In more detail

Tariffs

Since taking office, President Trump has announced a multitude of tariff measures on a variety of countries. This has produced uncertainty, with measures being announced, implemented, and suspended on short notice. As part of his Presidential campaign, Trump promised tariffs against China specifically, as well as allies such as Mexico and Canada. At the time of publication, 25% tariffs against Canada and Mexico have been imposed and suspended for products which qualify for preferential treatment under the USMCA (the end of the suspension date is unclear but thought to be 2 April 2025), alongside a range of tariffs on Chinese imports. Since becoming President, Trump has stated that he intends to impose significant tariffs on steel, aluminum, semiconductor chips, copper and drugs. Other reciprocal tariffs on all US imports from all countries are also expected from the US in the coming weeks and months, whilst other countries have announced their own retaliatory measures in response.

On 12 March 2025, the EU announced countermeasures to protect European businesses and consumers from the impact of US steel and aluminum tariffs. The countermeasures include the reimposition of suspended 2018 and 2020 retaliatory tariffs on 1 April 2025, and the imposition of a new, additional package of retaliatory measures by mid-April. Although this additional new package of retaliatory measures generally excludes pharmaceuticals, the list includes a number of US originating products of medical use which we have listed below under the "Medical Devices" section and a number of components and materials which may be relevant to manufacturing in the pharmaceutical and medtech industries.

Increased tariffs mean that pharmaceutical and medical devices, which are generally not subject to customs duty, will now be subject to customs duty on import into the US (and into any other jurisdictions that impose retaliatory tariffs against US originating products). Customs duty is paid as a percentage of the customs value of the imported goods and is a cost that will be borne by the importer (depending on its contractual terms with its customer, it may be possible for this cost to be passed on to the latter).

The implications of tariffs are wide ranging: the volatile nature has created significant uncertainty in the markets, whilst tariffs on imports from major trading partners like China, Canada, and Mexico may lead to increased consumer prices whilst straining key trading relationships. Countries affected have also retaliated with their own tariffs, stoking fears over a looming trade war.

Increased costs from tariffs can impact transfer pricing arrangements and compliance with the arm's length principle. Companies need to determine which entity should bear the increased costs to ensure they remain tax deductible and align with group transfer pricing policies. Tariffs can also lead to potential double taxation issues, as different tax authorities may interpret cost allocation differently, possibly resulting in disputes and the need for relief through mutual agreement procedures.

In addition, tariff proposals are having an effect on M&A activity. Buyers are unable to confirm their business case and pricing of a deal as the future profitability of the target business may be impacted in a myriad of ways. For example, if the target company's supply chain includes the production of goods in Mexico which are then imported into the US, this could now be subject to a tariff and erode the profit margin on such products. As businesses typically trade on a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), this could have a substantial effect on the pricing of deals.

Pharmaceuticals

President Trump announced plans to impose tariffs of at least 25% on the pharmaceutical industry. This poses a range of concerns, set out below:

• WTO Violation: According to the WTO's 1994 Pharma Agreement, the majority of pharmaceutical products, and the substances used to produce them are exempt from tariffs. The Agreement was signed by Canada, the European Union, Japan, China, Norway, Switzerland, the United Kingdom and the United States. If Trump imposes tariffs on pharmaceuticals, this could amount to a violation of World Trade Organization rules.
• Increased Costs and Prices: Tariffs will lead to higher costs for the importer, as noted above, and can lead to higher prices which are often borne by the end consumer. This is of significant relevance given that many pharmaceuticals are an essential need. Since pharmaceutical products often involve ingredients sourced from other countries, these increased costs could make medications more expensive, affecting hospitals and patients alike.
• Supply Chain Disruptions: The highly complex and global nature of pharmaceutical supply chains means that tariffs could cause significant disruptions. Most pharmaceutical products are the result of an internationally connected supply chain and sourcing materials may become more difficult and expensive, ultimately increasing, existing drug shortage problems.
• Manufacturing Location Strategies: Trump's stated aim of tariffs is to bolster US domestic production and coerce companies to relocate their manufacturing operations to the US. While this could reduce dependency on foreign suppliers, it may also lead to higher production costs and longer timelines for drug availability. The timescale for relocation could prove extensive given the highly regulated landscape, and it is not clear in all cases – even considering the tariffs – whether domestic production would prove cheaper than the vast economies of scale in other countries, such as China and India.

