A Drag On Drugs? Trump’s Tariffs Could Raise Costs, Particularly For Generics

President Trump’s threats of tariffs on China, Mexico and other US trading partners have triggered little, if any, public reaction from the pharmaceutical sector, while the promise of border-adjusted tax cuts from the House of Representatives at least drew some cautious applause in recent earnings calls. (See sidebar)

Privately, industry representatives worry that in the event Trump follows through on his threats, it could squeeze profits, particularly for older, marginal generic drug products, potentially leading to shortages and price increases.

Two key members of Trump’s economic team have laid out a strategy that could lead to high tariffs over a long period of time, particularly on imports from China. Such tariffs could increase the cost of active pharmaceutical ingredients and drug products. With more than 80% of APIs and 40% of drugs manufactured abroad, the tariffs could squeeze domestic firms' margins while protecting them from foreign competition.

New Tariff In Town

A September 2016 white paper lays out Trump’s strategy on tariffs. Its co-authors were Peter Navarro and Wilbur Ross, senior policy advisors to the Trump campaign at the time.

Trump since has nominated Ross, an investor and former banker, for secretary of Commerce and appointed Navarro, a University of California-Irvine business professor and director of the documentary “Death by China: How America Lost Its Manufacturing Base,” as his director of trade and industrial policy, overseeing a new White House National Trade Council.

One plank of Trump’s platform on global trade was to direct his Treasury secretary “on Day 1” to label China a “currency manipulator.” The Senate Feb. 13 confirmed Goldman Sachs veteran Steven Mnuchin as Treasury secretary, but he has yet to check the task off his “to do” list.

Naming a country as a currency manipulator “will allow the US to impose defensive and countervailing tariffs if the currency manipulation does not cease,” the Navarro/Ross paper explains.

The paper says China manipulates the Yuan by preventing the currency from floating freely in exchange markets. It goes on to claim China is “the biggest trade cheater in the world” due not only to currency manipulation, but also to illegal export subsidies, theft of intellectual property, forced technology transfers, “and a widespread reliance upon both ‘sweat shop’ labor and pollution havens.”

The paper asserts the Trump administration would use tariffs “not as an end game, but rather as a negotiating tool to encourage our trading partners to cease cheating. If, however, the cheating does not stop, Trump will impose appropriate defensive tariffs to level the playing field.”

Given that at best, it would take years of reforms to address much of the alleged cheating, the tariffs would likely be long-lasting.

Also, China might respond in kind by raising tariffs on the US rather than submit to Trump’s reform agenda, particularly as he rolls back protections in the US.

Trump has suggested he would impose tariffs as high as 45% on imports from China, which is a major source of active pharmaceutical ingredients, intermediates and drug products on the US market.

While API cost is miniscule for brand drugs, it can be significant for generics. High tariffs could turn some marginal generics into money-losing products. Companies would have to decide in those cases whether to take the losses until they’re able to renegotiate contracts to pass along the higher costs to customers and eventually perhaps expand API manufacturing capacity in the US.

There has been no talk of hitting India with tariffs, which could be particularly challenging for the pharmaceutical sector.

The White House Jan. 26 floated the idea of a 20% tariff on Mexican imports to pay for the wall Trump wants to build on the border with the country. If he proceeds with that tariff, it could affect US-based pharmaceutical companies like Perrigo Co. PLC, which has three manufacturing plants in Mexico.

The Trouble With Tariffs

Most discussions about tariffs focus on labor-intensive industries like steel and auto manufacturing. But they also can impact the pharmaceutical sector, as a landmark World Health Organization analysis shows.

WHO in 2005 published a sweeping analysis of the effect of pharmaceutical tariffs on price, protection of local industry and revenue generation, the results of which were incorporated into the 2006 final report of WHO’s Commission on Intellectual Property Rights, Innovation and Public Health.

The study examined how tariffs on active pharmaceutical ingredients, finished drug products and vaccines impacted revenues in more than 150 countries. At the time, about 60% of the countries studied levied tariffs on API and drug products; 35% on vaccines.

In the great majority of cases, tariff rates were low, imposed to generate a little government revenue. In a few cases, including China and India, tariffs rates were high enough to protect local industry.

But the tariffs sometimes were imposed in ways that didn’t make sense. For example, there were cases where countries protected domestic drug makers with tariffs on drug products, but then undercut those protections with tariffs on APIs.

WHO found that in general, tariffs had little impact on the cost of medicines compared to manufacturers’ pricing, sales taxes, markups and other charges, but that they’re “a regressive form of taxation which targets the sick [and] could be eliminated without adverse revenue or industrial policy impacts.”

From the editors of the Gold Sheet.