Tariffs & Trade Policy: What to Watch for, Cost Impacts, and Supply Chain Strategies

*full transcript below

In Part 2 of our multi-part interview series, international trade expert Jason Waite of Alston & Bird outlines the potential implications of the Trump administration’s proposed Section 232 tariffs on imported pharmaceuticals and active pharmaceutical ingredients. The tariffs, previewed at a July 8 cabinet meeting, could start at a relatively low rate and increase over time, potentially reaching up to 200%. While this phased approach is a first for sectoral tariffs, it reflects an acknowledgment of the pharmaceutical industry’s complexity, including the long timelines and significant capital investment required to build domestic manufacturing capacity.

Waite warns that these tariffs, if implemented as suggested, could significantly disrupt the pharmaceutical supply chain, particularly for generic drug manufacturers that operate on thin margins and may be unable to absorb the added costs. He notes that the combination of static reimbursement rates and high capital costs could force some producers to exit the US market, exacerbating existing drug shortages. Waite notes that proactive government affairs strategies, diversification of supply chains, and advocacy for targeted policy alternatives, such as purchasing incentives or regulatory simplification, could better support reshoring efforts more effectively than tariffs alone.

Access Part 1 - What Pharma Manufacturers Need to Know About US Trade Policy Changes, and look for additional segments on how to mitigate pricing and development timeline impacts, compliance risks to monitor in this shifting trade environment, how to prepare for related potential audits or enforcement actions, best practices to navigate global trade disruptions, and affects on certain manufacturing geographies for outsourcing.

About the Interviewee

For over 25 years, Jason Waite has advised clients on all regulatory aspects of international trade and investment, including customs and trade agreements, export controls and sanctions, and related policy matters. Jason conducts internal investigations and compliance self-assessments, develops internal trade compliance and training programs, represents clients in audits and origin verifications, and guides clients through voluntary disclosures of actual and potential import and export violations. Jason has significant experience representing clients that are the subject of government investigations involving alleged violations of the export, import, and economic sanctions regulations. In transactional and strategic planning matters, Jason conducts international trade compliance due diligence, negotiates trade compliance responsibilities among parties to transactions, and develops supply chain optimization and global customs planning strategies. He regularly advocates before agencies in Washington for favorable advance rulings, advisory opinions, and commodity jurisdiction and classification determinations, and handles complex export licensing matters.

He is a frequent speaker at seminars and conferences on international trade topics and has been recognized in Chambers USA, Chambers Global, and The Best Lawyers in America^®.

Transcript

*Editor’s Note: This transcript is a direct, unedited rendering of the original audio/video content. It may contain errors, informal language, or omissions as spoken in the original recording.

As I just said, this investigation, this section 2 3 2 investigation which is nearing its conclusion by all accounts, threatens to impose substantial tariffs against pharmaceuticals and API and other ingredients imported into the United States. At a July 8th cabinet meeting, the president said that pharmaceuticals would be tariffed at a quote very high rate, like 200%.

More recently, he said the tariffs would take effect as soon as the end of this month. And and he also indicated that we plan to start with a low tariff to give pharmaceutical companies time to build. Then we're going to increase that tariff or make it much higher. So this type of phase, it remains to be seen exactly how these tariffs will be implemented, what they will come, what the conclusion of this investigation will be.

But we're getting these previews now from the administration. This type of a phase in of tariffs or an increase over time has not been done with sectoral tariffs so far. It does seem to be a recognition that the pharmaceutical market is particularly complex. That so they're considering more creative structures.

The, there is some reason for hope. I think that the tariffs, it may be announced. They might be announced at the end of this month or in early August, that still seems somewhat ambitious in terms of them taking effect. So I think there's some reason to hope that they won't actually take effect until a little bit later than that.

Of course, most people in the industry know that it will take a lot more than a year or even 18 months to be able to build out. US drug manufacturing capacity that doesn't exist today for many drugs. And so the notion that we're gonna have a tariff that starts at a low number and then increases over a year it's not clear that, that period of time, no matter what, the increase is going to be enough.

To reshore manufacturing here. And of course that all assumes, that's just for economically viable production, right? That there's some production that, that, some people would say is it may not be viable at all in the United States. It's not clear yet whether the, how much of this the administration is gonna take into account in its rollout.

This recognition of unique complexities in the market. The apparent idea about phasing it in the very ambitious policy of wanting to reshore pharmaceutical production. I think this does present opportunities for companies to consider government affairs efforts.

Government affairs strategies. Time is short. But the president has shown flexibility in adjusting tariff plans in the past. There could still be opportunities to impact the structure of the pharma tariffs. Based particularly on, for example a particular company's domestic activities, domestic investments, commitments for the future.

