Washington DC- January 31: US President Donald Trump speaks to reporters after signing …(+)
Getty Images
President Trump has imposes considerable tariffs on top trading partners. This includes a 25% obligation on goods from Canada and Mexico and an increase to 20% on Chinese products. The president's rationale for targeting Canada and Mexico is allegedly suspected of not taking sufficient action to curb the fentanyl crisis at the border. Furthermore, he argues that the US is being exploited by its trading partners.
This affects all industries. A recent Forbes article noted that the price of a vehicle could rise by $3,000. Healthcare is no exception.
Tariffs increase healthcare costs or reduce healthcare availability.
What is customs duty?
Tariffs are taxes collected by the government on imported goods, usually a percentage of their value. This tax incidence – the person who pays it – often (but not always) drips down on the consumer due to the higher prices or the availability of lesser items.
The new tariffs are trying to protect domestic industries or punish trading partners. Tariffs historically used to adjust revenue or trade balances have sparked debate about their effectiveness and impact on consumers, and are still controversial. The challenge is that domestic industries are not moving towards higher prices or less efficient production. Recently, another challenge has become a global company in delivering products.
Potential Positives of Customs
US companies could increase domestic development of products and reduce international dependence. Rareness creates ingenuity.
Tariffs could develop resilience within the US health market. By increasing import costs, tariffs encourage domestic production of critical medical products and reduce reliance on foreign supply chains. For example, intravenous contrast lack in 2022 – triggered the export of iodinated contrast caused by China's Covid-19 lockdown, US hospitals have been scrambling, delayed scans, and in some cases treated. Contrast is often required to diagnose cancer, infections, etc.
The argument from tariff advocates is that they can create jobs and strengthen national security. It could also serve as a short-term tool in negotiations for better trade rates.
Three adverse effects of tariffs on healthcare
Tariffs increase healthcare costs and are passed on to patients in one of two ways. It's an increase in costs or a decrease in care. Rising healthcare costs can disproportionately hit low-income and chronically ill patients who rely on affordable imports. The American Hospital Association, together with the Advanced Medical Technology Association, advocates for obtaining medical products exemptions.
1) Increased cost of generic drugs
A 10% tariff on Chinese imports increases the cost of active pharmaceutical ingredients (API). Most of them are sourced from China. This generally does not affect branded medications, but it does affect generics. This shows a rise in supply chain prices. For example, common antibiotics such as amoxicillin and common steroids such as hydrocortisone rely heavily on Chinese APIs. This could potentially increase patient out-of-pocket costs and hospital budgets, potentially reducing access to essential medications.
It will be interesting to see if businesses can move their APIs to countries that are not affected by tariffs that may be under better quality surveillance. Does this create a new era of US development? Is it an efficient pivot?
2) Increase in medical device prices
According to the Medical Device Network, the majority of medical devices in the US market (69%) are manufactured entirely outside the US.
The AHA points out that a large amount of everyday medical supplies come from China, from blood pressure cuffs to sterile drapes. The bigger challenge could actually be brought about by a 25% tariff on Mexican imports. Mexico is growing rapidly in the manufacturing industry of medical devices due to its low wages and low manufacturing costs. Mexico is the seventh largest in the world for medical exports and is the top exporter of medical products to the United States. This includes everything from ultrasound machines to infusion pumps. Maquiladora Zones thrives in Mexico, generating $13.7 billion in healthcare exports.
The impact of this supply chain will put pressure on private doctors, hospitals and surgical centers and hand over to patients and insurance companies.
3) Economic contraction reduces healthcare funds
Tariffs imposed on Mexico, Canada and China are expected to contract with the economy, indirectly undermining healthcare delivery. The Federal Reserve Bank of Atlanta's GDPNOW model predicts a 2.8% decline in GDP for the first quarter of 2025 due to declines in trade and investment. Currently, 143.3 million people receive health insurance or health insurance subsidies through the government, accounting for around 45% of total medical expenses, with private companies covering the rest. A recession inevitably leads to a decrease in healthcare delivery.
Why economists hate tariffs, technical debate
Nobel Prize-winning economist Milton Friedman has renownedly urged society to evaluate programs based on results rather than their intentions.
That's why most economists dislike minimum wage, customs duties, corporate income taxes, and more.
How does tariff work happen, and how does a trade war actually happen?
Timmy loves candy bars and his parents give him a dollar a day, even after school. That's the highlight of his day.
Timmy lives in Chocolate Town, a city with a large workforce and ample space, and is extremely efficient at producing labor-intensive, complex and handmade chocolate candy bars. Right next to it is Candyland, a town rich in capital and technology. Candyland specializes in a variety of flavors with incredible efficiency by producing machine-made chocolate candy bars.
According to the Heckshire Olin model of economics, cities need to specialize in products that utilize their wealth of resources. Chocolate Town can focus on handmade candy bars, machine-made bars, and can engage in free trade to take advantage of their comparative advantage.
Despite living in the chocolate town, Timmy loves the diverse selection of chocolate candies produced at Candyland. As a result, he usually chooses a different machine-made flavor of candy every day. I enjoy coconuts on the days I choose peanut butter and the other days.
However, Chocolate Town has imposed tariffs (import tax) on machine-made candy bars in Candyland, raising prices in the Chocolate Town market. This protectionist measure aims to protect local candy producers in Chocolate Town from unfair competition. As a result, Timmy, who prefers machine-made bars, only $1, could buy handmade locally produced items, reducing consumer choices and increasing costs.
In response, Candyland retaliates with a counterattack from a handmade candy bar in Chocolate Town, setting a ignited trade war. This escalation further distorts trade and forces both cities to produce goods other than comparative benefits.
Chocolate Town could be trying to produce machine-made candy bars despite the lack of required capital stock and little operation of complex candy making machines. We've spent years completing our world-class handmade chocolate bars, but now we're struggling to produce 31 different flavors using machines that are not familiar to us.
Meanwhile, Candyland faces its own challenges as it seeks to produce handmade candy bars despite a lack of a skilled workforce. That workforce, accustomed to running complex candymaking machines, ended up manually squirting caramel into designer chocolate.
This misallocation of resources results in productive inefficiency and loss of death. This is a decline in overall economic welfare that does not benefit producers or consumers.
Ultimately, Timmy has to ask her parents for $1.25 for a candy bar and have a hard time finding what she likes.
Tariffs in Healthcare Economics
Returning to healthcare, tariffs distort the allocation of resources between countries, causing increased input costs (such as Chinese drug ingredients), and supply-side inflation. This is similar to the critique of the minimum wage. Both policies impose artificial price floors and reduce market-approved transactions and welfare.
History provides warning tariff stories
The Smoot Holy Customs Act of 1930 imposed an average 20% tariff on more than 20,000 imports aimed at protecting US farmers and manufacturers during the Great Repression. Instead, it probably exacerbated depression. Douglas Irwin's book is a great read on this issue. World trade plunged as countries such as Canada and the UK retaliated with their own tariffs, cutting US exports by 67% between 1929 and 1933. More importantly, if you are a politician, it is one of the factors that led to increased hostility towards then-President Herbert Hoover.
