Donald Trump announced on August 5 that tariffs will be imposed by the United States against imported pharmaceuticals. The president has promised to provide details in the coming days about the tariffs on semiconductors.
The “reciprocal” tariffs policy, which has placed duties of 10 to 41% on imports of goods from more than a dozen countries already, is complemented by these new measures.
The new target is chips and drugs, with a strategic rationale, because the supply chains of both industries are fragile and global.
Trump’s proposal is an attempt to extract political leverage out of uncertainty and force production shifts. While headlines focused on tariffs, the true story is how these measures can reshape markets, industries and corporate behaviour before any single rate takes effect.
The first step in testing is pharmaceuticals
The new drug tariffs appear simple at first: Bring manufacturing back home, penalize foreign suppliers and reduce costs for American customers. The math is not as simple as it seems.
India and China dominate the API market in the United States. Trump’s proposal to increase tariffs from “small to 250%” is intended to spur production.
This ignores the multi-year nature of building a US pharmaceutical plant. The FDA must approve the facility, as well as provide specialized equipment and train staff. The industry would not be able to meet the deadline even if they wanted.
What happens next can be predicted. The generic manufacturers who have thin margins will be the hardest hit. Prices will rise, and many may leave the US market. This means that there are fewer basic medicine suppliers and an increased risk of shortages.
Branded pharmaceutical giants like Pfizer Merck Johnson & Johnson are more protected. Tariffs won’t change much in terms of their price power, as they already own their intellectual properties. Tariffs may even strengthen their position, by reducing the number of low-cost competitors.
It’s a simple market triage. If history is any indication, the patients will be affected long before US factories are online.
The real reason behind Trump’s tariffs on chips
Semiconductors have a different nature. Trump may not have revealed tariff rates yet, but the fact that he has announced them separately was not by chance. The US Industrial Strategy is centered around chips, and tariffs can be used to negotiate as well as generate revenue.
Through the CHIPS Act, US taxpayers have already invested more than $50 Billion to help bring manufacturing back home. Most chip manufacturing still occurs in Taiwan, South Korea and China.
Trump created deliberate uncertainty by withholding details about the tariffs on chips. This uncertainty already has the effect of a tariff.
Cloud providers, automakers and electronics makers are among the multinationals who rely heavily on semiconductors. Wait for White House action or change sourcing in advance.
Some have already begun to increase their procurement of non-Chinese vendors. Some are already re-evaluating where to build their data centers. Although the tariff is not yet written, it has already caused the market to react.
Few people are aware of the second layer. The cost of US-made fabs may rise dramatically if the tariffs do not only include chips, but also semiconductor manufacturing equipment.
The equipment from Japan and Europe will be affected, reducing the margins of Intel’s Arizona facility, TSMC, and other companies just as they are ramping up construction. The same thing that looks like an attack on foreign rivals could strain companies Trump wants to support.
No one is willing to price the legal wildcard
Trump’s tariffs are based on the International Emergency Economic Powers Act, the same act that he used to impose his “reciprocal Tariffs” earlier in the month. This authority, however, is currently being appealed in federal court.
The Federal Circuit’s decision could be rendered within a few weeks. If it is against the White House then the legal foundation for the tariffs might collapse.
The markets do not trade this risk. Investors focus on the amount of tariffs and not their reversibility. Corporations cannot ignore this. The legal challenge is successful, but if tariffs were retroactively canceled, companies would be left with unrecoverable costs.
Some firms do not wait for certainty. Hedging is done now. They have front-loaded inventory, and are already negotiating with alternative suppliers.
It is ambiguity that drives policy. It is the threat that drives behavior, and not its implementation.
Investors are missing out on a lot
Wall Street viewed the headlines about tariffs as political theatre. Semiconductor shares fell slightly following Trump’s comments, but then rose again. Pharma stocks barely changed. This is not the real point. Short-term prices tell us little about the boardroom.
Supply chain is the real issue. The 150% drug tariff is a problem that cannot be ignored. Generic manufacturers can’t absorb the cost. Either they will pass the cost on to consumers or leave the market.
This creates an opportunity for firms with large domestic footprints such as Viatris or Catalent, but also increases the risks of systemic shortages.
Chips are a less obvious but more serious risk. US tech giants such as Nvidia AMD and Apple rely on an optimized globalized supply chains.
Tariffs which disrupt this flow, even in part, could increase costs and cause product cycles to slow. Tariffs on semiconductor equipment will increase capital expenditures for US fabs, and could delay their breakeven times by many years.
They are not visible in earnings reports, but they will be important in the valuation model. These effects also help explain why the best capital is moving into infrastructure investments in the US while reducing exposure to manufacturers that are heavily dependent on imports.
This is more important than headline figures
Public debate has focused on the question of whether Trump would really raise tariffs on chips to 250% or if he would go up to that level. This is missing the real point.
Timeliness is policy. Trump’s decision to announce tariffs in stages forces businesses to act before knowing the total. He creates uncertainty in an industry which cannot wait to know the details.
The most significant market effects are not visible until after they have already begun. Watch out for signs such as drug shortages, abrupt shifts in orders of chip equipment, and unexpected announcements about new factories in North America.
Tariffs may not be fully implemented or may even be overturned in court. The pressure that they create is real and is affecting the way two of the most important industries in the world operate.
It is more than a simple trade story. This is an experiment to use uncertainty in policy. Whether it is a success or a failure, its costs won’t be abstract. The costs will be measured by drug prices, lead times for chips, and balance sheet.
As updates are made, this post Trump’s tariff risk on drugs and chips could be a game changer may change.
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