Prescription for made in America? Tariffs and U.S. drug manufacturing.

Abstract

Tariffs on U.S. pharmaceutical imports have been recently proposed. This article examines the potential effects of tariffs on U.S. domestic drug manufacturing, focusing on the differential impact on branded and generic drugs. We contend that generic manufacturing is labor-intensive, operates on thin profit margins, and has strong competition that usually constrains price increases. However, where supply is dominated by a tariff-affected country, capacity limits may lead to spot-market prices increases. Unless tariff-driven global price increases outweigh the amortized costs of relocation and higher domestic production costs, U.S. reliance on foreign suppliers for generics is likely to continue. By contrast, branded manufacturers have greater incentives to reshore production. Branded manufacturers' patent-protected monopolies provide sufficient pricing power to absorb the costs of relocation. Branded manufacturers also have an incentive to relocate production of active pharmaceutical ingredients (APIs) to the U.S. Domestically-produced branded APIs could be exported for final processing at lower costs and imported back into the U.S. as finished drugs without incurring tariffs. Tariff policy uncertainty may influence manufacturers' relocation decisions. Among the possible unintended consequences from the added pressure from tariffs on global pharmaceutical manufacturers, compromised product quality, drug shortages, higher prices, retaliatory actions like export quotas or bans, and reciprocal tariffs stand out.