Preparing for Pharmaceutical Tariffs: What Industry Can Do To Mitigate Supply Chain Risks

 The pharmaceutical industry has benefitted from a generally duty-free import environment for decades, allowing pharmaceutical manufacturers and importers to develop extensive, multi-jurisdictional supply chains optimized for cost, quality, efficiency, and tax savings. The second Trump Administration’s various tariff initiatives, including an ongoing investigation[1] into the impact of pharmaceutical imports on national security under Section 232 of the Trade Expansion Act of 1962, may affect a wide range of pharmaceutical items and supply chains.

President Trump and key Administration officials, including the Secretary of Commerce (who oversees the Section 232 investigation), have expressed an intent to introduce pharmaceutical tariffs in the near future. Against this backdrop, companies should proactively evaluate their supply chains to make informed decisions regarding key compliance and commercial considerations to mitigate potential supply chain disruptions and cost increases when the tariffs take effect.

To start, companies should review supply agreements to ensure that key compliance concepts and obligations are properly addressed. For example, supply contracts should clearly identify which entity is acting as the importer of record—as the importer of record is legally responsible for paying tariffs on U.S. imports. Inaccurate import valuation practices could lead to serious consequences, including charges for underpayment of tariffs and liability for additional penalties under customs statutes and the False Claims Act. Where the company is acting as an importer of record, it should consider negotiating arrangements to allocate the financial burden of tariffs across the supply chain.

Accurately determining the value of imported goods is essential for pharmaceutical companies as a matter of customs compliance and as a means to assess the tariff exposure of an imported article. Under U.S. law, all imported goods must be appraised to determine the customs duties owed. The default valuation method is the “transaction value,” which is calculated as the “price actually paid or payable” for the article, subject to certain required adjustments.[2] These price adjustments—both additions and subtractions—fall into numerous categories, and in the pharmaceutical context can raise particularly complex questions regarding the role of intellectual property licensing agreements, royalties, intercompany transfer price structures, and contributed materials and technology in connection with the valuation of a manufactured product. In a duty-free import environment, these questions may have seemed less pressing. Now companies should consider these key principles of valuation and how these concepts may map on to existing or planned changes to supply chains.  

Importers involved in multi-tiered international supply chains may also be eligible to use the “first sale” rule when valuing an imported product. This doctrine—a topic of considerable interest in recent months—allows an item’s dutiable value to be based on the (often lower) price of a sale between the manufacturer and an intermediary, rather than the subsequent sale or transfer price to the U.S. importer. This transactional structure may be particularly relevant to pharmaceutical supply chains that involve third-party manufacturing arrangements and intercompany transfers before the manufactured article is imported into the United States. However, importers must ensure that the arrangement meets the technical criteria to satisfy the first sale rule, including that the “first sale” in question involves a true transfer of title and the risk of loss. Companies interested in pursuing this valuation method should therefore carefully examine upstream supply agreements and implement strategic revisions as appropriate. At the same time, it is critical to review potential changes through the lens of a company’s tax strategy, including giving careful consideration to how a change in import valuation may affect reliance on a cost of goods sold deduction.

Additional considerations are often present in the pharmaceutical context, particularly in the areas of classification and country of origin assessments (particularly relevant in the event of country-specific pharmaceutical tariff rates or exemptions). U.S. customs regulations provide tariff-free exemptions for certain products that qualify under special classification criteria, such as certain imports used for activities relating to research and development (“R&D”). Importers should be prepared to evaluate how pharmaceutical tariffs may affect their current import practices, and should consider whether strategic modifications to supply chains involving chemical compounds, intermediates, and bulk drug substances used for R&D could result in lower tariff obligations. In each case, it will be important to maintain clear documentation of the roles of various parties and activities.

There is no one-size-fits-all solution as importers grapple with the expected tariffs. The optimal approach will depend on the specific nature of the product and structure of the supply chain, and certain tariff solutions may not be worth the associated logistical or tax burdens. While much remains uncertain about the projected new tariffs, importers who engage in systematic planning will be in the best position to mitigate the impac