Trump is toying with us, but his 200% tariff threat could still harm sick Australians

Australians should feel concerned that US President Donald Trump has publicly toyed with the idea of applying tariffs of up to 200 per cent on pharmaceuticals. Tariffs of this size are unlikely to materialise, or at least stay in place for long, and are much more likely to be used as a threat to extract other concessions related to pharmaceuticals. But such concessions could still be very damaging for Australia in the long run.

Large tariffs would, of course, present serious problems for pharmaceutical companies in countries that export drugs to the US, with flow-on effects for national economies. This includes Australia. With $2.2 billion in pharmaceutical exports to the US last year, we have a lot at stake.

Pharmaceuticals are the third-biggest category in Australia’s export trade with the US, after beef and gold.Credit: AP

Trump says he will allow some time for companies to move their manufacturing to the US before the tariffs kick in – perhaps up to a year and a half – but it takes many years to establish and staff high-tech facilities, and there would be huge costs involved.

If Trump decided the tariffs would apply to ingredients as well as to finished pharmaceutical products, this could also cause chaos in supply chains, with results difficult to predict. American drug companies faced with inflated manufacturing costs could increase drug prices in markets that allow it and threaten to withdraw them from others, such as Australia.

The Trump administration is unlikely to introduce tariffs of this size, given the effects they would have on the drug costs in the US for health insurers and consumers. The US already spends far more on medicines compared with other OECD countries – $US1432 ($2190) per capita on retail pharmaceuticals in 2021, well over double Australia’s per capita expenditure of $US647 ($990). The RAND Corporation found that US drug prices in 2022 were, on average, 2.78 times higher than 33 comparison countries, and more than four times higher for new, brand-name drugs. Tariffs of 200 per cent would sharply increase costs for imported drugs, many of which can’t easily be replaced with alternatives. Trump would face immediate and intense domestic pressure to remove them.

But in line with other aspects of Trump’s trade policy, it’s likely the threat of astronomical tariffs will be used to extract concessions that countries wouldn’t agree to under normal circumstances – and haven’t agreed to in past trade negotiations. It seems that as part of its trade deal with the US announced in May, the UK has already agreed to “endeavour to improve the overall environment for pharmaceutical companies operating in the United Kingdom” in exchange for preferential treatment for tariffs on pharmaceuticals and pharmaceutical ingredients.

What concessions are countries likely to be asked to make? The US agenda is not very clear, partly because the results of a Department of Commerce investigation into pharmaceutical imports are yet to be announced. But the US agenda is also a rat’s nest of conflicting policy objectives.

The US pharmaceutical industry has been agitating about our Pharmaceutical Benefits Scheme, which subsidises medicines for Australians. As a monopsony (a single buyer), the PBS can keep prices well below those in the US. In a letter to the US Trade Representative in March, the peak organisation representing branded US drug companies, PhRMA, complained that Australia’s pharmaceutical pricing policies were “egregious and discriminatory” barriers to trade.

It’s not clear yet whether the PBS is actually in Trump’s sights, although rhetoric certainly abounds about foreign countries freeloading on the US. The argument goes like this: the US funds the lion’s share of research and development, foreign countries force drug manufacturers to sell their drugs at low prices, and prices for Americans are inflated as a result. In fact, this is a furphy: drug prices in the US are related to domestic policies – especially government-protected monopolies for drug manufacturers – rather than the practices of other countries.

Fortunately, the Albanese government has made it clear that it’s not prepared to give any ground on the PBS.

A report released by the US Trade Representative in March set out so-called foreign trade barriers and zeroed in on a different issue: how much notice drug companies receive that a generic competitor is coming to market in Australia. Providing companies with earlier notice, as the US is seeking, could delay the availability of generic medicines in Australia and the associated PBS price reductions – adding to costs for both governments and patients.

Then there is Trump’s objective of bringing manufacturing onshore. Apart from the issue of feasibility, there is the issue of cost. Manufacturing drugs in the US rather than in lower-cost jurisdictions, such as India, would increase prices, particularly for generic drugs.

The upshot? Trump’s foreshadowed tariffs are unlikely to be implemented, but neither can the threats be dismissed as just hot air.

Deborah Gleeson is an associate professor in public health at La Trobe University.