President Trump Imposes New Tariffs, Once Again Sowing Economic Chaos

The move is rocking markets 

The United States President recently announced the imposition of new 25% to 100% tariffs on pharmaceuticals, heavy-duty trucks, upholstered furniture, and kitchen and bathroom cabinets. The move is rocking markets and is likely to impact shipping costs, the furniture industry, and trade relations with various trading partners. It could also affect Israeli companies in various sectors.

Imposition of New Tariffs

Further to our earlier update, US President Donald Trump recently announced the imposition of new tariffs, slated to come into effect in early October. This wide-scale measure imposes variable tariffs ranging from 25% to 100% on a wide variety of products, primarily branded and patented pharmaceuticals, home furnishings, and heavy-duty trucks. Specifically, Trump announced he is imposing a 100% tariff on all branded or patented pharmaceuticals manufactured outside of the United States (but not on generic drugs), a 50% tariff on kitchen and bathroom cabinets, a 30% tariff on upholstered furniture, and a 25% tariff on heavy-duty trucks.

The Trump Administration has also opened additional investigations focusing on medical devices, robotics, and industrial machinery, which could result in additional tariffs in the future.

However, the Trump Administration emphasized that companies that maintain manufacturing operations in the United States or establish new production lines in the United States will be able to benefit from exemptions or reduced customs tariffs.

This course of action broadens Trump’s tariff policy substantially. The policy has already resulted in sharp declines in manufacturers’ stocks in various markets around the world. Moreover, if Trump continues to expand this policy, it could even affect mega furniture brands, such as IKEA, which exports a large share of its cabinets, furniture, and accessories from Europe and Asia to the United States.

Goal Behind the Tariffs

President Trump’s course of action has a clear goal: to promote domestic manufacturing, which declined sharply in recent decades, and thereby reduce dependence on imports of critical products, including pharmaceuticals and medicinal products. The Trump Administration asserts that major companies, such as Eli Lilly, Johnson & Johnson, and AstraZeneca, have become accustomed to manufacturing pharmaceuticals in European countries, particularly Switzerland, Denmark, and Ireland. President Trump says they will now have to invest in manufacturing facilities in the United States if they want to maintain access to the US market.

Imposing a heavy 100% tariff could, of course, spur dramatic price hikes or intense pressure on pharmaceutical companies to relocate manufacturing to the United States.

President Trump claims he is taking this drastic course of action for “national security” reasons, to prevent the American market from being inundated with imported products. The President imposed the tariffs by virtue of Section 232 of the Trade Expansion Act, the same statute that permitted his imposition of tariffs on steel, aluminum, and copper based on national security considerations. 

Impact of Tariffs on Israeli Companies and the Israeli Market

President Trump’s tariff policy could also have a significant impact on the Israeli market, since the United States is the Israeli pharmaceutical industry’s main export destination. Teva, Israel’s leading pharmaceutical company, generates billions of dollars in revenues annually in the US market, primarily from generic drugs. Other Israeli companies, such as Taro, Kamada, and smaller biotechnology companies, also rely on the US market for a portion of their revenues.

Several Israeli companies have already established manufacturing facilities or manufacturing partnerships in the United States, which may give them an advantage in obtaining exemptions or customs reductions. However, other Israeli companies could be forced to restructure their manufacturing and supply systems to cope with the new reality of high tariffs.

One of the positive factors for pharmaceutical market entities is the differentiation between branded and generic drugs. According to the announcement, the high tariffs will apply to branded and patented drugs, while generic drugs appear to be exempt. If this is actually the case, it will offer significant relief to Israeli pharmaceutical companies, like Teva, Taro, and others, which focus on the generic drug industry. These tariffs will be imposed in lieu of the tariffs to be imposed on products imported from the State of Israel.

Recommendations for Israeli Companies

The imposition of various tariffs at changing rates, and the opening of investigations of additional sectors that could result in the imposition of more tariffs, are a reminder to trading partners, like Israel, that the era of preferential access to the American market is coming to an end. Trade is becoming a tool for political and economic leverage, with a single country setting the rules.

This controversial strategy creates regulatory uncertainty that impedes business decision-making and future investments. Inter alia, the following factors are at play:

• The US Federal Court of Appeals has ruled that some of the tariffs imposed by President Trump are unlawful, and an appeal of this ruling is underway before the Supreme Court.
• Some of the agreements already announced by the Trump administration—for example, the agreement with the European Union—explicitly stipulate that no additional tax will be imposed on pharmaceuticals and other products. In any case, it seems that some countries will be able to export pharmaceuticals to the United States at a lower tax rate than other countries. It is easy to imagine the uncertainty that will arise as a result.
• The tariff hikes are not limited to direct costs; they also create fertile ground for contractual disputes among manufacturers, suppliers, and distributors in the distribution chain. Existing contracts could require various adjustments or reopening. In addition, in some instances, a dispute could arise over the activation of legislative amendments, force majeure clauses, or pass-through mechanisms intended to relay the added costs to customers.
• This material policy change could affect the capital markets and company values, thereby prompting investors and lenders to apply pressure.

Under these circumstances, the various players in the global market must carefully monitor the details of the legislation and other regulatory developments in order to plan their next steps and minimize their exposure to the new tariffs. They must understand the business environment in which they operate and that they must adapt to functioning in a world of uncertainty.

Strategic Coping Over Time

In the short term, it is very important for companies to swiftly map the full range of exposures to exports to the United States, while distinguishing between different types of products, as well as to analyze their profitability under the new tariff regime. Concurrently, companies must thoroughly re-examine their existing contracts, revise clauses relevant to legislative and regulatory amendments, and prepare for continuous dialogues with their commercial partners in order to protect legal rights.

In the medium term, companies must rethink how to optimally restructure future contracts to incorporate precise mechanisms for contending with unexpected regulatory amendments.

In the long term, the various players will need to reassess their investment strategy in the United States, consider establishing industrial collaborations or acquiring US manufacturing operations, and explore opportunities for mergers and acquisitions that could mitigate their exposure to changing trade policies.

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Prof. Amichai Cohen serves as the special counsel on international law at Barnea Jaffa Lande.

Dr. Ran Karmi is an associate in our firm’s Antitrust and Competition Department.