Redirected Pharmaceuticals – US Tariffs Implications on China for the EU Pharmaceutical Markets

Introduction

The potential imposition of US tariffs on Chinese pharmaceutical products creates the possibility for trade diversion to the European Union, a region significantly dependent on Chinese pharmaceutical inputs. While such a redirection could offer short-term relief from pricing pressures and supply shortages and mutually benefit the geoeconomically dependent parties, it simultaneously raises serious concerns about market distortion and strategic dependencies. The regulatory hurdles, geopolitical tensions, pressure from the US as well as the internal EU policy divergence and fragmentation in European policy coherence also present serious limitations. The EU faces a narrow strategic window to reinforce its pharmaceutical industry, at the same time balance the transatlantic solidarity and competitive vulnerabilities. Carefully managing this convergence of industrial, regulatory, and strategic variables is key for the EU to balance its engagement with China against deepening internal political divisions, geopolitical risks, structural dependencies without compromising transatlantic cohesion.

The ongoing trade war between the US and China, fueled by President Trump’s tariffs (which may soon target pharmaceuticals), has created a realignment of global trade flows. China, facing severe tariffs on its goods entering the US market, potentially as high as 245 percent is redirecting its exports, including pharmaceuticals, towards other regions. The European Union, with its USD 204 billion pharmaceutical market size, stable demand for pharmaceutical products, and openness to trade diversification, it is a logical strategic choice and a likely destination for redirected Chinese pharmaceutical goods. This is further reinforced by diplomatic outreach from Beijing and growing logistical trends such as a 15 percent rise in shipping rates to Mediterranean ports, which is signaling an increased trade redirection.

However, the prospect of China redirecting pharmaceuticals to the EU is viewed with mounting caution in Brussels. There are significant concerns over market access imbalances, regulatory disparities, and the risks posed by state-backed dumping practices. The European Commission has already established task forces to monitor import flows and prevent oversaturation of sensitive sectors. While Chinese pharmaceuticals might offer cost benefits and address supply chain gaps, they also pose strategic risks, particularly given China’s history of industrial subsidies, dual-use technologies, and opaque compliance with intellectual property norms.

Compounding these concerns is the political climate within the EU. The June 2024 European Parliament elections strengthened far-right and protectionist factions, complicating consensus on China policy. Although some countries, notably Hungary, Slovakia, Spain and Italy, are pushing for closer ties with Beijing, others remain wary, citing China’s alignment with Russia and systemic competition with the EU. These divisions make a unified EU response difficult and increase the risk of an incoherent approach to pharmaceutical trade and regulatory enforcement.

Furthermore, EU’s pharmaceutical industry has its own vulnerabilities. It is dependent on external active pharmaceutical ingredients and supplies coming from China and India mainly and faces considerable pressure to reduce healthcare costs amid aging demographics and fiscal limitations. An influx of cheaper Chinese pharmaceuticals will likely temporarily relieve price pressures but may undermine local pharmaceutical manufacturers.

The future of the EU–China pharmaceutical market will likely be shaped by multiple complex factors, heavily influenced by the ongoing US-China trade tensions and the strategies the European Union adopts in response to shifting global dynamics. As the US aims for tariffs on pharmaceutical exports, China will likely seek to redirect its goods to alternative markets, including the European Union, which has become a more crucial player in the global pharmaceutical supply chain. This has the potential to create cost advantages for the EU; however, it also opens up several risks like oversupply, price competition, and market disruption. How the EU responds to these developments will determine its role in the global pharmaceutical market, its relationship with China and the US, as well as its internal economic stability.

Another scenario involves strategic alignment with the US. If the EU follows the US lead and adopts restrictive measures against Chinese pharmaceutical imports, either through trade barriers or by enacting similar tariffs, it could effectively limit the scope for redirected Chinese products to flood the European market. Alternatively, if re-exports to the US cause transatlantic tensions, Brussels may face pressure from Washington to enact protective barriers to limit China’s access to the EU market. In this case, the EU would be caught in a tightrope walk, where the need for economic diversification through engagement with China conflicts with the geopolitical pull from the US. Aligning too closely with the US will likely create further diplomatic rifts with China and exacerbate economic disruptions, potentially diminishing EU’s bargaining power in future trade negotiations.

Lastly, there is the possibility of geopolitical retaliation. If EU-China relations worsen, particularly if the EU is perceived as aligning too closely with US efforts to isolate Chinese technology and supply sectors, Beijing could respond by restricting its pharmaceutical exports to the EU. This form of economic coercion will likely disrupt the European pharmaceutical market, particularly if China uses its position as a key supplier of pharmaceuticals and other essential chemicals to exert pressure. Given the increasing significance of Chinese pharmaceutical exports to the EU, such actions will likely have severe consequences on EU’s pharmaceutical production capabilities. In this scenario, the EU will likely face a significant strategic dilemma, as retaliatory measures from China could jeopardize EU’s access to affordable and timely pharmaceutical supplies, exacerbating health security concerns.

