End of the Road

US President Donald Trump’s shock decision to impose tariffs on pharmaceuticals from April has put the spotlight on one of the most worrisome problems in international commerce—the absence of a global trade regulator. The World Trade Organization (WTO) has been dying a slow death over the past decade, and even its most trenchant critics have been troubled by the deliberate attempt of the US, which, ironically, championed its formation, to shackle the apex trade regulatory body. With Trump in his second term resorting to more impulsive, aggressive tariffs and violating one of the basic tenets of WTO, there is no recourse for trading partners except retaliation, as the 166-member organisation has no means to challenge the arbitrary US measures. For the Indian industry, one of the leading suppliers of generics to the US market, there are tough challenges ahead.

The confusion and alarm in Big Pharma are palpable. Some firms are forming tariff taskforces while others are engaged in complex analyses on the likely impact of the 25 per cent tariffs Trump has said he will impose in early April. There is no clarity yet, because the US president has at one time spoken of a 10-25 per cent tariff hike while at others of the higher figure. For the Europeans, the major worry is about the consequences of tariffs on medical equipment, while for many others it is on the active pharmaceutical ingredient (API), which is the active component of a drug product. This will affect the entire supply chain in the production of medicines.

Tariffs on the pharma industry are patently a violation of WTO rules under which the majority of pharma products and the substances used to produce them are exempt from any levies. So why is it that neither European countries, which are home to some of the biggest names in the drug industry, nor others like India are showing any willingness to challenge such tariffs at WTO? This is for the simple reason that the world knows Trump does not care if he is breaking WTO rules, which he made clear during his first term. For another, any legal challenge at the apex regulatory organisation will not get very far because the dispute settlement system, the lynchpin of WTO, has been rendered ineffective by the US.

Since the time of Barack Obama, the US has blocked new appointments to the WTO Appellate Body (AB), the dispute settlement system’s appeals panel, undermining the legitimacy of the institution set up to uphold the rules-based multilateral trading system. It is not as if WTO was perceived as fair or impartial by a host of developing countries that had sought a major reset of the organisation through the Doha round of negotiations in 2001. The attempt by these countries to foster fairer global trade practices to address their concerns was not successful, except with regard to public health. The Doha declaration confirmed the right of WTO members to take measures to protect public health, and led to a legal amendment of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) that opened a pathway for access to affordable medicines.

Although WTO continued to work as per its founding mandate, which favoured the rich nations and in particular the US and the EU, the US had been showing increasing opposition to the functioning of the dispute settlement system, especially the AB over what analysts said was Washington’s displeasure on AB rulings on US trade remedy laws. A recent European Parliamentary Research Service report noted that “the US has indeed adopted an increasingly hostile posture towards the AB, as AB reports clashed time and again with longstanding US domestic trade remedy laws.” The first blow was struck by Obama in 2011, when he refused to reappoint an AB member because of failure to “protect American interests”. Since then, the US has refused to allow the appointment of new members to AB when their rotating terms ended. AB’s decisions are connected to enforcement or compliance, and without it, the regulatory function of WTO becomes a futile exercise.

The big crisis occurred in 2018, when Trump imposed unilateral tariffs on steel and aluminium. At the time, a Washington policy analyst wrote: “March 8, 2018: The day the WTO died. Twenty-three years and sixty-seven days after its launch on January 1 of 1995. RIP.”

While Trump is known for his reckless use of tariffs from his first term, his successor did nothing to set right WTO. Trade experts have noted that the Joe Biden administration’s refusal to implement WTO panel decisions signified “a wholesale repudiation of the rule of law at the WTO”.

The AB no longer exists, and even if it were operational, it is unlikely the Trump administration would accept its ruling. Since a challenge at WTO is out of the question, what are the options for the pharma industry? Many are hedging their bets. Pfizer, for one, says it will move many of its production facilities to the US. Whether that would work in the limited time frame available to the industry is a billion dollar question. It does not help that an international economics expert Jürgen Matthes at the German Economic Institute thinks that “creating uncertainty and making constant new threats” is a means by which he is “seeking power and leverage over foreign governments and domestic industries to make them more willing to negotiate”. It clearly does not matter to the US President that tariffs on less expensive generic drugs, which account for nearly half of the prescription drugs for Americans, will hurt his citizens the most.

For India, the jury is still out on how seriously the pharma sector will be hit by the proposed tariffs. The US is a major market accounting for close to one-third of its global exports of drug formulations and biologicals. This amounts to sales of USD 8.72 billion. Some industry spokespersons have dismissed concerns over any fallout on generics suppliers but others have warned of dire consequences, such as crippling pressures on smaller firms operating on tight margins. One analyst has warned of closures and the likelihood of forced consolidation.

What should worry drugmakers here is that the Coalition for a Prosperous America, which is the US version of the Swadeshi Jagran Manch, is targeting Indian and Chinese pharma companies as a threat to US national security interests. The odds are piling up. DTE

Views expressed are personal