On August 21, the U.S. and the European Union (EU) issued a joint statement announcing a framework on a new trade agreement, including the key terms on pharmaceutical tariffs. The agreement is set to go into effect on September 1 and will include the following new tariffs for pharmaceuticals, active pharmaceutical ingredients (APIs), and other related materials from the EU as follows:
- For brand drugs, APIs, and precursors, the tariff will be 15 percent.1
- For generic drugs, APIs, and precursors, the tariff will be effectively zero, described in the statement as the "Most Favored Nation (MFN) rate." In this context, the term "MFN" is unrelated to ongoing Trump Administration discussions surrounding "MFN pricing" of pharmaceuticals (see, for instance, recent letters from the White House to 17 drug manufacturers outlining the steps they "must take to bring down the prices of prescription drugs.") Instead, it refers to the highest tariff the U.S. can impose in compliance with World Trade Organization agreements on a particular good, which is generally zero or near zero, as noted in a fact sheet released by the EU.
In general, this announcement is a positive development for the tariff treatment of imported generic pharmaceuticals; the original framework for the U.S.-EU agreement had contemplated carving out only select generics, instead of all generics. More broadly, the decision on the treatment of generics in this agreement suggests that the Administration may be taking a more nuanced approach to assessing pharmaceutical supply chains, including with respect to the forthcoming 232 investigation. Notably, however, generic drugs manufactured in the EU with API from other countries, such as China or India, will generally be subject to tariff rates imposed on those countries, because country of origin for pharmaceuticals is typically based on where API is produced.
Given the bilateral nature of the U.S.-EU statement, the framework is likely close to what will take effect. Though there may be additional modifications to the agreement between now and September 1 or other developments, the joint announcement is a significant step toward the implementation of new tariffs taking effect.
Footnote
1. This tariff rate will remain the same regardless of what the ongoing Section 232 pharmaceutical investigation determines for other nations. Under Section 232 of the Trade Expansion Act of 1962, the Secretary of Commerce is required to investigate the national security grounds for imposition of a particular tariff before the President is able impose tariffs of imports on national security grounds. The conclusions of the 232 pharmaceutical investigation have not yet been released.
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