A recent analysis commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA) indicates that a potential 25% tariff on pharmaceutical imports into the United States could dramatically increase the cost of medications for American patients.
The Ernst & Young report estimates that US drug costs could surge by nearly $51 billion annually. This could lead to a price increase of up to 12.9% if these tariffs are passed on to consumers.
US reliance on foreign pharmaceutical imports
The study highlights the United States' significant reliance on foreign pharmaceutical products. In 2023, the United States imported $203 billion in pharmaceuticals. Of these imports, 73% originated from European nations such as Ireland, Germany, and Switzerland. For context, the total US sales of finished pharmaceuticals in the same year amounted to $393 billion.
Trump administration's pharmaceutical tariff considerations
This analysis comes at a time when the Trump administration has been actively exploring tariffs on pharmaceutical imports. They cite national security concerns stemming from the country's reliance on foreign drug production. Last week, the administration initiated probes into these imports. They opened a 21-day public comment period as part of the Commerce Department's investigation.
The pharmaceutical industry, represented by groups like PhRMA, is concerned about the potential ramifications of such tariffs. They argue that these measures would undermine efforts to bolster domestic manufacturing. This is a stated objective of the Trump administration. Historically, pharmaceutical products have been mainly exempt from trade disputes due to the potential for widespread negative impacts on public health.
Drugmakers seek to mitigate tariff impact
Drugmakers are reportedly using the current probe as an opportunity to demonstrate to the administration. They are showing that imposing high tariffs could impede their ability to scale up US production rapidly. They are also exploring alternative solutions to mitigate the potential harm. Trade lawyers advising these companies suggest they may propose a phased implementation of tariffs on imported pharmaceuticals. This approach could lessen the immediate financial burden.
Swiss drugmaker Roche has already engaged in direct talks with the US government to seek exemptions from potential import tariffs. The company argues that its imports into the United States are balanced by its exports of US-made drugs and diagnostics.
Uncertainties in pharmaceutical pricing and consumer impact
The Ernst & Young report also delves into the complexities of pharmaceutical pricing. While production costs are a factor, the extent to which tariffs on imported ingredients or finished products would be directly passed on to consumers remains uncertain. Tariffs on finished products could potentially be absorbed by wholesale or retail distributors. However, the report warns that if these duties are fully reflected in domestic prices, US drug prices could increase substantially.
Furthermore, the analysis indicates that approximately 30% of pharmaceutical imports in 2023 consisted of ingredients used in U.S. manufacturing. These are then either exported or sold domestically. Imposing tariffs on these ingredients could raise domestic production costs by an estimated 4.1%. This would reduce the global competitiveness of U.S.-made drugs.
Risks to US pharmaceutical exports and jobs
With roughly 25% of US pharmaceutical output being exported, totalling $101 billion in 2023, the report warns that higher input costs resulting from tariffs could jeopardise a portion of the 490,000 export-related jobs within the industry. This would be by weakening foreign demand for US medicines.
Notably, the report does not account for the potential impact of retaliatory tariffs from other countries. These would likely amplify the economic consequences for U.S. pharmaceutical producers.
As the debate over pharmaceutical import tariffs continues, this report's findings underscore the potential for significant cost increases for American consumers. There are also broader implications for the US pharmaceutical industry and its global competitiveness.