Phase two of the Section 232 pharmaceutical action reaches mid-sized and small drugmakers, while a late specialty carve-out spares rare disease products from twenty designated jurisdictions
WASHINGTON, Oct. 2, 2026. The second and far broader phase of the United States Section 232 action on patented pharmaceuticals took effect at 12:01 a.m. Eastern time on Sept. 29, extending a tariff regime that had applied to seventeen named multinationals since July to every branded drugmaker, importer and distributor shipping covered products into the United States.
The expansion lands alongside a separate and partly offsetting development. Guidance published in the Federal Register on Sept. 23 established the procedures for a specialty pharmaceutical carve-out, under which qualifying rare disease, cell and gene, antibody-drug conjugate and plasma-derived products manufactured in twenty designated jurisdictions, India and Taiwan among them, pay no additional Section 232 duty.
Taken together, the two actions sharpen a divide that has been forming since the regime’s inception. Large manufacturers that negotiated their way into the exemption structure face little or no incremental duty. Mid-sized and small firms that did not, and that import branded product from jurisdictions outside the designated list, now face a headline rate of 100 percent.
The structure of the regime
The action rests on Section 232 of the Trade Expansion Act of 1962 and was given effect through Proclamation 11020, issued in April 2026 following a national security determination on pharmaceutical supply chains. Phase one took effect July 31 and applied to the seventeen manufacturers named in Annex III of the proclamation. Phase two, effective Sept. 29, removes that limitation.
The rate structure is tiered and the tiers are conditional rather than automatic.
The default rate on covered patented pharmaceutical products and associated ingredients is 100 percent. A manufacturer with an onshoring plan approved by the Department of Commerce pays ordinary duties plus a 20 percent Section 232 component, a concession that steps back up to 100 percent on April 2, 2030. A manufacturer holding both an approved onshoring plan and a most-favored-nation pricing agreement with the Department of Health and Human Services pays no additional Section 232 duty at all through Jan. 20, 2029.
Country arrangements cap exposure independently. Products of the European Union, Japan, South Korea, Switzerland and Liechtenstein face a total tariff of 15 percent. United Kingdom products carry no additional Section 232 duty under a separate pricing arrangement running to Jan. 19, 2029.
A category of exclusions sits outside the rate structure entirely. Generic medicines, biosimilars, United States origin products, excipients and inactive ingredients are not covered at this time. Orphan drugs, cell and gene therapies, antibody-drug conjugates, plasma-derived therapies, nuclear medicines and fertility treatments are excluded subject to the specialty conditions described below. A new exemption covers products imported solely for clinical trials, research and development, or other non-commercial use.
Why the large manufacturers are largely untouched
The economics of the regime were settled before phase two arrived, and they were settled through negotiation rather than through tariff payment.
The phase one cohort included AbbVie, Amgen, AstraZeneca, Bristol Myers Squibb, Eli Lilly, Johnson and Johnson, Merck, Novartis, Novo Nordisk, Pfizer and Sanofi. Every one of them secured a zero rate by signing the required combination of onshoring commitments and most-favored-nation pricing agreements. By Aug. 31, twenty-six manufacturers representing approximately 89 percent of the branded pharmaceutical market by value had concluded most-favored-nation pricing agreements with Health and Human Services.
That figure is the single most important number for understanding the regime. A tariff whose headline rate is 100 percent but which roughly nine-tenths of the affected market has contracted its way out of is not primarily a revenue instrument. It is a pricing lever, and it has already done most of the work it was designed to do.
What phase two changes is who is left outside the arrangement. Chris Young of KPMG observed that mid-sized and smaller drugmakers and importers “are facing greater exposure” precisely because their onshoring commitments and sourcing decisions were made without the leverage that produced the large manufacturers’ agreements.
The specialty carve-out and its conditions
The guidance published Sept. 23 created a route to zero duty that does not depend on company-level agreements, and it is the most important development for importers of specialty product.
Qualifying specialty pharmaceuticals and their associated ingredients, covering rare disease medications, infertility treatments, cell and gene therapies, antibody-drug conjugates, plasma-derived products and certain animal pharmaceuticals, avoid the additional Section 232 duty if they are manufactured in one of twenty designated jurisdictions. The list comprises Argentina, Bangladesh, Cambodia, Ecuador, El Salvador, the European Union, Guatemala, India, Indonesia, Japan, Jordan, Liechtenstein, Malaysia, North Macedonia, South Korea, Switzerland, Taiwan, Thailand, the United Kingdom and Vietnam. China is not on it.
The qualifying condition for a jurisdiction is that it maintains a current or forthcoming trade and security framework agreement with the United States. That is a looser standard than a concluded free trade agreement, and it explains the breadth and the apparent eclecticism of the list.
A second route exists for products that do not qualify geographically. An importer may file an urgent United States health need request on a product-by-product basis. That process is administratively demanding and is not a planning tool for a portfolio; it is a relief valve for individual shortages.
For Indian exporters in particular the carve-out is consequential. India led American pharmaceutical import sources in 2025 at roughly $13.39 billion, ahead of Germany and Belgium, and the Indian industry’s exposure is concentrated in generics, which were never covered, and specialty and rare disease products, which the carve-out now protects.
