A Tough Pill to Swallow: An Investigation into Pharmaceutical Trade Elasticity and Tariff Counterfactuals in the Age of Trump

Abstract

Since the beginning of Trump’s second term, tariffs have become the focal point of the administration’s economic and foreign policy initiatives. These new economic policies have been particularly impactful for the pharmaceutical industry, one that historically has faced near 0% tariff levels. Using tariffs, this administration has sought to reshore pharmaceutical production to protect domestic supply chains and combat rising drug prices by using tariffs as a bargaining chip. This thesis sought to find both the elasticity of pharmaceutical trade from twenty of the largest pharmaceutical trading partners with the United States using a PPMLHDFE model along with the impact of proposed tariff rates on the market shares of these countries within this broad market. For elasticity analysis, this study found that, across all twenty countries, pharmaceutical products generally have inelastic import demand of around -0.5. On the individual country level, most countries also had elasticities within this inelastic range. For the tariff counterfactual analysis, while a 15% reciprocal tariff rate applied to all countries led to negligible changes in market share, more country-specific tariffs, particularly a 125% tariff on China and a 50% tariff rate on India, led to significant reductions in trade volume and subsequent drops in market share. These results show that tariffs on pharmaceutical imports are far from the best option, causing significant drops in trade volumes from top exporters with unclear solutions as to which other countries can fill this drop in supply or when. These potential supply shortages and subsequent price jumps pose a significant concern for American consumers. Rather than tariffs, this administration should focus on domestic support of the pharmaceutical industry through subsidies and tax credits to promote domestic supply along with bilateral trade agreements with foreign countries to combat high drug prices rather than blanket tariff policies.