Donald Trump has made so many threats of tariffs that it is hard to know what to take seriously. But his latest outburst on the pharma sector will have been very uncomfortable news in Dublin, for a few key reasons.
The first is that while it may not be wise to take too literally the Trump threat of a “very high” tariff of up to 200 per cent being imposed on the sector in a year to 18 months, it is nonetheless a statement of an intended direction. And it comes after the administration has undertaken a review of the pharma sector and where it produces and pays its taxes.
The message emerging from this is clear – Trump wants more pharma production for the US market to be undertaken in the US itself. His way of going about it is economically risky and damaging for the US too. For the sector, relocating production in a year to 18 months would be, in most cases, simply impossible and in many cases producing in the US would push up costs significantly compared, for example, with countries such as India. American consumers would be hit.
Nonetheless, pharma remains firmly in Trump’s sights and Ireland is a big part of this story, as the location from which a host of big US players send products back home. For the Irish economy, the big pharma players are not just a key source of jobs – for about 70,000 largely skilled staff – they also, together with tech, underpin the massive growth of corporate tax here in recent years.
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Some 40 per cent of the exports from the Irish pharma sector goes to the US. Trump says he wants these drugs and key ingredients made at home, both for economic and national security reasons, though it remains to be seen how the “doability” of this is framed in the report from his administration, which has yet to see the light of day. The powerful pharma sector will also have a say in how this all plays out – Trump will not be able to simply dictate what happens. He is due to publish a key report undertaken on the pharma sector at the end of this month and give more details on his approach to the sector.
This latest threat on pharma raises questions for the EU in its trade talks with the US. Does it accept a wider high-level agreement on tariffs in general, while still leaving this threat hanging over pharma – and possibly semiconductors too? Reports suggest that it may so do, though we will have to see the details on any outline agreement.
Trump has isolated these two sectors for special treatment and threatened tariffs on a different legal basis than the so-called wider reciprocal tariff. The same so-called section 232 tariffs already apply to steel, aluminium and cars. The US may want to do a general deal and come back to these sectors later, as Trump has now indicated. The key issue to watch is whether - like the UK - the US offers the EU any preferential treatment in relation to the section 232 tariffs on pharma, subject to security of supply conditions being met.
The wider context here is that the EU wants to sign a deal in principle with the US - and may be close to doing so - but reports on Wednesday said that this would be on worse terms than the UK deal. The UK has been promised preferential treatment on the Section 232 tariffs. This will be of concern to Ireland on pharma, while Germany will wait to see the current 25 per cent levies on cars reduced.
There are risks here for Ireland and diplomatic questions, too. It would not, as one observer put it last night, look good for the Government if the EU pushes ahead with a tariff deal without having some comfort for Ireland on pharma. Ireland’s Brussels diplomats face a busy few weeks.
Like other member states, Ireland also faces risks from Trump’s general approach to tariffs. The food and drink sector is already being hit by the 10 per cent tariffs and there are reports that Trump wants these increased to 17 per cent. In better news, reports suggests spirits and aircraft may be excluded. A deal in principle would, of course, see off a threat of a hike in general tariffs on August 1st - Trump had threatened the EU previously with 50 per cent so-called reciprocal tariffs, in other words ones which would apply generally to most imports from the EU.
The economic risks from pharma tariffs are both short term and long term. In the short term, a gradual build-up of tariffs on imports to the US – if that is what Trump intends – would encourage big pharma firms to change their pricing arrangements and import products into the US from overseas production locations such as Ireland at a lower price. In turn this would mean lower profits declared in Ireland and less tax paid here.
Over the longer term the fear is of a drift away of investment from Ireland. We would hope that pharma companies would continue to invest here to produce for other markets, but Trump is intent on making exporting back to the US much more difficult. Trump’s 200 per cent tariff threat may be just the latest top-of-the-head notion. But it does show his intent to find a way to pressure the sector and this poses dangers for Ireland, as does the risk of general tariffs remaining in place.