Industry reaction
Reaction has been sharp and has come from unusually varied quarters.
Stephen Ubl, president of the Pharmaceutical Research and Manufacturers of America, said bluntly that “tariffs will undermine this important goal,” referring to the objective of discovering and manufacturing affordable medicines domestically. John F. Crowley, president of the Biotechnology Innovation Organization, framed the issue in capital allocation terms, warning that “tariffs divert scarce resources away from research and development,” with the likely consequences being delayed treatments and a weaker American biotechnology sector.
Patient advocacy groups raised a different objection. Merith Basey, chief executive of Patients for Affordable Drugs, warned that “tariffs of this magnitude could have enormous consequences, raising costs, worsening shortages, and putting access to lifesaving medicines at risk.” Biocom, representing the California life sciences cluster, warned of “significant unintended consequences for American patients.”
The generics sector has been watching a different clock. Commerce is required to review within one year whether tariffs on generic medicines are necessary. Sandoz chief executive Richard Saynor put the industry position compactly: “Patients pay the tariff.” Generic medicines account for the overwhelming majority of American prescriptions by volume while carrying very thin margins, and the sector’s argument is that a tariff on a product selling for a few dollars a course cannot be absorbed and will instead be answered by withdrawal from the market.
The reshoring timeline problem
The regime’s theory is that tariff exposure will pull pharmaceutical manufacturing onshore. The industry’s consistent response has been that the policy clock and the manufacturing clock run at different speeds, and the gap is measured in years.
Building a new pharmaceutical manufacturing facility costs up to $2 billion and takes between five and ten years from decision to validated commercial output. Establishing a new active pharmaceutical ingredient supplier takes roughly four years. The associated regulatory approval pathway can run to eight years. Fill-finish capacity, the constraint that most often binds in practice, is booked roughly eighteen months ahead across the available American contract manufacturing base, with limited slack for reshoring programs.
Against those timelines, the step-up of the onshoring concession from 20 percent to 100 percent on April 2, 2030 is a demanding deadline. A firm beginning a facility program today is unlikely to be producing commercially by then.
The practical consequence is that firms are hedging across policy scenarios rather than committing to a single capital plan, which is an expensive way to run a manufacturing network and which itself diverts the research spending the industry says is at risk.
What the applied rate data shows
The aggregate burden on pharmaceutical imports remains well below the headline rate, and the distribution explains why.
Modelled estimates from Global Trade Alert’s United States Tariff Estimates series put the trade-weighted average applied American tariff on Harmonized System chapter 30, pharmaceutical products, at 14.6 percent as of Oct. 2, across roughly $212 billion of covered trade flows. The simple average across tariff lines is 24.7 percent and the maximum applied rate on a single line reaches 80 percent.
The distribution is bimodal in a way that reflects the regime’s design. Roughly 43 percent of trade value sits in the band above zero and up to 5 percent, and a further 34.6 percent sits between 5 and 15 percent. At the other end, 23.5 percent of individual tariff lines carry rates above 50 percent, but those lines account for only 8 percent of trade value.
In other words, the high rates are real and they are numerous, but they fall on a small share of the money. The large flows are moving under the agreements, the country caps and the exclusions. The firms paying the headline rates are, by value, a minority, and they are disproportionately the smaller ones.
That is precisely the pattern phase two was designed to produce, and it is the pattern that importers outside the agreement structure now have to manage.
How the regime was built
The pharmaceutical action did not arrive without warning, and its design reflects an unusual blend of trade and health policy objectives that distinguishes it from the metals and machinery actions taken under the same statute.
Section 232 authorizes the President to adjust imports where the Secretary of Commerce determines that the quantity or circumstances of those imports threaten to impair national security. In the pharmaceutical investigation, the threat identified was supply chain concentration: a dependence on a small number of foreign jurisdictions for finished medicines and, more acutely, for the active pharmaceutical ingredients and intermediates from which they are made. That dependence had been visible for years in shortage data and had been the subject of successive reports, but no administration had previously used the trade statute to address it.
What made the resulting proclamation distinctive was the linkage to drug pricing. Rather than imposing a flat duty, the structure offered relief in exchange for two things the administration wanted independently: domestic manufacturing investment, and most-favored-nation pricing commitments under which manufacturers agree to offer the United States terms no worse than those available in comparable markets. A manufacturer willing to provide both receives a complete exemption. One willing to provide only the first receives a partial one, on a clock.
That design has a consequence worth stating plainly. The tariff rate a manufacturer pays is a function of what it negotiated, not of what it ships or where it ships it from. Two identical products from the same facility can enter at 0 percent and at 100 percent depending on whose name is on the agreement. For customs purposes this is highly unusual, and it is the source of most of the operational difficulty importers are now reporting.
The country caps layered on afterward introduced a third basis for differentiation. The European Union, Japan, South Korea, Switzerland and Liechtenstein secured a 15 percent ceiling through bilateral frameworks; the United Kingdom secured complete relief through a pricing arrangement of its own. Those caps apply by origin rather than by company, so they can rescue a manufacturer that negotiated nothing, provided it manufactures in the right place.
