Trade War — Outlook for the Healthcare Sector
October 25, 2018 | Sourcing Strategy
Introduction
The ongoing trade war between the U.S. and China has led to many developments over the past six months. In April 2018, the U.S. Trade Representative (USTR) released a list of products — spread across categories including pharmaceutical and medical devices — that were subjected to new tariffs that would likely generate an additional $11.5 billion. This list was revised in June 2018, and as per the revision, the healthcare sector was subject to 25 percent tariffs, generating $400 million in tax revenue.
Impact on the U.S. Healthcare Ecosystem
The U.S. imports about 30 percent of parts used in medical devices and 80 percent of raw materials used in drugs from countries including China. Tariffs on these products will result in a significant increase in costs incurred by manufacturers, which will translate into a higher healthcare burden on the economy. Product scarcity is also a concern, as manufacturers look toward transitioning supply contracts to local vendors, which might take time.
Products Impacted by Current Tariffs
The initial list targeted pharmaceutical ingredients and products such as insulin, birth control pills and vaccines, among several others. Due to the sensitive nature of the industry and the substantial increase in the cost of the pharmaceutical products, the USTR revised its stance and released a fresh list of targeted products on June 15, 2018. This updated list for the Medtech and diagnostics sectors is subject to a 25 percent tariff. Notably, it excludes several pharmaceutical ingredients that were a part of the original list.
Products severely affected by these tariffs include electrodiagnostic apparatus ($76 million increase), X-ray apparatus ($44 million increase) and computed tomography apparatus ($33 million increase). Other major categories of products include medical imaging equipment, sterilization devices, patient monitoring systems, displays, ultrasonic scanning apparatus, parts of several other diagnostic tools, etc. The tariffs imposed on such imports from China valued at $1.75 billion are expected to cause an additional burden of about $400 million on Medtech and diagnostics manufacturers. This massive rise in tariffs will burden manufacturers in terms of increased production costs, leading to a price rise for healthcare products and services. The increased healthcare burden will inevitably be borne by American consumers. To provide an example, Medline’s division group president Jim Pigott commented in the USTR public hearing on July 25, 2018 that the tariffs will greatly affect the company’s low-margin business, which will lead to an increase in prices for hospitals, surgery centers, nursing homes and individual consumers who purchase its healthcare products.
Recommended Strategy
With every passing day in this trade war situation, if the tariffs continue to escalate, the impact on economies will be even more severe. According to the International Monetary Fund, the retaliation on tariffs may reduce 0.5 percent off the global growth till 2020. If the tariffs continue to rise, price rise will not be the only downside; non-tariff steps such as barriers to entry/business continuation of American companies in China, inequality in tendering and delays in regulatory approvals may be among the strategies deployed to punish organizations.
To minimize the negative impact of the ongoing trade war, manufacturers should devise a strategy around identifying qualified suppliers — either local or in non-tariff-impacted nations — for products currently facing the brunt of the tariffs, and also the ones that may be impacted in the next wave of proposed tariffs targeting $500 billion worth of goods. Advanced risk assessment and planning would enable organizations to mitigate risks and secure the supply chain. Additionally, companies can keep strategic decisions related to sourcing and procurement on hold and wait for the situation to stabilize.
Some companies are already taking measures. For instance, Charles M. Hubbs, European director at Premier Guard, a medical products manufacturer, disclosed that the company plans to move about 60 percent of its present manufacturing based in China to the United States in case the tariffs are enforced.
Conclusion
With the U.S. targeting products under “Made in China 2025” and China targeting agricultural products from the U.S., the threat of a full-blown trade war is looming large and procurement decision-makers need to be ready to tackle the situation.
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