US-China Trade War: Medical Device and Medtech Products Hit Hard by New Tariffs in 2nd Round

On Friday, July 6th, the US imposed a 25% tariff on $50 billion worth of Chinese goods. In this expansive list of goods subject to the new tariff, approximately $836 million in medical devices are now affected.

What first began as an attempt to balance trade for steel products has now evolved to include a broad spectrum of products and compon, traents manufactured in China.

Chinese made components and assemblies for lighting, LEDs, batteries, electronics, medical devices, medtech, industrial equipment and more, are now impacted in this second round of the so-called “US-China Trade War.”

Despite medical device manufacturing trade between the US and China being relatively balanced, for now these new tariffs are here to stay. These new tariffs also come on the back of accusations of IP theft while manufacturing in China and a tense geopolitical climate in Asia.

What Medical Products Fall Under the New 25% Tariff?

A complete list of products can be found on the US Trade Representative’s website (see sources below).

USA Today lists the following medical tech products as subject to the new 25% tariff:
• Electrocardiographs and EKG parts
• Magnetic resonance imaging (MRI) equipment
• X-ray equipment and X-ray tubes
• Computed tomography (CT) equipment
• Anesthetic equipment and instruments
• Ophthalmology instruments and equipment
• Ultrasound equipment
• Electrodiagnostic equipment (used for nerve testing) and parts
• Patient monitors
• Ultraviolet and infrared equipment

What Does This Mean for Medical Device Manufacturers Who Operate in China or Who Import These Products?

Tariffs are a tax on an imported products or goods. Anyone in business knows that an additional 25% increase in cost, regardless of its origin, will negatively impact their bottom line. Some companies may choose to absorb this cost, cutting into profit margins, or may increase the final cost of the product to the consumer or end-user such as hospitals and medical centers.

As a part of business continuity planning companies may seek a more comprehensive approach. Rather than grin and bear it, some companies may choose to move their production to other countries. Repatriation doesn’t seem to be a choice medical device companies are openly discussing, but bringing production back to North America does seem to be feasible.

Often the additional labor and logistics cost-savings in countries such as México can offset the cost to relocate production rather than stay in place and be subject to the new tariff. Over 70% of the world’s largest medical device manufacturers already operate in Mexico where companies still enjoy zero tariffs on imports and exports under NAFTA. Most companies initially start go for soft-landing solutions to start manufacturing in Mexico by working with a shelter company services provider for rapid ramp ups to production.

Related Article: How 70% of Medical Device Manufacturers Got Started in Mexico

Push Back from Industry Organizations and the US Senate

Two medical device manufacturing advocacy organizations, AdvaMed and The Medical Imaging and Technology Alliance (MITA), are and have been working to stop the new tariff being applied to medical technology.

"Imposing higher tariffs on medical technology imports from China will not help U.S. competitiveness or achieve the president's objectives for our industry," AdvaMed Executive Vice President Ralph Ives wrote in a May 10 public comment on the tariffs proposed at that time.

AdvaMed’s successfully lobbied during the public comment period and the number of affected medical device products was reduced from $2.8 billion worth of med tech products to the now $836 million on the list. MITA is now calling on the Trump Administration to establish a "timely and robust exemption process for medical imaging products and components from China Section 301 tariffs."

US lawmakers are also throwing their towels into the ring. On Wednesday, July 11th, the US Senate voted 88-to-11 for a non-binding resolution calling on Trump to seek congressional approval before using national security as a reason for imposing new tariffs. Though not enforceable legislation, strong congressional resistance to these new and future tariffs may help sway the Trump Administration or at least allow the legislative branch of the US government a seat at the President’s strategy table.

 Round 3 Upcoming: More Products to be Subject to a 10% Tariff

This week the White House said it was considering an additional $200 billion worth of Chinese products for a 10% tariff. In 2015 the Chinese government released an industrial strategy to make its goods competitive in the global market called “Made in China 2025.”

As with the previous two rounds of tariffs, the list of products and raw materials potentially subject to a 10% tariff were taken from this Chinese industrial strategy. Though the Trump Administration says it’s going after raw materials to minimize impact on consumers, manufacturers and the public aren’t buying it. Ultimately, higher costing raw materials make for higher costing final products.

The US Trade Representative has published this preliminary list of over 6,000 products that will be subject to the 10% tariff, a majority of which are agricultural in nature. Find the pdf here: https://ustr.gov/sites/default/files/301/2018-0026%20China%20FRN%207-10-2018_0.pdf

How Is This Different Than the US Medical Device Excise Tax?

Implemented in 2013 as a part of the Affordable Care Act (ACA), the Obama Administration levied a 2.3% excise tax on medical devices manufactured in the US. Medical device companies have complained that this significantly hampered R&D efforts. According to tctMD, the Medical Device Excise tax was responsible for a $3.7-million loss of overall sales of companies. The medical device excise tax was recently suspended.

Related Article: Nearshore Trends as Medical Device Manufacturers React to Newly Imposed U.S. Excise Tax