President Trump has reached a trade agreement with the European Union, imposing a 15 percent tariff on most items. However, the president said that pharmaceuticals are excluded from the agreement, pending an ongoing U.S. investigation.
EU officials hope that when the dust settles, pharmaceutical tariffs won’t be higher than 15 percent, which they see as a win, since that’s less than Trump’s threat to impose tariffs of up to 200 percent on prescription drugs and their active ingredients manufactured outside the U.S.
Trump is keeping up the tariff pressure on drugs reportedly to encourage onshoring and bring more U.S. pharmaceutical manufacturing jobs to the U.S. But given that Trump has complained about high drug costs, imposing outrageously high tariffs on pharmaceuticals would be a terrible, not to mention costly, idea.
In 1994, as part of World Trade Organization negotiations, several major trading partners agreed to exempt most pharmaceuticals from tariffs, known as a “zero-to-zero initiative.” The thought was that pharmaceuticals are just too important to human health and well-being to become part of a very politicized tariff process. They still are, but Trump looks to upend that agreement.
What is clear is that imposing tariffs on pharmaceuticals is not a way to hammer China. According to a drug supply-chain analysis by U.S. Pharmacopeia, only 3 percent of the active pharmaceutical ingredients in brand-name drugs are made in China and only 2 percent in India. It’s 8 percent and 35 percent, respectively, for generics.
Europe is the big winner, manufacturing 43 percent of brand-name active pharmaceutical ingredients, while 15 percent are manufactured in the U.S. Indeed, Ireland has become a drug-manufacturing powerhouse, in part because of its low corporate tax rate and welcoming business environment — policies Trump understands.
With respect to Trump’s concern about jobs, the U.S. Bureau of Labor Statistics says that “pharmaceutical and medicine manufacturing” provided more than 340,000 jobs in 2023, with an average annual wage of $87,170. That’s a solid showing. Yes, manufacturing jobs could be shifted to the U.S., but not for several years, since building drug-manufacturing facilities is a very complex and costly process. And manufacturers are increasingly turning to automation to get the job done.
And there are other considerations. Pharmaceuticals are distributed worldwide, and countries that buy a lot of them, like those in the European Union, understandably want some domestic manufacturing — just as Americans like to see foreign-branded cars made in U.S. factories.
The good news is that reduced regulations and the corporate tax benefits in Trump’s One Big Beautiful Bill Act provide a strong economic incentive for drug companies to base more of their manufacturing in the U.S. It may take time, but his limited-regulation approach is attractive, and his low-tax policies are permanent, creating economic stability — unlike the on-again, off-again tariffs, which could be easily eliminated by the next president.
A better way to attract more pharmaceutical manufacturing would be to reinstitute the manufacturing tax breaks that U.S. territories like Puerto Rico once enjoyed. The island once had a thriving pharmaceutical manufacturing industry until Congress began phasing out the tax breaks — known as Section 936 — in 1996. The island has never recovered economically.
With respect to Trump’s concern about national security, Europe is one of the U.S.’s strongest allies. There is very little reason to think Europe’s production of APIs or finished drugs poses any threat to the United States.
Another of Trump’s stated concerns about the pharmaceutical industry is high drug prices. And it’s true that some of the newest drugs, and especially biologics that treat some of the rarest and most debilitating diseases, can be very expensive. But imposing tariffs would make drugs manufactured in other countries even more expensive.
Many of the most innovative drugs, for diseases like cancer, are made by very small niche biopharmaceutical companies that are surviving on investors’ money and don’t have other sources of revenue that might help them eat some of the tariffs. They will have to pass on any increased costs.
Pushing drug companies to reshore their manufacturing may also encourage some countries to implement compulsory licensing, which permits a government to allow a different manufacturer to produce a patented drug without the patent-holder’s permission. It’s bad politics for a country to allow compulsory licensing when a drug company is providing jobs. If the company relocates, that restraining factor is gone.
Tariffs on pharmaceuticals is one of the worst possible ideas. Trump has taken positive steps through tax and regulation policy to encourage drug manufacturers, as well as other industries, to reshore, and more could be done. Breaking the zero-to-zero initiative would be counterproductive.
Merrill Matthews is a co-author of “On the Edge: America Faces the Entitlements Cliff.”