In each of these scenarios, the EU faces significant trade-offs. Whether through regulatory adaptation, strategic alignment with the US, supply chain localization or managing geopolitical retaliation, the future will likely require nuanced decisions that balance economic imperatives with geopolitical realities. EU’s ability to craft a cohesive strategy will likely depend on its capacity to manage the tensions between maintaining access to competitive Chinese pharmaceutical products and safeguarding the stability and resilience of its own pharmaceutical sector. Moreover, internal divisions within the EU over how to approach China, compounded by health security concerns and the unpredictable nature of global trade, will make it increasingly challenging for the bloc to form a unified stance.

The inclusion of pharmaceuticals in the US tariff policy will likely have far-reaching effects on the EU pharmaceutical market. The impact of redirected Chinese pharmaceutical exports on the EU must be assessed across multiple dimensions:

Economic and Market Impact

EU’s pharmaceutical market stands to experience short-term economic benefits as China redirects its pharmaceutical exports to fill the void which will likely be created by US tariffs. As China’s market share in global pharmaceutical exports increases, European pharmaceutical companies may benefit from more competitive pricing (20-30 percent cheaper than Indian equivalents) and the availability of previously inaccessible drugs. This will likely lower drug prices within the EU, reducing costs for healthcare systems and consumers as well. However, such benefits must be weighed against the risk of dumping, where China’s cheaper products could undercut local European producers, potentially harming domestic industries. The risk of a flood of low-cost goods from China into the EU will likely lead to market distortions, which could undermine domestic manufacturing competitiveness, intensifying competition for local manufacturers and suppliers and also deter long-term investment in EU-based R&D unless offset by EU industrial policy reforms. In the longer term, the EU will likely face increased reliance on Chinese pharmaceuticals, exacerbating its already significant trade deficit in this sector. China’s dominance in the production of APIs and raw materials for pharmaceutical manufacturing means that the EU will likely become more dependent on Chinese exports for critical healthcare supplies. This dependency could leave the EU vulnerable to supply chain disruptions in the event of geopolitical tensions or market imbalances.

Health Security and Supply Chain Vulnerabilities

EU’s reliance on Chinese pharmaceutical imports poses health security risks, especially considering the lessons learned from the COVID-19 pandemic, which highlighted vulnerabilities in global supply chains and revealing how supply disruptions can quickly escalate into social and political crises, further reinforcing the importance of pharmaceutical security in EU policy debates. A disruption in Chinese pharmaceutical exports to the EU will likely lead to severe shortages of essential medicines. These shortages could particularly impact the supply of life-saving drugs, chronic disease treatments, and vaccines. EU regulatory bodies provide a certain level of safety and ensure product quality; however, the speed at which these standards are enforced will likely become a point of tension if the EU seeks to fast-track approvals for Chinese products to meet the growing demand, further heightening the supply risk. The US-China trade war could also prompt China to restrict pharmaceutical exports to the EU as part of a broader economic retaliation strategy. Given China’s critical role in the global pharmaceutical supply chain, such a move will likely destabilize EU’s healthcare system, leading to public outcry and potential political ramifications.

Geopolitical and Diplomatic Implications

The growing tension between the US and China over trade, coupled with EU’s potential strategic shift toward China, will likely create ramifications with geopolitical significance. If the EU chooses to align more closely with the US, it risks damaging its relationship with China, potentially triggering retaliatory trade measures that will likely hurt EU industries beyond the pharmaceutical sector. For instance, China could impose tariffs on EU exports or restrict the supply of critical raw materials, thereby impacting EU’s broader industrial base. Conversely, if the EU leans towards China, it will likely face scrutiny from the US, which could interpret such a move as a shift away from transatlantic alliances. A rise in pharmaceutical re-exports from the EU to the US could also provoke backlash from Washington, damaging the transatlantic relationship. In addition, the geopolitical uncertainty regarding the currently active armed conflicts and contested regions further complicates EU’s decision-making process, as leaders will need to carefully balance trade relations with both China and the US, while considering the broader political consequences of each choice.

Domestic Industry and Innovation Challenges

Increased exposure to Chinese pharmaceutical products will likely undermine EU’s efforts to foster a competitive, innovation-driven pharmaceutical industry. The EU faces a growing trade deficit with China in pharmaceuticals, which signals that Chinese companies are becoming increasingly dominant in certain areas of drug production. While the EU is home to some of the world’s leading pharmaceutical companies, these will likely face mounting pressure as they compete with Chinese manufacturers offering lower prices. This will likely result in a decline in domestic innovation or force European companies to lower their prices to remain competitive, potentially impacting profit margins and investments in research and development. Also, the prospect of supply chain disruptions and increasing reliance on external markets could be the incentive for the EU to invest in domestic pharmaceutical manufacturing and innovation. However, this transition will take years to materialize and will require substantial investments in infrastructure, workforce development, and R&D in a time when EU is aiming to rearm and restock itself as a response to the Ukraine war. During this period of transition, the EU will remain vulnerable to external shocks, and pharmaceutical supply security will remain a key concern.

