On 5/8, US President Donald Trump announced plans to impose a 250% tariff on imported pharmaceuticals, the highest he has ever proposed. The pharmaceutical industry has typically been exempt from trade tariffs due to its essential nature. However, Trump has repeatedly criticized the industry's "unfair" pricing practices and urged companies to bring production back to the US. "We want pharmaceuticals to be made in our country," he told CNBC.

However, the ramifications of this policy are complex, ranging from reshaping corporate behavior and disrupting supply chains to potential drug shortages. Economies like Australia and Ireland, whose pharmaceutical sectors heavily rely on the US market, could be significantly impacted.

Restructuring the pharmaceutical industry: an ambitious goal

According to Trump, the tariffs aim to incentivize companies to relocate pharmaceutical production to the US. The US currently imports about 80% of its active pharmaceutical ingredients (APIs), primarily from China and India. Building a new pharmaceutical plant in the US takes years, requires approval from the Food and Drug Administration (FDA), specialized equipment, and a skilled workforce.

While large corporations like Pfizer, Merck, and Johnson & Johnson might weather the storm due to their intellectual property and robust supply chains, generic drug companies operating with thin profit margins would be hit hard. They could be forced to exit the US market, potentially leading to shortages of essential medications.

The legal basis for this policy rests on the International Emergency Economic Powers Act (IEEPA), which is currently being challenged in federal court. If the court rules against the policy, many businesses that have restructured their supply chains will face irrecoverable sunk costs.

Illustration of various medications. Photo: Pexel

Illustration of various medications. Photo: Pexel

India: A key market faces uncertainty

The high demand for affordable generic drugs in the US has fueled India's pharmaceutical industry for years. Companies like Cipla, Sun Pharma, and Dr Reddy's Laboratories have seized this opportunity, successfully competing with hundreds of off-patent drugs in the US. This has allowed them to establish a strong foothold in the global pharmaceutical market.

In the 2024 fiscal year, India exported USD 8.7 billion worth of pharmaceutical products to the US, representing over 11% of its total merchandise exports. 47% of generic drugs consumed in the US originate from India, making the US India's largest pharmaceutical export market.

The Indian pharmaceutical industry had hoped that generic drugs, being essential commodities, would be exempt from tariffs. However, Trump repeatedly announced a 25% tariff on pharmaceuticals starting 2/4, which was then postponed for 90 days and rescheduled for 1/8.

Currently, India imports about USD 800 million worth of pharmaceuticals from the US and imposes a 10% tariff. Experts believe that even if the US increases tariffs on APIs, India will still have an advantage if tariffs on other countries are higher.

Namit Joshi, chairman of the Pharmaceuticals Export Promotion Council of India (Pharmexcil), asserts that the US will remain reliant on countries like India due to high domestic production costs. Shifting supply chains to other countries or back to the US would take at least three to five years.

Daara Patel, secretary general of the Indian Drug Manufacturers' Association, believes the industry shouldn't panic. He questioned whether any other country could provide affordable, high-quality drugs in the same quantities as India. He also believes that if tariffs increase to 10%, the industry can absorb the costs or pass them on to US consumers.

However, if US tariffs exceed 15%, India might be forced to explore new markets like East Africa or the Middle East. While these markets are not as valuable, they offer greater strategic stability.

Australia faces supply chain and financial risks

As a major pharmaceutical exporter to the US, Australia faces significant financial risks if the new tariffs take effect. Last year, Australia exported about AUD 2.2 billion worth of pharmaceuticals to the US, nearly 40% of its total pharmaceutical exports. Approximately 87% of these exports are blood plasma products, primarily from CSL Limited.

If the 250% tariff is implemented, Australia could lose up to AUD 2.8 billion. The damage would extend beyond direct exports, impacting markets dependent on Australian raw materials. In addition to increased costs, companies face supply chain disruptions and reduced research and development (R&D) budgets.

The Australian government has expressed concern. Treasurer Jim Chalmers described the proposed tariffs as "very concerning." Reserve Bank Deputy Governor Andrew Hauser warned that the impact could be comparable to Brexit. Another risk is Trump's "most favored nation" (MFN) policy. This policy requires pharmaceutical companies to not sell drugs at lower prices to other countries, threatening the pricing mechanism of the Pharmaceutical Benefits Scheme (PBS), which ensures affordable drug prices for Australians.

Australian biotech companies will also face difficulties raising capital and maintaining research collaborations with the US if trade barriers continue to rise.

Ireland: Economic model under threat

Trump's tariff policy could profoundly impact Ireland. Pharmaceuticals account for a significant portion of Ireland's over EUR 70 billion in exports to the US. Major corporations like Pfizer, Merck, and Eli Lilly have chosen Ireland as a manufacturing hub for exports to the US and globally.

A 15% tariff could pose challenges, but 150-250% would cripple exports, forcing companies to reconsider maintaining production in Ireland. This raises serious questions about the country's future ability to attract foreign direct investment (FDI) and the sustainability of its FDI-dependent economic model.

Another issue is uncertainty. Less than 24 hours before the 15% tariff was set to take effect, Trump threatened to raise it to 250%. This prevents businesses from long-term planning, forcing them to prepare for worst-case scenarios.

Even if multinational companies adopt a wait-and-see approach, Trump's identification of pharmaceuticals as a major contributor to the US trade deficit with the EU suggests that trade tensions will not easily subside. With the US remaining the world's largest pharmaceutical market, any changes in trade policy will have ripple effects.

Thuc Linh (According to India Today, Proactive Investors, Irish Times)