President Trump has imposed significant tariffs on top trading partners. This includes a 25% duty on goods from Canada and Mexico as well as an increase to 20% on Chinese goods. The president’s rationale for targeting Canada and Mexico is their alleged failure to take sufficient action to curb the fentanyl crisis at the border. Additionally, he asserts that the United States is being exploited by its trade partners.
This will impact all industries. A recent Forbes article notes that vehicle prices may increase $3,000. Healthcare is no different.
Tariffs will either increase healthcare costs or decrease healthcare availability.
What Are Tariffs?
Tariffs are taxes levied by governments on imported goods, typically a percentage of their value. The incidence of this tax — who pays it — often (but not always) trickles down to consumers via higher prices or less availability of goods.
The new tariffs seek to shield domestic industries or penalize trade partners. Used historically for revenue or trade balance adjustments, tariffs remain contentious, sparking debates over their efficacy and consumer impact. The challenge is that domestic industries can increase prices or be forced to shift to less efficient production. More recently, another challenge is that delivery of goods has become a global enterprise.
The Potential Positives Of Tariffs
There is a potential that U.S. companies will increase domestic development of products and reduce international dependence. Scarcity breeds ingenuity.
Tariffs have the possibility in the long run to develop resilience within the United States healthcare market. By raising import costs, tariffs incentivize domestic production of critical medical goods, reducing dependence on foreign supply chains. For instance, the 2022 intravenous contrast shortage — triggered by China’s COVID-19 lockdowns slashing iodinated contrast media exports — left U.S. hospitals scrambling, delaying scans and in some cases treatments. IV contrast is often needed to diagnose things like cancers or infections.
The argument from tariff supporters is that they could create jobs and enhance national security. They could also serve as a short-term tool in negotiations for better trade rates.
Three Negative Impacts of Tariffs On Healthcare
Tariffs will increase healthcare costs, which will then be passed on to patients in one of two ways — either increased cost or decreased care. Higher healthcare costs could disproportionately hit low-income and chronically ill patients reliant on affordable imports. The American Hospital Association is advocating with the Advanced Medical Technology Association to obtain an exemption for healthcare goods.
1) Increased Cost Of Generic Drugs
The additional 10% tariff on Chinese imports will elevate costs for active pharmaceutical ingredients (APIs), many of which are sourced from China. This generally doesn’t impact branded medications, but it does affect generics, which will see a supply chain price increase which is almost certainly passed down to the consumer in some fashion or another. For example, generic antibiotics like amoxicillin or common steroids like hydrocortisone rely heavily on Chinese APIs. This could raise patient out-of-pocket costs or strain hospital budgets, potentially reducing access to essential medications.
It will be interesting to see if companies are able to shift their API to countries not impacted by the tariffs that may have more quality oversight. Will this spawn a new era of United States development? Is that an efficient pivot?
2) Higher Prices For Medical Devices
The majority (69%) of U.S.-marketed medical devices are manufactured entirely outside of the U.S., according to Medical Device Network.
The AHA notes a large amount of everyday medical supplies, from blood pressure cuffs to sterile drapes, comes from China. The bigger challenge may actually come in the 25% tariff on Mexican imports. Mexico has grown rapidly in medical device manufacturing with its lower wages and lower manufacturing costs. Mexico is seventh in the world for medical exporting and is the top exporter of medical goods to the United States. This includes everything from ultrasound machines to infusion pumps. Maquiladora zones are thriving with Mexico, creating $13.7 billion in healthcare exports.
This supply chain impact will put pressure on your private physician, hospital and surgery centers, which will be passed on to patients and insurers.
3) Economic Contraction Will Reduce Healthcare Funding
The tariffs imposed on Mexico, Canada and China are expected to contract the economy, indirectly undermining healthcare delivery. The Federal Reserve Bank of Atlanta’s GDPNow model now predicts a 2.8% decline in GDP for Q1 2025 due to reduced trade and investment. Currently, 143.3 million individuals receive their health insurance or subsidies for health coverage through the government, accounting for approximately 45% of total healthcare spending, with private businesses covering the remainder. An economic downturn will inevitably lead to a decline in healthcare delivery.
Why Economists Dislike Tariffs, A Technical Discussion
Nobel Prize-winning economist Milton Friedman famously urged society to evaluate programs based on their outcomes rather than their intentions.
That’s why most economists dislike things like the minimum wage, tariffs and the corporate income tax.
How Do Tariff’s Work And How Do Trade Wars Actually Happen?
Let’s say Timmy loves candy bars, and his parents give him $1 a day to buy one after school. It’s the highlight of his day.
Timmy lives in Chocolate Town, a city with a large labor force and ample space, making it highly efficient at producing labor-intensive, intricate and handmade chocolate candy bars. Just next door is Candyland, a town rich in capital and technology. Candyland specializes in manufacturing machine-made chocolate candy bars in a wide variety of flavors with remarkable efficiency.
According to the Heckscher-Ohlin model in economics, each city should specialize in goods that leverage its plentiful resources — Chocolate Town can focus on handmade candy bars and Candyland on machine-made ones — and engage in free trade to exploit their comparative advantage.
Despite living in Chocolate Town, Timmy loves the diverse selection of chocolate candy produced in Candyland. As a result, he typically chooses a different flavor of machine-made candy each day — some days opting for peanut butter, other days enjoying coconut, and so on.
However, Chocolate Town just imposed a tariff — an import tax — on Candyland’s machine-made candy bars, raising their price in Chocolate Town’s market. This protectionist measure aims to shield Chocolate Town’s local candy producers from unfair competition. As a result, Timmy, who only has $1 and who prefers the machine-made bars, is stuck buying handmade ones produced locally, reducing his consumer choice and potentially increasing his costs.
In response, Candyland retaliates with a counter-tariff on Chocolate Town’s handmade candy bars, igniting a trade war. This escalation further distorts trade, forcing both cities to produce goods outside their comparative advantages.
Chocolate Town, despite lacking the necessary capital stock, may attempt to manufacture machine-made candy bars despite having little experience operating the intricate candy-making machines. Although it has spent years perfecting world-class handmade chocolate bars, it now struggles to produce 31 different flavors using unfamiliar machinery.
Meanwhile, Candyland faces its own challenges as it attempts to produce handmade candy bars despite its shortage of skilled labor. Its workforce, accustomed to operating complex candy-making machines, now finds itself manually squirting caramel into designer chocolates — an inefficient and unfamiliar process.
This misallocation of resources results in productive inefficiency and a deadweight loss — a reduction in overall economic welfare that benefits neither producers nor consumers.
In the end, Timmy now has to ask his parents for $1.25 for a candy bar and struggles to find the one he likes.
Tariffs In Healthcare Economics
Back to healthcare, tariffs distort intertemporal resource allocation, elevating input costs (e.g., Chinese pharmaceutical ingredients) and triggering supply-side inflation. This parallels the minimum wage critique: both policies impose artificial price floors, reducing market-clearing transactions and welfare.
History Provides A Cautionary Tariff Tale
The Smoot-Hawley Tariff Act of 1930 levied tariffs averaging 20% on over 20,000 imported goods, intended to shield U.S. farmers and manufacturers during the Great Depression. Instead, it most likely made the depression worse. Douglas Irwin’s book is a fantastic read on the issue. Global trade plummeted as nations like Canada and Britain retaliated with their own tariffs, slashing United States exports by 67% from 1929 to 1933. The agricultural sector, expecting relief, saw crop prices collapse. More importantly, if you’re a politician, it’s one of the factors that led to increasing animosity toward then-President Herbert Hoover.
Read the full article here