Therefore, the disruption of Chinese pharmaceutical exports to the US and the likely redirection of these products to the EU present various implications for the European pharmaceutical market. While it could provide short-term cost advantages and ease some supply shortages, it also heightens EU’s exposure to Chinese competitive trade, geopolitical tensions, and potential supply chain vulnerabilities. EU’s ability to manage these challenges will likely depend on its regulatory response, its geopolitical strategy, and its capacity to diversify its pharmaceutical supply chain, thereby ensuring EU’s long-term economic and health security, at the same time aiming to maintain its global competitiveness and relevance.

The evolving trade conflict between the United States and China introduces notable strategic, economic, and geopolitical risks for EU’s pharmaceutical sector. The potential redirection of Chinese pharmaceutical exports may seem advantageous, yet the underlying vulnerabilities introduce a range of risks that could destabilize EU’s pharmaceutical market and broader economic interests.

Heightened Strategic Dependency and Supply Chain Exposure

Increased imports from China may temporarily stabilize supplies, but deepen long-term dependence, weakening EU’s strategic autonomy and exposing it to political leverage by Beijing. The EU already imports a considerable amount of its pharmaceuticals from China. Any increased inflow following the US tariffs on pharmaceuticals will deepen EU’s dependency on a single supplier for essential health products. This vulnerability raises serious concerns, particularly in a geopolitical climate characterized by uncertainty and competition. Should political tensions escalate, particularly if Brussels aligns more closely with Washington’s containment policies, then it is likely that China could reduce pharmaceutical exports as a political leverage. This mirrors tactics already seen in rare earths and other strategic commodities, exposing the EU to potential shortages and exacerbating public health risks. Moreover, supply chain localization efforts, while essential for long-term resilience, remain years away from significantly altering the risk landscape. In the interim, EU’s healthcare systems and pharmaceutical industries will likely be precariously reliant on external sources for core medical supplies, leaving them exposed to disruptions beyond their control.

Geopolitical Repercussions and Retaliatory Measures

China’s decision to retaliate as seen in recent developments poses a clear risk if the EU is perceived to side too closely with the US in broader technology and supply chain disputes. The pharmaceutical sector will likely become collateral damage in broader strategic contests. Therefore, if EU-China relations deteriorate, China will likely impose export controls or use pharmaceutical supplies as an instrument of economic coercion. Should the EU act as a transshipment point for Chinese pharmaceuticals into the US, it could face secondary US tariffs or diplomatic pushback, which will further damage its role as a transatlantic partner and will likely complicate future trade negotiations. This will likely be especially acute if the EU is perceived to be collaborating with US efforts to isolate China’s technology and supply sectors. Beijing’s proven willingness to leverage economic dependencies for political purposes, as seen in its disputes with Australia and Lithuania, suggests this is not a theoretical risk but a realistic scenario. Such retaliation would not only trigger immediate supply shortages but could also escalate into broader economic conflict, affecting other strategic sectors including green technologies, rare earths, and advanced manufacturing, which are areas where the EU also maintains dependencies.

Internal EU Fractures and Policy Incoherence

Diverging national strategies within the Union, with countries favoring engagement with China, while others prioritizing transatlantic alignment, certainly is a major political risk. These inconsistent postures undermine EU’s capacity to formulate and implement a cohesive pharmaceutical security strategy, delaying critical decisions on investment, regulation, and international negotiations. This fragmentation weakens Brussels’ negotiating position with both China and the US, increasing vulnerability to external pressure and market manipulation. Policy incoherence may also result in uneven distribution of pharmaceutical products across the Union, with some member states securing better access at the expense of others, further stressing the principle of solidarity within the bloc.

Investment and Innovation Risks

The influx of cheaper Chinese pharmaceuticals could pressure European manufacturers to cut costs, potentially diverting resources away from research and innovation. As EU firms compete on price rather than quality or innovation, there is a risk of declining global competitiveness over the long term. Strategic industries could become hollowed out, making the EU less capable of achieving its ambitions in health technology leadership and resilience. Additionally, uncertainty surrounding future regulatory frameworks and geopolitical alignments will likely deter long-term investment in pharmaceutical production and innovation in Europe, because investors typically require policy predictability and market stability, both of which are at risk under the current volatile environment.

Financial and Trade Risks

An unbalanced influx of Chinese pharmaceuticals risks worsening EU’s trade deficit in the chemical and pharmaceutical sectors. Persistent deficits could weaken the euro, fuel political populism centered on deindustrialization anxieties, and prompt protectionist measures. Such developments will likely undermine EU’s broader strategic autonomy goals and could trigger retaliatory trade actions from both China and US, resulting in a complex and costly global trade environment.

Ultimately, while the EU stands to benefit in the short term from redirected Chinese pharmaceutical exports, these opportunities must be weighed against the longer-term risks. The EU will need to focus on building a more resilient and diversified pharmaceutical supply chain to secure both short-term access to affordable medicines and long-term strategic stability. Balancing the benefits of Chinese imports with the necessity of reducing dependency on a single foreign supplier will be central to ensuring EU’s health security and economic sovereignty in the years ahead.