Potentially even to seek carve outs for certain ingredients that might help fuel

the policy objective of reshoring of production.

Yes.

Because what are the alternatives? The alternatives seem to be continue importing at what is threatened to be quite a high tariff, which adds costs or build out domestic capacity, which by accounts I've heard. Is very costly and ha just the capital investment alone is it requires a lot of time, a lot of capital investment, which is sure to

increase costs as well.

So one of our standard pieces

of advice these days in this new high tariff environment is to diversify, sourcing, to spread and mitigate risk. This can be particularly helpful if you, if certain countries are targeted by a particular tariff regime, that you have an alternative that might be less severely affected.

Now, the pharmaceutical tariffs, like other sectoral tariffs are expected to apply to products from all countries equally. Although I think that's one of the. Variables that companies could seek to try to influence. But certainly diversification is something that I still think is just generally advisable.

The other thing is, we, not every, you can't always be swimming upstream, right? There clearly is a, an objective of the United States policy here to onshore or reshore pharmaceutical production. Now, and so companies that can, companies that have, that can build economically viable models for onshoring production, developing greater domestic capabilities, developing more domestic supply chain.

Certainly that's a strategy that needs to be considered as well. I think, if these tariffs take effect, these prices, as we were just saying earlier, these prices are are very likely to eat into profitability. It, some of the prices may be able to be passed on to consumers, but it's likely to eat into profitability of the brand name pharmaceutical companies.

Meanwhile, the generic producers which I understand make up approximately 90% of US drug sales and have very thin profit margins to begin with. They're gonna face a whole set of their own challenges. There's a limited ability to raise prices because of the reimbursement system and the insurance system and how drugs are paid for in our market.

And tariffs could force. There are many that say that tariffs could force generic drug manufacturers to have to choose between operating at a loss or leaving the US market entirely. And if these companies leave the US market, it could result in drug shortages. Many people point out that there are already certain drugs that are in shortage in the US market, and that this could exacerbate that problem or that trend.

We also note interestingly, that companies that are contemplating a disruption in supply in the us in some cases, they have obligations to notify FDA about those kinds of supply disruptions. So this is a one of these complexities of the market that. I don't think there's really an analog in the other sectoral tariff programs.

There's not a similar analog in steel or aluminum or copper, where you've got the these vast differences between branded pharma and generic drugs. You've also got this major overlay of reimbursement. Policies and levels and insurance, right? And so that really makes the market much more complex.

Certain companies and organizations are advocating for the administration to treat. Generic medicines differently. They're arguing that, they're, the margins are so low and the reimbursement rates aren't moving anywhere. So there's just no, there, there's nowhere to go with these tariffs.

They can't simultaneously absorb the tariffs and sell these low margin drugs at the reimbursement rates that are afforded because the reimbursement rates aren't gonna go up. These static rates, the, they've also argued, I think that, these margins make it very difficult to invest in domestic production 'cause of the high cost of that capital investment and the need to run, the return on investment calculations just aren't there for some drugs as we understand it.

And these same organizations point out that, this reimbursement system is it's, the way that this system works. You can pay more tariff, but you're not gonna get reimbursed more. You're not gonna make any more. So this is driving, somebody's gotta eat this and it's gonna be the suppliers.

These and that could lead to, again, that could lead to shortages. That's what many of these organizations and companies are saying. So they're trying to, I think, convince the policy makers in the administration to, to consider this. To look at alternatives. I think the fact that the president has already indicated that this will be a phase in, I think that's a good sign.

It is just a sign that there's a recognition of complexity in the market. The, and the, there are people that can, that these, there are some that are arguing, Hey, you don't, you can do more than just tariffs. Yes. This investigation under 2 3 2 authorizes you to impose tariffs.

But there are other things you could look if you really wanna reshore. Domestic pharmaceutical supply chains and manufacturing. There are other things you should be looking at. You need to use more than just tariffs. You need to use government purchasing programs. You need to use targeted incentives. You need to do some regulatory simplification.

There are other policies that could be implemented that some argue would have a better effect in terms of reshoring production. So anyway, I think the branded pharma companies already have more, some more domestic production and they appear better poised to expand such production.

And they should, that's what they should certainly be looking at doing as well. And they might ha also be able to absorb the tariffs a little bit more because of margins. But. It's it really remains to be seen how this remedy is gonna be fashioned, whe how it's gonna take into account these differences in the market, the reimbursement, ddy dynamics of the market, and frankly the need of patients to have access to medicines.

You can put off, you, you might be able to put if your job is buying steel coil, you can put that off for a month or two, but you can't really put off buying your insulin. If you are if you have diabetes.