Overview

This brief provides an overview of federal policy on imported pharmaceutical and medical commodities and examines the impacts of tariffs and the ‘Most Favored Nation’ (MFN) policy on relevant stakeholders.

Tariff Policy

On April 1, 2025, the US Department of Commerce launched an investigation of pharmaceutical-related imports under Section 232 of the Trade Expansion Act, a statute that permits the president to regulate imports on the basis of maintaining national security.[1] The imports subject to investigation include both finished pharmaceuticals and their active ingredients, known as unfinished goods. The Department of Commerce has 270 days to complete the investigation, at which point the president will have 90 days to act.[2] Although the Department of Commerce has yet to release its findings, the Trump Administration has indicated its intention to impose tariffs on imported pharmaceuticals and their derivatives. On August 5, President Trump told CNBC that he aims to initially impose a “small tariff” on pharmaceutical products, followed by 150% and 250% levies thereafter.

We want pharmaceuticals made in our country

President Trump, CNBC interview, August 5, 2025

Between 2014 and 2024, US pharmaceutical imports rose dramatically from $73 billion to $215 billion.[4] Currently, the US outsources 78% of its solid oral generics and nearly 60% of injectable generics; for brand-name drugs, these figures are 50% and 55%, respectively. These percentages are higher for generics, which have significantly smaller margins than brand-name drugs. As a result, many generic drug manufacturers offshore production to markets like India, where manufacturing costs are lower.[5]

The tariff policy on pharmaceuticals aims to curb US reliance on foreign markets through the following mechanisms:

Incentivize domestic manufacturing — Historically, pharmaceuticals have generally been exempted from import taxation, providing lucrative incentives to offshore drug manufacturing.[6] Import tariffs eliminate these incentives, thereby promoting reshoring of drug manufacturing.

Minimize the trade deficit — In 2024, the trade deficit on pharmaceuticals (imports minus exports) was $139 billion.[7] The stated objective to encourage domestic drug manufacturing through tariffs would reduce this trade deficit.

Address pharmaceutical shortages — In Q1 of 2024, drug shortages reached an all-time high of 323, 70% of which were generic medications. US dependence on foreign markets to source generic drugs and their active ingredients, known as APIs, plays a role in facilitating supply chain disruptions.

Most Favored Nation Policy

US consumers pay significantly more for brand-name pharmaceuticals, though generic drugs are less expensive than in other developed nations. In a comparative analysis of drug prices across 33 OECD countries and the US, Americans paid 2.78 times more for drugs (generic and brand-name) than their counterparts abroad. For brand-name drugs in particular, Americans paid 4.22 times more, while for generics, Americans paid 40% less, on average.[9]

The ‘Most Favored Nation Policy’ aims to address disparate drug pricing by employing mechanisms that bring US prices closer in line with those abroad. On May 12, 2025, President Trump set this policy in motion by issuing E.O. 14,297, which requires pharmaceutical manufacturers to lower prices to MFN levels or face financial penalties. The administration escalated this agenda on July 31, when the White House sent letters to 17 pharmaceutical manufacturers demanding they enact MFN pricing by September 29: AbbVie, Amgen, AstraZeneca, Boehringer Ingelheim, Bristol Myers Squibb, Eli Lilly, EMD Serono, Genentech, Gilead, GSK, Johnson & Johnson, Merck, Novartis, Novo Nordisk, Pfizer, Regeneron, and Sanofi. The policy aims to accomplish the following goals:

Increase economic access to pharmaceuticals — In 2024, 21% of American adults did not fill their prescription due to affordability.[10] If pharmaceutical prices approach MFN prices, fewer Americans would need to forgo filling their prescriptions due to cost, resulting in more widespread accessibility.

Regulate pricing power of pharmaceutical industry — Historically, the federal government has permitted drugs to be priced in accordance with market forces. Given the high-risk nature of drug manufacturing, this mechanism has been viewed as crucial for encouraging pharmaceutical R&D in the US. The MFN policy would contradict this status quo by enhancing governmental oversight of drug pricing.

Projected Impacts: MFN Policy

Potential to Discourage Pharmaceutical Investment

Pharmaceutical companies invest an average of $3 billion over the course of the drug development process, which lasts approximately twelve years. The majority of these drugs (80-90%) never reach the market. Given the high-risk nature of pharmaceutical development, drugs that do reach the market generate significant returns until their patents expire. When a drug’s patent expires, new entrants enter the market, resulting in a drastic decline in price.

