On 3 April, the Trump administration threatened to place tariffs of 25% on more than 1,300 Chinese goods worth approximately USD50 billion annually. The proposed tariffs – which would apply to a wide range of products, including active pharmaceutical ingredients (APIs) and medical devices, as well as several treatments including vaccines, antidepressants, insulin, and antibiotics – was met with a threat of retaliatory tariffs from the Chinese government.
“As the Chinese saying goes, it is only polite to reciprocate,” the Chinese embassy in the United States said, according to CNN. This led the US government to propose an additional USD100-billion’s worth of tariffs on Chinese goods.
For the time being, the tariffs are just proposals, not policy. But what would US tariffs on imported Chinese APIs mean for drugmakers?
Who would US tariffs on Chinese-made APIs hurt more?
According to the China Chamber of Commerce for Import & Export of Medicines & Health Products, in 2017, the United States imported USD3.9-billion-worth of Chinese-made APIs, representing an increase of 23.8% year on year. This has lead to an increasing number FDA approvals for Chinese generics, culminating in a near-doubling of approvals in 2017. While public health concerns still linger over the quality of Chinese generics – this has been the case since faulty imported Chinese heparin led to several deaths in the US in 2008 – US demand for low-cost Chinese-made generics and APIs continues to rise.
However, the proposed US tariffs are expected to have minimal impact on Chinese generics manufacturers. It is well-known that China’s pharmaceutical market is a sea of generics. However, only about 10% of Chinese generics makers sell to the US. The rest make their income purely by selling to the domestic market, the world’s second-largest pharma market in the world.
The numbers back it up: Chinese API exports to the United States reached USD3.9 billion in 2017, accounting for 82.5% of China’s total API exports, according to the China Chamber of Commerce for Import & Export of Medicines & Health Products. However, only slightly more than 500 of China’s approximate 5,000 drug makers are registered to export APIs to the United States. This indicates that if the US tariffs do become a reality, only a small fraction Chinese generics makers will be affected and possibly re-direct themselves to meet growing demand at home. Chinese generics makers are already benefiting from several favourable policies announced by the Chinese authorities earlier this year.
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(It’s also worth noting that while the Trump administration’s tariffs would deliberately target China’s strategic growth industries, the tariffs are not going to deter the Chinese authorities from their ambitions of developing their pharmaceutical sector as part of a wider “Made in China 2025” campaign. Nor has the threat of tariffs deterred China from its plan of slashing import taxes on imported cancer treatments.)
For US drugmakers, however, the situation looks slightly different.
Tariffs on Chinese APIs would be expected to punish US generics makers, rather than companies focusing mainly on high-cost innovative treatments. API costs typically make up a small proportion of the overall cost of developing an innovative or prescription treatment, given their high research and development and marketing costs, as well as typically higher list prices. US generics makers, on the other hand, may be more significantly affected the proposed tariffs. This is due to the substantially lower cost and relative lack of innovation involved in manufacturing generic treatments, with manufacturers potentially expected to pass the cost on to patients to preserve their typically thin profit margins.
Any US tariffs that come into force would not do so until at least May. US President Trump has indicated that his administration would “probably” come to an agreement with China, according to Bloomberg. Overall, it is anyone’s guess what happens next.