100% tariffs on drugs, unless you build here

On 25 September the administration said that all imported prescription drugs and active pharmaceutical ingredients (APIs) will face an immediate 100 per cent tariff, unless the manufacturer formally commits to building a production plant in the United States within twenty-four months.

The announcement came on the president's social-media account late in the day, alongside new duties on heavy trucks, kitchen cabinets and upholstered furniture, with an effective date of 1 October. It follows an investigation opened in April under Section 232 of the Trade Expansion Act, the national-security statute that has already been used for steel, aluminium, cars and copper. Unlike the emergency tariffs now before the Supreme Court, duties under Section 232 rest on firmer legal ground.

Build here or pay double

The order is an attempt to force drug manufacturing back home through punitive taxation, and nothing on this scale has been tried before. Drugmakers have spent thirty years organising their supply chains around Ireland, Switzerland, India and Singapore, where costs are lower and corporate taxes kinder. A 100 per cent tariff wrecks the economics of making drugs abroad overnight.

Tax policy put the plants there. For decades Section 936 of the tax code gave American drugmakers generous breaks for manufacturing in Puerto Rico, and when Congress repealed it in 1996 with a ten-year phase-out, much of that production moved to Ireland and Singapore, which offered low corporate tax rates. Patents and other intellectual property followed the factories offshore, so profits on American sales could be booked in low-tax jurisdictions. The tariff is an attempt to reverse, with a stick, a pattern that was built with carrots.

Who is already exempt

The threat has been in the air since spring, and much of the industry has already moved. Johnson & Johnson, Roche and AstraZeneca have each pledged investments of $50 billion or more in American manufacturing and research, and Eli Lilly, Novartis and others have announced new domestic plants. Companies with projects already under way have the best chance of qualifying for the exemption, which makes the tariff less a new tax than a way of locking in commitments already made.

Trade deals blunt it further. The framework agreed with the European Union in the summer caps American tariffs on European pharmaceuticals at 15 per cent, and Japan secured similar treatment. Since Ireland, Belgium, Germany and Switzerland are among the largest sources of branded drugs, much depends on how those caps interact with the new order. Switzerland, which has no such deal and already faces a 39 per cent reciprocal tariff, is the most exposed of the big producers.

Two years is not enough

Building specialised biologics plants that satisfy the FDA takes years of investment and specialist engineering, followed by lengthy regulatory validation. No drugmaker can put up a domestic plant in twenty-four months. The first result will be much higher drug prices for American patients and hospital networks.

Construction is only the first hurdle. Each product moved to a new site needs regulatory approval for the change in manufacturing location, backed by validation batches showing that the new plant makes an identical medicine, and the site itself must pass inspection. Skilled staff for sterile and biologic manufacturing are scarce, and much of the specialised equipment is itself imported and now subject to tariffs.

The price mechanism runs through the importer, usually the drugmaker's own American subsidiary, which pays the duty at the border and must decide whether to absorb it or raise list prices. Insurers and pharmacy-benefit managers negotiate rebates off those list prices, but patients who pay a percentage of the list price, including many on Medicare drug plans and high-deductible insurance, feel the increase directly. Hospitals, which buy many injectable drugs outright, have little room to pass costs on quickly.

The risk of shortages is greatest where margins are thinnest. Cheap generic drugs, many made in India or from Chinese ingredients, sell for pennies per dose, and producers of old sterile injectables have repeatedly exited the market when prices fell too low. A tariff that doubles the cost of an ingredient can make a product uneconomic to supply at all. Big branded drugmakers can afford to wait out a tariff; the smaller generic suppliers that keep hospital shelves stocked cannot.

A tariff that fights drug-price policy

The order also sits awkwardly with the administration's other goal. In May the president signed an executive order seeking most-favoured-nation pricing, under which Americans would pay no more for drugs than patients in other rich countries, and in July he wrote to seventeen drugmakers demanding price cuts. Tariffs push in the opposite direction, raising costs that companies will try to recover in the one large market where they can still set prices relatively freely.

The industry may have more room for manoeuvre than the headline suggests. Tariffs are levied on the declared customs value of an import, and for a patented medicine much of the value lies in intellectual property rather than the physical product. Companies can restructure transfer prices so that less value crosses the border, although customs authorities scrutinise such moves. The cost of the tariff may prove smaller than 100 per cent of the retail value, but the compliance cost and uncertainty are real.

The case for the policy, and its limits

Supporters argue that the pandemic exposed a dangerous reliance on foreign suppliers for basic medicines, and that only a credible threat will change investment decisions made over decades. That argument has force for essential generics and their ingredients. It is weaker for patented biologics made in allied countries such as Ireland and Switzerland, which pose no supply risk and are the main target of the order.

The details to watch are the formal text of the order, how the administration defines a qualifying commitment to build, and whether generics and drugs from countries with trade deals are carved out. Any move by the largest drugmakers to raise American list prices early next year will show how much of the cost reaches patients. A 100 per cent tariff on imported medicines holds healthcare hostage to industrial policy, and American patients will probably face shortages and sharply higher prices well before any new plant opens.