China Tariffs and Impacts to the Chemical-Pharmaceutical Industry
A SOCMA Perspective
Specialty chemicals have a wide range of applications and end use sectors, many of which are unreasonably burdened by Section 301 tariffs. Due to the heterogeneous nature of the industry, determining the extent of the tariff exposure by sector can be difficult. For example, in the case of fine chemicals utilized in the preparation of pharmaceuticals, many intermediates are also used in processes outside the pharmaceutical sector.
Rigid purity and performance demands, costly infrastructure and expertise and economic and global trends often result in a lack of suppliers outside China. And, in the event that alternate sources exist, supplier(s) often lack adequate volume to make up for shortfalls from China and so SOCMA members are placed on insufficient allocation and face price increases that results in the loss of market share to foreign competitors not subject to such taxes on inputs needed to formulate products.
Regarding pharmaceuticals, SOCMA analysis shows that the Administration was fairly careful about avoiding increasing the cost of health care, with exceptions in the over-the-counter (OTC) space. Finished pharmaceuticals (HTS Chapter 30) are exempt, and active pharmaceutical ingredients (API) for prescription drugs generally tend to be spared or have been delisted. For example, it appears the Office of the U.S. Trade Representative (USTR) avoided major pharmaceutical tariff lines such as 2935 (sulfonamides), 2933 (nitrogen heterocyclic compounds and derivates) and 2934 (nucleic acids and their salts), which are heavily dominated by biologically active compounds.
However, some APIs with OTC applications are listed, which could lead to supply chain disruptions or increased costs. Such applications include acne preparations, wart removers, face and skin peels, topical pain relief cremes, and sunscreen, among others.
So, how much of the “pharmaceutical preparations” category is actually a finished pharmaceutical product?Pharmaceutical preparations are materials generally one step before they are finished into deliverable form, e.g. tableted. All finished pharmaceutical products and pharmaceutical preparations are HTS Chapter 30 and duty-free, and not on any of the “China lists.” As part of the Uruguay Round Trade Agreement in 1994, “pharma zero-for-zero” came into effect and so there are no tariffs in HTS Chapter 30 in all of the world’s key trading areas.
Interested parties may also wonder whether “active pharmaceutical ingredients” are classified as “pharmaceutical preparations” or as chemicals. The short answer – it depends. If an API is strictly that ingredient, it is classified as a chemical in HTS Chapter 29. Once it includes any of the auxiliaries, e.g. anti-caking agents, colorants, etc., it becomes a preparation and shifts to HTS Chapter 30. In other words, once it is fit for purpose, or prepared to be fit for purpose, e.g. prepared for compounding into finished products, it is characterized as a pharmaceutical product.
Since late September, industry submitted approximately 500 exclusion requests for List 3 products in HTS Chapter 29. Certain products are also captured by Lists 4A/4B. At this stage, determining the extent of the exposure is difficult, but industry will have a fuller sense of impacts when all exclusion requests have been submitted.
For more information, please contact Matthew Moedritzer, Esq.
This blog post is intended to be a general summary of policy/law and does not constitute legal or business advice. Please consult industry experts to determine applicable requirements in a fact-specific situation.