The deal between the United States and European Union on trade in pharmaceutical products is likely to raise the price of critical medications in the short term. But it also promises to have a far deeper impact on the underlying structure of the industry.

The agreement, reached last summer, capped tariffs on most pharmaceuticals moving from the EU to the U.S. at 15%. It also exempted European pharmaceutical products from any additional tariffs imposed under Section 232 of the Trade Expansion Act of 1962, which grants the President the power to impose tariffs or other restrictions on imports if the goods in question are deemed as “threatening to impair” U.S. national security.

(Section 232 tariff actions are distinct from those taken by President Trump on a raft of other products under the International Emergency Economic Powers Act (IEEPA). His authority to impose tariffs under IEEPA is currently under court review.)

The pharma deal apparently protects European producers from additional tariffs of up to 100% on brand-name and patented pharmaceutical products entering the U.S., announced by the Trump Administration in September. (Manufacturers can supposedly avoid those tariffs if they’re in the process of setting up domestic plants in the U.S.)

Still, the 15% tax places a heavy upfront burden on EU producers. In 2024, more than 38% of European pharmaceutical exports were destined for the U.S., valued at nearly $142 billion, and the tariff level set under the transatlantic agreement could cost the industry an additional $19 billion per year.

The impact of the pharma deal might not be immediately evident to the end-user. The burden initially will fall on insurance companies, who make up the bulk of U.S. pharmaceutical purchases through reimbursements to patients, notes Tony Gulotta, principal and practice leader of national tax with the Ryan tax firm.

“It’s not like a pair of shoes with thin margins,” Gulotta says. Still, he believes pharmaceutical producers will only hold the line on prices for so long. And 60% of U.S. pharmaceutical imports come from Europe.

Insurance companies, too, are likely to boost premiums to protect their own margins, Gulotta adds.

Complicating matters is the question of how much the EU as a single trading bloc can control the manufacturing practices of its member states. It’s one thing, for instance, to strike a deal with Japan on that country’s pharma exports. But ensuring compliance across 27 sovereign nations is another matter entirely.

It's also unclear as to how many of the tariffs on EU pharmaceuticals could be threatened by the upcoming U.S. Supreme Court decision on the validity of Trump’s tariffs invoked under IEEPA, and how many might be upheld if Trump were to rely instead on Section 232 as his justification for imposing them. The Court took up the IEEPA matter this fall, and a ruling is expected by late December or early January.

The long-term objective of the tariffs, according to the Trump Administration, is to incentivize domestic production of pharmaceuticals. But while they await clarification on the legality and amount of the tax, European manufacturers are likely to hold off making any long-term commitments. Reshoring of production entails multiple complications beyond the requirements of simply erecting new plants on U.S. soil. Producers would be subject to sales, use, income and property taxes that vary widely from state to state, Gulotta says. And certain specialized pieces of equipment would still need to be imported, so that a domestic producer would find itself subject to a “pyramiding” tax burden.

So what should European pharma manufacturers be doing in a time of such uncertainty? “Hopefully, they’ve already stockpiled medications in the U.S.,” Gulotta says. Longer term, the industry could undergo a drastic restructuring of sourcing, even if that falls short of the Trump Administration’s vision of an American resurgence of pharma production.

Gulotta envisions a gradual reconfiguration of the pharmaceutical industry, as the international legal landscape becomes clearer and companies begin to commit the huge amounts of capital required to make the shift happen. “Pharmaceutical production is very sophisticated,” he says. “You need clean rooms, and there are environmental considerations. It’s not like shifting production of garments from China to Indonesia.”