Pharmaceutical Tariffs Would Add Costs and Reduce Innovation

Introduction

President Trump and his administration made several threats to subject pharmaceutical products and ingredients to tariffs throughout 2025. While no new tariffs apply to pharmaceuticals as of January 2026, the threat of new tariffs—and higher costs for Americans—remains. We estimate three different pharmaceutical tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. scenarios to illustrate a range of potential costs for US households. We find that a maximal approach for pharmaceutical tariffs could increase tariff costs by $23 billion, while a more narrowly tailored tariff approach would add $19.7 billion in new tariff costs.

Tariff Threats on Pharmaceuticals

At the start of 2026, pharmaceutical products and ingredients remain exempt from new tariffs imposed by the Trump administration. An ongoing investigation into pharmaceutical imports and other threats of tariffs, detailed in the list below, means the possibility of tariffs on drugs and ingredients remains:

• On April 15, 2025, the Secretary of Commerce opened a Section 232 investigation into imports of pharmaceutical products and ingredients, the findings of which have not yet been publicly released.
• On July 8, 2025, the president remarked at a cabinet meeting that an announcement on pharmaceutical tariffs of up to 200 percent was forthcoming.
• On September 25, 2025, the president posted on social media that beginning October 1, 2025, the United States would impose 100 percent tariffs on any branded or patented pharmaceutical product unless the company is building a manufacturing facility in the United States; however, those tariffs did not take effect on October 1.
• Negotiations with the EU, UK, and Japan have outlined different arrangements with each trading partner if pharmaceutical tariffs take effect: for the EU and Japan, tariffs would be capped at 15 percent, and the UK would be exempt.

Estimating the Burden of Pharmaceutical Tariffs

We estimate up to $225 billion of imports could potentially be impacted should the president decide to impose tariffs on the more than 800 pharmaceutical products or ingredients that were exempted from tariffs under the Annex 3 exemptions list.

In 2024, across the categories of goods listed in Annex 3, the US imported $214 billion of medicines and $63 billion of chemicals, of which we estimate $11.3 billion were for pharmaceutical use (see methodology section), leading to a total of $225 billion in pharmaceutical-related imports. Most imports of both medicines and pharmaceutical ingredients came from the EU—61 percent and 47 percent, respectively—while China accounted for less than 4 percent of imports overall.

Table 1. Pharmaceutical Imports Totaled $270 Billion in 2024

Source: USITC DataWeb.

We estimate the total taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase that would arise in 2026 under three different pharmaceutical tariff scenarios, applying a 25 percent tariff unless different rates have already been negotiated:

• Scenario 1: Apply the tariffs to all pharmaceutical imports, with rates at 15 percent for imports from Japan and the EU and at 25 percent for imports from all other countries except the UK.
• Scenario 2: Exempt all active pharmaceutical ingredients and apply the tariffs to imports of drugs and medicaments under subsection 30 in Annex 3 at 15 percent for imports from Japan and the EU and at 25 percent for imports from all other countries except the UK.
• Scenario 3: Apply the tariffs to an estimate of branded drugs at 15 percent for imports from Japan and the EU and at 25 percent for imports from all other countries except the UK.

Importing firms and consumers would make tariff payments to the US government. We estimate that under the broadest application of pharmaceutical tariffs under Scenario 1, those payments would total $23 billion in 2026. If the tariffs focused solely on goods imported under subsection 30 in Annex 3, tariff payments would total $21.9 billion. An even narrower approach that targets drugs, but excludes generic drugs (see methodology section), would result in $19.7 billion of tariff payments made to the US Treasury. Across the three scenarios, we estimate tariff costs would increase between $19.7 billion and $23 billion.

The Trump administration has indicated it would potentially exempt imported generic drugs from new pharmaceutical tariffs. Our estimates suggest a relatively limited impact on the overall cost of new tariffs from exempting generics. While generic drugs make up the majority of prescriptions, they account for a significantly smaller share of spending, with branded drugs accounting for nearly 90 percent of drug spending.

In all three tariff scenarios, the net revenue generated from the tariffs is less than the direct tariff payments. This is because of a mechanical, offsetting effect: tariff payments to the government come out of business revenues before those revenues are distributed to workers, owners, and shareholders as compensation. After paying a new tariff to the federal government, that income is simply no longer there. When income is taken out of the economy through an indirect taxAn indirect tax, unlike a direct tax such as the income tax, is a tax collected on a product by the retailer or manufacturer; however, the end consumer of the final product ultimately bears much of the burden through the higher price of a good or service. Sales and value-added taxes (VATs) are two examples of indirect taxes. increase like tariffs, it shrinks federal income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. revenues, leading to a slightly lower net revenue effect for the government than implied by looking at the tariff payments alone.

We estimate that new pharmaceutical tariffs would increase taxes between $15.1 billion and $17.7 billion in 2026 on net.

Table 2. Pharmaceutical Tariffs Would Add Up to $23 Billion in New Costs

Source: Tax Foundation estimates and Tax Foundation General Equilibrium Model.

The pharmaceutical sector as a whole may be more limited in its ability to pass tariff costs forward to consumers because of regulations on pricing and contracts. But the inability to pass the cost on to consumer prices does not erase the burden that pharmaceutical tariffs would impose on American households.

If, instead, pharmaceutical companies face higher production costs because of the tariffs, the lower profits that result would mean lower wages for workers, lower returns to shareholders, and lower reinvestment in new drug development.

It is unlikely that firms would make major changes to their investment plans in response to temporary or uncertain tariffs. If, however, firms did decide to move production to the US, it would not be a quick or cost-free process. Even if firms restructure their supply chains to avoid directly paying the tariff, they would be burdened with higher costs, and consumers could potentially experience shortages in the near term.

Conclusion

Though, to date, the Trump administration has not imposed new, industry-specific tariffs on drugs or active pharmaceutical ingredients, an ongoing Section 232 investigation into pharmaceutical imports could give the president authority to do so. We estimate a range of tariff scenarios, applying 25 percent tariffs to pharmaceutical imports (unless lower rates have already been negotiated), finding it would increase drug costs by up to $23 billion. Even if tariffs are narrowly targeted, and even if regulations prevent firms from passing the costs directly to consumers, pharmaceutical tariffs will act as a hidden cost on Americans: they would shrink incomes, reduce investment, and lead to less innovation.

Methodology

To estimate the direct revenue effect of tariffs, we apply an elasticity of –2 using a functional form equation based on research from Boehm et al. and the USITC. We assume a noncompliance rate of 8 percent. To produce the net revenue effect of tariffs, we produce an income and payroll tax offset within our microsimulation model. In 2026, our calculated payroll and income tax offset is .232.

To estimate the broad tariff base, we use all 815 HTS codes noted as pharmaceutical products currently exempted under Annex 3, with an adjustment for the end-use of chemical imports. Broad categories of chemicals included on Annex 3 likely span many industries. As such, we assume that 18 percent of import values of chemicals are for use in pharmaceutical preparations.

To estimate branded drug imports, we assume the split between branded drug imports and generic drug imports matches their respective drug spending shares, resulting in an assumption that 90 percent of drug imports by value are for branded drugs.

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