Tariffs Are Back in the News

Tariffs were a big item of interest for a period of time and have slowly faded from the headlines. It’s really hard to extrapolate what impact these tariffs have had on our daily lives, mostly due to the inflation caused by world events and other variables. From a healthcare point of view tariffs were mostly directed at drug manufacturers as a way to reduce costs and to bring pharmaceutical manufacturing back to America, commonly called reshoring. The tariff threats of the past brought large drug manufacturers to the bargaining table where many of them signed deals on pricing and increased investment in stateside manufacturing. Recently the focus has shifted to medium sized drug manufacturers with talks of possible negotiations. The real news concerning tariffs was the President’s announcement last month that he would impose no tariffs on foreign sourced generic drugs until August of 2028 and then there would be 100% tariff for a year followed by a second year at 200%. The original tariffs were on brand name drugs which historically cost the most but make up only about 10% of the total medications used by Americans. The proposed tariffs on generic drugs will affect 90% of those used in the U.S. which could affect a much larger number of older adults. Before I talk some more about these proposed tariffs let me reiterate why I have always disliked them.

Economists, almost universally, dislike tariffs, especially long-term ones. They see them as nothing more than a tax on foreign imports that are eventually passed on to the consumer. Some have said tariffs are short-term actions that have long-term negative outcomes. The current administration has seen it as a powerful leverage tool to force both foreign and domestic entities to comply to their plans to correct trade imbalance, bring manufacturing back to the U.S., and control the price of prescription medications. Historically tariffs haven’t been used very often but that has changed recently. I just think there are more long-term solutions that can be found without using tariffs.

The proposed tariffs on generic drugs are based on a national security concern. The fear is that many of the Active Pharmaceutical Ingredients (API) used to produce generic drugs are obtained from foreign countries. There was an interruption in production of APIs during the COVID pandemic leading to issues around availability and shortages. This is particularly egregious when an API is withheld by a not so friendly country (China for instance) to obtain leverage and power over the U.S. The administration’s power to invoke these tariffs is based on the Trade Expansion Act of 1962, section 232 which says the President needs to show a national‑security interest, a supply‑chain vulnerability, or a need to reduce reliance on foreign production in order to invoke tariffs. I’m certainly in favor of limiting our exposure to shortages in generic drugs caused by foreign countries - right now more than 80% of the APIs for generic drugs come from outside the U.S. - but I’m not sure tariffs are the way to accomplish this goal.

According to Tinglong Dai, the Bernard T. Ferrari professor of business at Johns Hopkins Carey Business School, the conditions that have long kept generic drug manufacturing out of the U.S. largely haven't changed and this most recent plan might only succeed in making drugs more expensive while failing to bring factories stateside.

A more practical approach may be to strengthen the conditions that make domestic manufacturing sustainable over the long term. Recent policy proposals have called for creating more predictable demand through long-term purchasing commitments, expanding public-private partnerships, and supporting advanced manufacturing technologies. These strategies focus on building a more resilient supply chain that will help ensure that seniors have reliable access to the medications they depend on. Doesn't that sound like a more workable solution?

There are some other things about the President’s proposal that could impact its success. With the slim profit margins that exist in the generic drug marketplace, reshoring manufacturing in two years would be very difficult and costly. The likely impact of a 100% tariff after two years would simply mean the manufacturer would quit selling the drug. Their small margins would probably mean even a 5% tariff would force them to halt manufacturing. Plus, President Trump will be out of office 6 months after the enactment of these tariffs, meaning the new President could change or eliminate the policy. The lack of response from the generic manufacturers gives me a sense that they are waiting to see where this thing goes.

Here’s my two cents. If we want to eliminate our dependence on foreign APIs let’s not waste two years on something that doesn’t look like it will accomplish the goal. Why don’t we prioritize the APIs that are most vital to our national health security, use other options to ensure their availability, and start the process now. A viable long-term solution started today makes more sense than a short-term solution that might not work at all and doesn’t start for two years.

Best, Thair