. The COVID-19 experience — when countries were desperate to hang onto their own medicine and medical supplies — underscored the dangers of relying on foreign countries in a crisis, especially when a key supplier is America’s geopolitical rival China.
Trump has bigger ideas, wanting to bring pharmaceutical factories back to the United States, noting that U.S.-made drugs won’t face his tariffs. Drugmakers are already investing in the United States, with the Swiss drugmaker Roche saying it will invest $50 billion in expanding its U.S. operations, and Johnson & Johnson expected to spend $55 billion within the United States in the next four years.
Challenges and Concerns
But building a pharmaceutical factory in the United States from scratch is expensive and can take several years. And building in the U.S. wouldn’t necessarily protect a drugmaker from Trump’s tariffs, not if the taxes applied to imported ingredients used in the medicine. Jacob Jensen, trade policy analyst at the right-leaning American Action Forum, notes that “97% of antibiotics, 92% of antivirals and 83% of the most popular generic drugs contain at least one active ingredient that is manufactured abroad.”
“The only way to truly protect yourself from the tariffs would be to build the supply chain end to end in the United States,” Pereira said. Marta Wosińska, a health policy analyst at the Brookings Institution, says there is a role for tariffs in securing U.S. medical supplies, but tariffs alone are unlikely to persuade generic drug manufacturers to build U.S. factories, saying they’d probably need government financing.
Conclusion
In conclusion, the imposition of tariffs on pharmaceuticals by President Trump poses significant risks to the industry and consumers. While the goal of reducing drug costs is admirable, the approach taken may have unintended consequences, such as disrupting supply chains, driving up prices, and creating shortages. As the situation continues to evolve, it is essential to monitor the effects of these tariffs and consider alternative solutions to ensure the stability and affordability of the pharmaceutical market.
Frequently Asked Questions
Q: What are pharmaceutical tariffs, and how do they work?
A: Pharmaceutical tariffs are taxes imposed on imported pharmaceutical products, including medicines and ingredients. They work by increasing the cost of these products, which can lead to higher prices for consumers.
Q: Why is President Trump imposing tariffs on pharmaceuticals?
A: President Trump aims to reduce drug costs and promote domestic manufacturing by imposing tariffs on imported pharmaceuticals. He believes that this will encourage companies to produce drugs in the United States, creating jobs and reducing reliance on foreign suppliers.
Q: How will tariffs affect generic drug manufacturers?
A: Generic drug manufacturers may be significantly impacted by tariffs, as they often have thinner profit margins than brand-name companies. Some may decide to leave the U.S. market or pass on the increased costs to consumers, leading to higher prices and potential shortages.
Q: Can building pharmaceutical factories in the United States protect companies from tariffs?
A: Building a pharmaceutical factory in the United States can provide some protection from tariffs, but it is not a guarantee. If the taxes apply to imported ingredients used in the medicine, companies may still be affected. To truly protect themselves, companies would need to build the entire supply chain in the United States, which can be a complex and costly process.