The result is a regime with three independent eligibility axes, company agreement, country of origin and product category, any one of which can reduce the rate to zero. Determining which axis applies to a given shipment, and proving it, is the compliance problem phase two has now handed to several hundred additional importers.
Economic analysis
Estimating the regime’s economic effect requires separating three distinct channels, because they run in different directions and on different timescales.
The first is the direct revenue and cost channel, and it is smaller than the headline rate implies. With roughly 89 percent of the branded market contracted out of the duty and the largest import flows further protected by country caps, the collected duty on pharmaceutical imports is a fraction of what a uniform 100 percent rate would produce. The applied rate data bears this out: a trade-weighted average of 14.6 percent on chapter 30, against a statutory headline of 100 percent, is the signature of a regime that most of the value has routed around.
The second is the pricing channel, which is where the policy’s real force lies. The most-favored-nation agreements signed by twenty-six manufacturers are, in substance, price commitments extracted under tariff threat. Their effect on American drug prices will show up gradually, through formulary negotiations and net price realization rather than through list prices, and will be difficult to attribute cleanly. But it is almost certainly larger in dollar terms than the tariff revenue itself. Whether it is larger than the offsetting effects on research spending is the question the industry groups are raising and which will not be answerable for several years.
The third channel is the investment response, and it is the slowest. Announced onshoring commitments have been substantial, but announcement is not construction and construction is not validated output. The five to ten year facility timeline and the four to eight year supplier and approval timelines mean that essentially none of the manufacturing capacity promised under these agreements will be producing before the end of the decade. In the interim, firms carry the cost of the commitments without the benefit, which is the mechanism by which the policy transfers resources away from research budgets in the near term.
A fourth consideration cuts across all three. The regime creates a systematic competitive advantage for large manufacturers over small ones. The firms that could negotiate agreements did so; the firms that could not now pay the headline rate. In a sector where small and mid-sized biotechnology companies account for a disproportionate share of novel therapeutic development, often licensing or selling their assets to larger firms at a later stage, a cost structure that penalizes the small is not obviously aligned with the innovation objective the policy also claims.
Implications for importers
The compliance burden created by this regime is unusually granular, because eligibility is determined product by product and shipment by shipment rather than company by company.
For every product crossing the border, an importer must establish four things. The first is the manufacturing stage at the time of entry, since the treatment of finished dosage forms, bulk product and active ingredients differs. The second is the customs origin assignment, which for pharmaceuticals with multi-country supply chains is frequently contested and rarely obvious. The third is the intended use, since the clinical trial and research exemption turns on it and must be documented at entry rather than asserted afterward. The fourth is the upstream supply chain, because ingredient sourcing can determine both origin and specialty eligibility.
A particular difficulty is that the company-level agreements with Health and Human Services and Commerce are not public at product level. A distributor importing a third party’s branded product generally cannot read the agreement that would establish its rate. The importer of record nonetheless carries the obligation to establish patent status, classification, origin and eligibility for each shipment, and to be able to defend each of those determinations on audit.
Practical steps follow directly. Importers should build a product-level matrix mapping every branded stock keeping unit to its manufacturing location, origin determination, specialty eligibility and claimed rate basis, and should retain the documentary support for each claim rather than relying on broker classification history. Where a product may qualify under the specialty carve-out, the manufacturing jurisdiction needs to be verified against the designated list rather than assumed from the shipper’s address. Where a product is imported for clinical or research use, the use documentation should be assembled before entry, not after a request for information.
Firms with product that qualifies for neither the agreement structure nor the specialty carve-out nor a country cap should model the 100 percent rate as the planning assumption and evaluate whether the American market remains viable at that cost. For some low-volume branded products from non-designated jurisdictions, it will not be, and the decision to withdraw is better taken deliberately than discovered through a liquidation.
What to watch
Three developments will shape the next phase.
The first is the Commerce review of generic drug tariffs, due within a year of the proclamation. Generics and biosimilars are presently excluded, and that exclusion is what has kept the regime’s effect on American drug prices contained. If it changes, the shortage dynamics the patient groups have warned about become immediate rather than theoretical, because the products involved have no margin to absorb a duty.
The second is the operation of the urgent health need process. If it functions as a workable route for products outside the designated jurisdictions, it limits the regime’s effect on access. If it proves slow or restrictive, it will produce visible shortages in specific therapeutic areas and will generate political pressure accordingly.
The third is the onshoring concession step-up scheduled for April 2, 2030. Firms that took the 20 percent rate in exchange for a manufacturing commitment are carrying an obligation that most cannot physically discharge by that date. Whether the deadline is enforced, extended or renegotiated will determine whether the regime ends as an industrial policy that worked or as one that collected a tariff from firms that tried.
For now, with 89 percent of the branded market contracted out of the headline rate and the specialty carve-out protecting a further tranche, the measurable burden of the Section 232 pharmaceutical action falls on a comparatively narrow set of importers. Those importers are, almost by definition, the ones least equipped to carry it.