Trump's Poison Pill: What's Next for Pharma Tariffs?

President Trump has followed through on his pre-election threat to increase US tariffs. Specific “national security” related duties on products such as steel, aluminium, copper and automotives have complemented a general tariff rise (the so-called “reciprocal” tariffs). Some trade partners, such as the UK, Japan, South Korea, and the EU, have succeeded in negotiating lower applied tariff rates, but none have succeeded in avoiding the tariff hike entirely.  

For deeper insight into how the UK and EU could respond to escalating US tariffs, read: Trump tariffs how could the EU and UK strike back?

On the list of products currently under US investigation but not yet subject to new US tariffs, pharmaceuticals stand out as a sector where tariff action could have significant commercial and broader ramifications. This is due to substantial US trade inflows and possible second-order impacts on public health outcomes.  

Pharmaceutical products have historically avoided tariffs. In 1994, countries including the US, the EU, Japan, Switzerland and the UK negotiated the WTO Agreement on Trade in Pharmaceuticals, which drew its product list from the World Health Organisation and was updated periodically, most recently in 2010. The agreement removes tariffs on a wide range of pharmaceutical products, ingredients and chemical compounds as part of broader public health policies to reduce the cost of medicines.  

However, Trump’s threats of pharma tariffs break this consensus, as does the US’s 20% ‘fentanyl’ tariffs on China, which cover pharmaceutical products.  

Trump has threatened a 200% tariff on pharmaceuticals, although he has said that this may be phased in to give companies time to relocate manufacturing to the US. Tariffs in the short-term could be between 25-50%, which would be in line with the outcome from other US Section 232 investigations on goods including automotives, steel, aluminium and copper.  

Countries have been concerned enough by Trump’s threats to attempt to negotiate pre-emptive carveouts. The EU believes it has secured a 15% tariff ceiling on pharma. Both Japan and the UK have said that they have secured similar commitments from the US, but their deals with the US are not explicit about the final tariff rate. The general terms of the UK-US Economic Prosperity Deal say that the UK and US will “negotiate significantly preferential terms on pharmaceuticals and pharmaceutical ingredients”, although this has not been finalised. The Japanese government has said that it will receive treatment equivalent to other countries on pharma tariffs, but this has not been confirmed by the US. 

Even if countries do follow the EU in negotiating lower headline rates, we expect average applied rates to be higher. This is because of the US’s focus on supply chain security, which has been embedded as a condition in several agreements, including those with the UK and Japan. The UK deal says that preferential treatment on pharmaceuticals will be contingent on the UK meeting “US requirements on the security of supply chains”. “Security of supply chains” is widely understood to be a euphemism for China exposure.  

In practice, there is a high likelihood that the US will apply strict rules of origin criteria to any pharmaceutical imports, with an emphasis on the origin of the Active Pharmaceutical Ingredients (APIs) based on past US customs rulings. As per the recent Executive Order on reciprocal tariffs, goods deemed to have been “transhipped” to avoid the US’s new country-specific rates are subject to an additional tariff rate of at least 40%. While the US reciprocal tariffs and subsequent transhipment penalties do not apply to pharmaceutical products, similar provisions could be introduced as part of any Section 232 tariffs. 

As an illustrative example, 2021 ECIPE research estimates that China supplies 22.6% of the EU’s APIs by volume, while India provides 3.1%. Depending on the exact product export profile, this means that even in a deal scenario, around a quarter of EU pharmaceutical exports to the US could be subject to a higher duty rate due to those exports no longer being deemed to have EU origin by US customs.  

Such an outcome would have a significant impact on the value of any US deal for pharmaceutical exports. Chart 1 shows the estimated historic value of EU pharmaceutical exports to the US from 2018 to 2024, assuming a 15% US tariff was applied to all imports, and separately assuming the application of a 15% tariff plus strict country of origin enforcement and a 40% tariff on the proportion deemed to use China/India-originating APIs.  

Related reading: how Trump-era trade policy is reshaping global supply chains and competitiveness (The Trump effect) how US trade policy is reshaping global supply chains and competitiveness 

Chart 1: Value of historical EU pharmaceutical exports to the US under different tariff assumptions (USD bn)

Source: Flint calculations, UNCOMTRADE data via WITs. Assumed trade elasticity of 1.8.  

It is possible that the US chooses to negotiate directly with pharmaceutical firms to secure lower company-specific rates on the condition they invest in US-based production facilities. In such a scenario, even countries that benefit from a deal or lower rate could lose out on future investment.  

In parallel to the ongoing Section 232 investigation, President Trump sent letters to 17 of the world’s largest pharmaceutical companies during the week of 28 July, giving them 60 days to lower prescription drug prices in the US by matching the lowest price offered in other developed nations. This move follows the Trump Administration’s efforts since May to gather evidence on how countries have been “freeloading on US innovation”, including by suppressing the price of pharmaceutical products below fair market value. 

This will have an impact on pharmaceutical supply chains by increasing scrutiny on the declared import values used for customs documentation submitted to the US government. These will be used to assess whether the company is providing drugs on a so-called most-favoured-nation pricing basis, while also potentially increasing the liability due for any pharmaceutical tariffs. 

What does this mean for business  

Pharmaceutical firms need to be increasingly vigilant about their trade strategies, as the impact of US tariffs has far-reaching consequences for supply chains and delivery mechanisms. This impact will only intensify if the proposed 200% tariff is phased in over the next two years. 

For many businesses, ensuring accurate customs valuations and origin for products which have been zero-rated for decades is not an easy task, especially when it has implications for transfer pricing and broader pricing negotiations with other countries. 

Even where APIs may not be subject to additional tariffs, the inconsistent treatment of different markets by the US may give rise to competitiveness arbitration between countries. Companies should proactively engage with host governments to advocate for securing preferential treatment for pharmaceutical products wherever possible. 

The risk of retaliation remains real if current agreements between the US and other trading partners falter. Although the EU’s list of potential countermeasures against US tariffs (currently on hold) largely excludes pharmaceutical products, it does include a range of medical equipment and other chemical products used in pharmaceutical manufacturing. Simply modelling the impact of US tariffs is no longer sufficient when developing a commercial strategy.  

For wider context on which economies and sectors are most exposed to Trump-era tariffs, see: Which countries and sectors are most exposed to Trump’s tariffs?

However, it is not all risk. The US tariff threats and wider security concerns are also triggering new opportunities for firms to make the case for additional support and funding as governments consider how to shield their domestic industries and grow their own manufacturing capabilities.  

Businesses should ensure they understand the potential risks and opportunities that new US tariffs could have on their global operations. This should inform their engagement strategy with both the US government and governments in the markets in which they operate.  Flint can help you assess these risks and develop strategies to mitigate them.  

This blog was written by Flint Partner Sam Lowe, Senior Adviser George Riddell, and Associate Director Will Haworth. Sam leads Flint’s Trade and Market Access Practice, George is a former director in a Big 4 trade strategy team, and Will previously worked on US trade at the UK Department for Business and Trade. 

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