The high payoff when drugs come to market serves as a mechanism for encouraging drug development in the US. In 2024, the US approved 50 new drugs,[11] while European nations—which generally maintain stricter regulations on drug pricing—cumulatively brought 46 drugs to market.[12] If US drug manufacturers are required to comply with MFN pricing during the patent stage, analysts project the US may experience a decline in pharmaceutical investment.

Potential to Raise Global Drug Prices

To minimize potential losses, pharmaceutical companies may raise prices abroad to increase MFN levels for specific drugs. Eli Lilly has already adopted this strategy, raising the price of its diabetes and obesity medication, Mounjaro, from $165 to $447 in the UK. While the NHS announced that post-negotiation prices will remain the same, MFN levels are projected to rise.[13]

Projected Impacts: Tariff Policy

Potential to Reshore Brand-Name Drug Manufacturing

In response to the tariff policy, pharmaceutical companies have already begun reshoring manufacturing to the US. Many of these companies, including Roche, Amgen, Biogen, and Johnson & Johnson, have invested in North Carolina-based plants, positioning the state as a significant stakeholder in domestic manufacturing. Johnson & Johnson pledges to invest $55 billion in US manufacturing over the next four years, $2 billion of which will finance a new biologics manufacturing facility in Wilson, NC, that will add 5,000 new jobs. However, the majority of these investments are concentrated in brand-name markets, suggesting that tariffs may have limited impact on generic manufacturers who operate on narrow margins.

Since the Section 232 investigation was announced in April 2025, pharmaceutical manufacturers have pledged nearly $283 billion in U.S. manufacturing investments. Table 1 details these commitments by company and announcement date.

Potential to Disrupt Global Supply Chains

According to the American Society of Health-System Pharmacists (ASHP), 253 drugs are currently in shortage as of the most recent data.[14] At their root, these shortages result from fragile and fragmented supply chains. Economic pressures, such as tariffs, threaten to further disrupt drug supply chains, especially for generics, which accounted for 70% of drug-related shortages in early 2024 and 85% of prescriptions filled. Generic manufacturers operate on small margins and have limited capacity to absorb additional costs. At the same time, generic drug companies may not be able to afford reshoring to the US, where labor and facility costs are significantly higher than in developing countries. To mitigate these challenges, generic manufacturers may source lower-quality ingredients, which could further disrupt drug supply chains given the heightened risk of contamination.[15]

Potential to Increase Domestic Drug Prices

Whether pharmaceutical companies reshore or not, tariffs are projected to reduce profit margins. For companies that continue to import their products, these reductions will come in the form of tariffs. Conversely, companies that reshore will incur costs associated with relocation, such as facility construction. While the impact on margins remains uncertain, Morningstar analysts project that profits will fall by 4% for drugmakers that relocate and 7% for those that do not.[16] Pharmaceutical companies will likely pass these costs onto payers and eventually consumers in the form of increased premiums and out-of-pocket expenses.[17]

Discussion and Conclusion

The federal administration’s tariff and MFN policies have significant implications for drug pricing and pharmaceutical supply chains. Critics of these policies assert that reforming tax policies would be a more effective mechanism to bolster US manufacturing. Others assert that structural reforms are necessary to bring down drug prices. MFN countries often have governments that directly negotiate with pharmaceutical companies, whereas the US government has limited authority to negotiate, as third-party middlemen known as Pharmacy Benefit Managers largely govern this process.[18] Without structural reforms to the negotiation process, critics argue that the MFN policy may face implementation challenges.

As the policy landscape continues to evolve pending the Department of Commerce’s Section 232 report, the consequences outlined in this brief are subject to change. Nevertheless, based on the current body of research, this brief identifies the following potential impacts of these policies:

Discourage pharmaceutical investment — By reducing the financial incentive to bring new drugs to market, the MFN policy may discourage pharmaceutical companies from investing in R&D in the US.

Raise global drug prices — To offset financial losses resulting from MFN pricing schemes, drugmakers may raise prices abroad to inflate MFN levels.

Reshore brand-name drug manufacturing — To avert potential losses incurred from tariffs, drug manufacturers have pledged significant capital investments in US domestic manufacturing.

Disrupt global supply chains — Given generic manufacturers’ low tolerance for financial loss, generic drugmakers may source cheaper, lower-quality ingredients, which are more susceptible to supply chain disruptions.

Increase domestic drug prices — Costs incurred due to import tariffs and/or reshoring to the US are expected to be passed on to consumers in the form of higher drug prices and insurance premiums.