Medical Devices

Tariffs are also likely to have a significant impact on the medical device industry, which also depends on complex supply chains and offshore manufacturing. Medical devices are not covered by the 1994 WTO Pharma Agreement. However, during President Trump’s first term, most medical devices from China were exempted from tariffs.

The American medical device trade association, Advamed, has called for a similar exemption for all medical technology products including medical devices and supplies, warning that tariffs could lead to higher prices and to reduced investment in research and development.

However, at this stage, the new US tariff measures do not foresee any blanket exemption for medical devices. Trump has clearly stated in the tariff measures already issued on China, Mexico and Canada that exclusions will not be entertained or granted.

The newly imposed tariffs on China, Mexico, and Canada do affect medical devices. Many medical devices are manufactured in these countries and the tariffs can lead to increased costs and potential shortages.

The types of medical devices most affected by tariffs on China, Mexico, and Canada include:

1. Medical Imaging Equipment: Devices such as MRI machines, CT scanners, and X-ray machines are heavily impacted due to their reliance on imported components.
2. Surgical Instruments: Many surgical tools and instruments are imported, and tariffs can significantly increase their costs.
3. Diagnostic Equipment: Devices used for diagnostics, including blood analyzers and other laboratory equipment, are also affected.
4. Electronic Medical Devices: This category includes devices like pacemakers, defibrillators, and other electronic health monitoring equipment.
5. Personal Protective Equipment (PPE): Items such as gloves, masks, and gowns, which are crucial for healthcare workers, face increased costs due to tariffs.

These tariffs can lead to higher costs for healthcare providers and potentially impact the availability of these essential devices.

Further, the 25% tariffs on steel and aluminum-containing products (so called "derivative" products) that took effect at 12:01 am 12 March 2025, could also impact medical devices that contain steel and aluminum components. (The 25% tariffs apply to the value of the steel/aluminum in such components.)

The medical devices affected by the EU's additional package of retaliatory measures include:

• Stockings for varicose veins of synthetic fibres, knitted or crocheted (61151010)
• Single-use gowns made up of nonwovens, of a kind used by patients or surgeons during surgical procedures (62101092)
• Single-use drapes used during surgical procedures made up of nonwovens (63079092)
• Filtering facepieces (ffp) according to en149, and other masks conforming to a similar standard for masks as respiratory protective devices to protect against particles (63079093)
• Protective face masks (excl. filtering facepieces ffp according to en149, and other masks conforming to a similar standard for masks as respiratory protective devices to protect against particles) (63079095)
• Contact lenses (90013000)
• Operating tables, examination tables, and other medical, dental, surgical or veterinary furniture (excl. dentists' or similar chairs, special tables for x-ray examination, and stretchers and litters, incl. trolley stretchers) (94029000)
• Empty cachets for pharmaceutical use (19059020)

Mitigation Strategies

Based on possible impacts, mitigation strategies should be taken into consideration (e.g., unbundling of transfer prices or use of alternative customs valuation methodologies to optimize customs values (see our blog on this topic here), possible use of First Sale valuation for US imports that involve more than one sale in the export transaction, the use of preferential tariff programs, inbound customs procedures and Free Trade Agreements). Businesses should be aware of their import and export volumes in the US and elsewhere, broken down by products and current tariff rates. This allows businesses to quickly calculate possible impacts on additional customs duties in both regions as a first step on the products targeted by the lists mentioned above and prioritize mitigation strategies.

Baker McKenzie has extensive experience with assisting clients in navigating and mitigating additional tariffs and trade-related actions, as well as conducting reviews of intercompany valuations on imports through the Firm's cross-functional Customs, Trade and Transfer Pricing working group. This also includes significant experience in advising companies on lobbying efforts in these areas. We stand ready to assist as needed. We will be monitoring developments in the life sciences space regularly and update this alert accordingly – please also check our Import and Trade Remedies Blog for regular updates and insight.

Evan Rush, Trainee, has contributed to this legal update.