Pharmaceuticals are a key pillar of U.S.–EU trade, making the sector especially sensitive to evolving U.S. tariff policies under the Trump administration. Branded drugs have so far escaped tariffs due to the balanced and strategic nature of transatlantic trade, but future levies remain a threat. This blog weighs manufacturing and tax benefits against risks like higher drug costs and reduced patient access. With legal challenges ongoing, the pharmaceutical industry must navigate a complex landscape shaped by trade, politics, and public health.
Earlier this year, President Trump reignited global trade tensions by introducing sweeping tariffs on foreign imports to rebalance trade and boost U.S. industry. A 10% baseline tariff took effect in early April, followed by reciprocal tariffs on “worst offender” countries, like the EU. While pharmaceuticals were temporarily spared, experts warned of potential price hikes and supply disruptions.
Legal challenges soon followed, with two federal courts ruling that Trump overstepped his authority under the 1977 International Emergency Economic Powers Act. However, the administration appealed, and temporarily reinstated the tariffs. Despite these setbacks, Trump still retains tariff powers under other statutes, including Section 232, which is currently being used to investigate pharmaceutical imports.
As the case winds through the courts, businesses across sectors, especially those importing raw materials and pharmaceuticals, are left navigating uncertainty. While pharma may have escaped the immediate tariff hit, broader trade volatility could still disrupt supply chains and market dynamics.
Why were pharmaceutical products spared from reciprocal tariffs?
The U.S. has largely exempted pharmaceutical products from recent rounds of reciprocal tariffs. Several factors help explain this strategic decision. Unlike many sectors impacted by global trade disputes, the pharmaceutical industry operates within a uniquely balanced and interdependent global framework.
Balanced Bilateral Trade
One of the key reasons for excluding pharmaceuticals from tariff retaliation is the relatively balanced trade relationship between the U.S. and its major allies, including the EU. Unlike other goods that contribute to significant trade deficits, pharmaceutical trade flows tend to be more equitable.
- U.S.-EU Partnership: Both regions are each other’s top trading partners for pharmaceutical products.
- In 2023, EU exports of medicinal and pharmaceutical goods to non-EU countries reached €277 billion, while imports totalled €119 billion, resulting in a €158 billion surplus.
- The U.S. accounted for 33% of EU pharma exports, making it the EU’s largest external market.
- Conversely, the U.S. was also the second-largest supplier of pharmaceuticals to the EU, after China.
This mutual reliance makes the pharmaceutical sector a poor target for punitive trade measures, as both regions have too much at stake.
Strong growth prospects
The pharmaceutical manufacturing sector in the U.S. and Europe was valued at $378.5 billion in 2022 and is projected to grow at a 6.81% CAGR through 2030. This growth is fuelled by:
- Ongoing investment from global manufacturers
- A large number of pharmaceutical production facilities
- Continued innovation and regulatory collaboration
Given strong growth, cooperation offers more benefits than confrontation.
Strategic and Security Considerations
Pharmaceuticals are not only a major economic driver, they are strategically essential.
- The U.S. depends on the EU for 32 strategically important import products, the majority of which fall within the chemical and pharmaceutical categories.
This interdependence gives the EU greater leverage in negotiations and shows why both regions aim to preserve supply chain stability.
Risks of Disruption
Despite their exclusion from tariffs thus far, pharmaceutical products are not immune from future trade tensions. The U.S. administration has floated the idea of targeting pharmaceuticals in upcoming tariff rounds, raising concerns among industry leaders. Potential consequences include:
- Increased drug prices
- Supply chain bottlenecks
- Reduced access to essential medicines
Pharmaceutical companies continue to urge both U.S. and EU leaders to keep medical goods out of trade wars, citing the World Trade Organization’s tradition of excluding healthcare products from punitive measures.
Potential Effects of Tariffs on Branded Drugs
In an effort to boost domestic manufacturing and reduce reliance on foreign drug production, President Trump argues that imposing tariffs on prescription drugs would not only bring manufacturing jobs back to the U.S. but also limit offshore tax avoidance and enhance national security by securing the supply of critical medicines.
Tariffs as a Manufacturing Incentive
Research published in the Journal of Managed Care & Specialty Pharmacy and Harvard Business Review suggests that tariffs on branded drugs could indeed motivate pharmaceutical companies to shift production to the United States. Some companies already announced plans for multibillion-dollar facilities on U.S. soil. However, meaningful job creation may take 3–5 years due to lengthy local permitting processes. In the short term, companies with both domestic and foreign facilities may redirect current U.S.-based jobs toward local production needs, improving compliance with tariffs but without creating new employment. While this shift might reduce supply chain tax avoidance, the national security benefits remain questionable, Especially as Europe, a key supplier, remains a close ally.
Risks to Drug Supply Chains and Patient Access
On the contrary, tariffs introduce a host of challenges, especially in a globally interconnected pharmaceutical supply chain. Countries like China, India and in Europe are vital suppliers of both branded and generic drugs or their components. Tariffs on imports from these countries could:
- Disrupt the supply of raw materials and active pharmaceutical ingredients
- Delay access to treatment and trigger shortages of essential medications, particularly for generics like antibiotics, injectables (e.g., epinephrine), and cancer therapies
- Increase operational strain on hospitals and pharmacies, who may struggle to maintain inventories
In anticipation of tariffs, pharmaceutical companies have begun stockpiling products, which may lead to panic buying by healthcare providers, further worsening regional shortages and creating unequal access.
Cost Burden and Long-Term Financial Impact
Although tariffs will increase procurement costs, pricing regulations mean pharmaceutical companies cannot easily pass these costs onto consumers. Over time, however, the financial burden may shift to other players in the system. Hospitals, already constrained, might temporarily absorb costs until reimbursement rates are adjusted. Insurers may renegotiate, raising premiums and out-of-pocket costs for patients and employers. Meanwhile, government-run programs like Medicare and Medicaid offer limited pricing flexibility, constrained by rebate penalties that penalize price hikes above the consumer price index.
Potential Setbacks in Innovation
Rising production costs could also lead companies to cut research and development budgets, threatening future medical innovation. R&D jobs are highly paid, the kind of employment the administration wants to protect.
Conclusion
Policy decisions have so far spared pharmaceutical products from the harshest U.S. tariff measures. However, the sector remains vulnerable to future trade tensions. Balanced transatlantic trade, strategic interdependence, and shared growth prospects have made pharma a less attractive target, but uncertainty persists. Tariffs may encourage domestic manufacturing and reduce offshore tax advantages, yet they also risk supply chain disruptions, price pressures, and setbacks in innovation. As legal and policy debates continue, preserving stable access to medicines while navigating protectionist agendas will remain a critical challenge for both governments and industry stakeholders.
If you’d like to discuss these insights further or explore how US tariffs could impact your market access strategy, please reach out to our team.