WASHINGTON, DC – JANUARY 31: U.S. President Donald Trump talks to reporters after signing an … [+]
President Trump has implemented significant tariffs on major trade partners, including a 25% duty on goods from Canada and Mexico and a 20% increase on Chinese goods. The reasoning for targeting Canada and Mexico is their alleged failure to address the fentanyl crisis at the border. Additionally, Trump claims that the U.S. is being taken advantage of by its trade partners.
These tariffs will have a wide-ranging impact on various industries. A recent Forbes article suggests that vehicle prices could rise by $3,000, and the healthcare sector will not be immune to these effects.
Tariffs are essentially taxes imposed by governments on imported goods, usually as a percentage of their value. The cost of these taxes is often passed on to consumers through higher prices or reduced availability of goods.
The new tariffs are intended to protect domestic industries or penalize trade partners. While historically used for revenue or trade balance adjustments, tariffs are a contentious issue, with debates on their effectiveness and impact on consumers. One challenge is that domestic industries may raise prices or be forced to shift to less efficient production methods. Another challenge is the global nature of goods delivery in today’s market.
Potential Benefits of Tariffs
There is a possibility that U.S. companies may increase domestic production of goods and reduce reliance on international sources. Scarcity can drive innovation.
In the healthcare sector, tariffs could lead to the development of a more resilient market in the long run. By increasing import costs, tariffs may incentivize the domestic production of essential medical goods, reducing dependence on foreign supply chains. For example, the shortage of intravenous contrast in 2022, caused by China’s lockdowns, highlighted the vulnerability of U.S. hospitals to disruptions in the global supply chain. IV contrast is crucial for diagnosing conditions like cancer and infections.
Supporters of tariffs argue that they could create jobs, enhance national security, and serve as a bargaining tool in trade negotiations.
Three Negative Impacts of Tariffs on Healthcare
Tariffs are likely to raise healthcare costs, which could be passed on to patients through increased prices or reduced care. This could disproportionately affect low-income and chronically ill patients who rely on affordable imports. The American Hospital Association is working with the Advanced Medical Technology Association to seek exemptions for healthcare goods.
1) Increased Costs of Generic Drugs
The additional 10% tariff on Chinese imports is expected to raise costs for active pharmaceutical ingredients (APIs), many of which come from China. While this may not affect branded medications, generic drugs, which heavily rely on Chinese APIs, could see price increases that are ultimately passed on to consumers. This could lead to higher out-of-pocket costs for patients or strain hospital budgets, potentially limiting access to essential medications.
It remains to be seen whether companies can shift their API sourcing to countries unaffected by tariffs and with better quality oversight. This shift could potentially lead to increased domestic development in the U.S.
2) Higher Prices for Medical Devices
The majority of medical devices marketed in the U.S. are manufactured outside the country. The AHA notes that many medical supplies, including everyday items like blood pressure cuffs and sterile drapes, come from China. The 25% tariff on Mexican imports could also impact the medical device industry, as Mexico is a major exporter of medical goods to the U.S. This supply chain disruption may result in higher prices for medical devices, affecting patients, insurers, and healthcare providers.
3) Economic Contraction and Reduced Healthcare Funding
The tariffs imposed on Mexico, Canada, and China are expected to contract the economy, indirectly affecting healthcare delivery. A decline in GDP could lead to reduced healthcare funding, potentially impacting the 143.3 million individuals who receive health insurance or subsidies through the government. An economic downturn could result in a decrease in healthcare services and coverage.
Why Economists Disapprove of Tariffs
Nobel Prize-winning economist Milton Friedman advocated for evaluating programs based on outcomes rather than intentions.
Most economists are critical of policies like tariffs, the minimum wage, and corporate income taxes.
How Tariffs Work and How Trade Wars Occur
Imagine Timmy, a child who loves candy bars and receives $1 a day from his parents to buy one after school. Timmy lives in Chocolate Town, known for its efficient production of intricate chocolate bars. Next door is Candyland, a town with advanced technology for candy production.
Candyland is a renowned manufacturer specializing in machine-made chocolate candy bars that come in a wide array of flavors, all produced with exceptional efficiency.
In the realm of economics, the Heckscher-Ohlin model suggests that each city should focus on goods that align with its abundant resources. For instance, Chocolate Town could concentrate on crafting handmade candy bars while Candyland excels in producing machine-made varieties. Through free trade, cities can maximize their comparative advantage.
Despite residing in Chocolate Town, Timmy has a strong affinity for the diverse range of chocolate candy bars crafted in Candyland. He enjoys selecting a different flavor of machine-made candy each day, whether it’s peanut butter, coconut, or another enticing option.
Recently, Chocolate Town imposed a tariff on Candyland’s machine-made candy bars to protect its local candy producers from perceived unfair competition. As a result, Timmy, who prefers the machine-made bars, must now purchase locally-made handmade candies due to the increased prices, limiting his choices and potentially raising his expenses.
In retaliation, Candyland initiates a counter-tariff on Chocolate Town’s handmade candy bars, sparking a trade war that disrupts the natural flow of trade and forces both cities to produce goods beyond their comparative advantages.
As a consequence of this trade conflict, both Chocolate Town and Candyland face challenges in adapting to new manufacturing processes. Chocolate Town struggles to operate intricate candy-making machines to produce machine-made bars, while Candyland’s workforce finds it challenging to manually craft handmade candies without the necessary skills.
This misallocation of resources leads to inefficiencies and a decline in overall economic welfare, benefiting neither producers nor consumers. Ultimately, Timmy now faces increased costs and limited options when purchasing candy bars.
In the context of healthcare economics, tariffs can distort resource allocation over time, increase input costs, and trigger inflation on the supply side, similar to the effects of minimum wage policies.
Looking back at history, the Smoot-Hawley Tariff Act of 1930 serves as a cautionary tale. This act, aimed at protecting U.S. farmers and manufacturers during the Great Depression, instead exacerbated the economic downturn. Global trade decreased significantly as retaliatory tariffs were implemented by other nations, leading to a drastic decline in U.S. exports. The agricultural sector, expecting relief, saw prices plummet, contributing to growing discontent towards then-President Herbert Hoover.
In conclusion, the repercussions of tariffs can have far-reaching consequences on economies and industries, highlighting the importance of careful considerations in trade policies.
