Trump Pharma Tariffs Would Raise Drug Prices for Americans

President Trump has recently floated the idea of imposing tariffs of up to 250 percent on pharmaceuticals, with the intention of shifting pharmaceutical production to the US. These tariffs would not only drive drug prices higher but could also lead to shortages and reduce long-run drug innovation.

The US pharmaceutical market consists of two types of drugs: branded and non-branded (generics). The Food and Drug Administration (FDA) estimates that about 90 percent of all prescriptions filled every year are generics, a large share of which are manufactured in India, where about 35 percent of the world’s active pharmaceutical ingredients (APIs) for generics are produced. Branded drugs, by contrast, come in large part from the EU, where about 43 percent of branded APIs are produced. While branded drugs only represent a small share of prescriptions, they account for nearly 90 percent of US drug spending, as those producers can charge elevated prices while their drugs are under patent. 

Tariffs could impact both drug markets, though somewhat differently. Firms that manufacture generics face thinner margins on their products due to competition in the generic market. They will be less able to absorb the tariffs and will likely pass their cost increases onto consumers, which could be reflected in higher insurance premiums. Drugmakers that earn high profits from branded drugs will have a greater ability to absorb those tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. increases, and may be more inclined to do so to preserve their market share.

Yet even this would not be a desirable outcome, because those profits are often reinvested in new drug development, which is costly, and it is the prospect of profits that incentivizes drug innovation in the first place. One estimate posits that the research and development costs to bring a new drug to market can exceed $3 billion, largely due to an expensive regulatory process. Increased costs could potentially slow drug development, especially for orphan drugs, which are used to treat rare diseases.

Firms could restructure their supply chains to reduce tariff exposure by increasing domestic production. However, this would be a costly and time-consuming endeavor and could lead to drug shortages in the short run. In quarter one of 2024 alone, more than 300 drugs were in shortage, 70 percent of which were generics. Consumers would more than likely end up switching to more expensive branded drugs as an alternative. Whether consumers purchase drugs abroad or domestically, the result would ultimately be higher prices and an elevated risk of shortages.

In 2024, the US imported $210 billion in drugs and vaccines. A majority of these were from the EU (61 percent), with notable shares also coming from Switzerland (9 percent), Singapore (8 percent), and India (6 percent). Currently, all of these products are exempt from the reciprocal tariffs, and the president has not yet specified which products would be targeted.

 

Although national security concerns about China related to pharmaceutical supply often dominate these discussions, China is responsible for a surprisingly small share of total pharmaceutical imports (3 percent). To the extent there is a national security concern related to certain products in particular, a better alternative would be to negotiate trade deals with other countries in Asia and elsewhere that would allow the US to continue to import generics cheaply.

President Trump has promised to reduce drug prices in his second term. Imposing tariffs on drugs would be a move in the wrong direction, reducing drug innovation and raising prices on consumers reliant on these products for their health.




 

Share this article

Twitter
LinkedIn
Facebook
Email