LawFlash

Impending Tariffs on China to Impact Manufacturers of Dietary Supplements, OTC Drugs, Cosmetics

September 19, 2018

Newly approved tariffs would impose 10 to eventual 25% tariffs on hundreds of chemical ingredients imported from China used for many FDA-regulated products, including dietary supplements, OTC drugs, and cosmetics. Manufacturers should review the list of ingredients and develop contingency plans and strategies for imposition of these tariffs in the coming weeks.

President Donald Trump announced on September 17 that additional tariffs on a total of approximately $200 billion of Chinese products will be imposed beginning as soon as September 24.[1] These additional tariffs could go into effect either as a whole or in tranches over time, as with the initial $50 billion of tariffs imposed earlier this year.[2] The tariffs initially will be imposed at the 10% level, but will later be increased to 25% by the end of 2018. The additional tariffs include hundreds of chemical ingredients that are used in dietary supplements, cosmetics, and over-the-counter (OTC) drug products. The president has also indicated that tariffs on as much as another $267 billion of Chinese products could be imposed in the future.[3]

Background

The Trump administration initiated a 25% tariff on $34 billion worth of Chinese goods on July 6.[4] The administration sought public comment on June 20 on an additional $16 billion in proposed tariffs against China, which went into effect on August 23. These actions were taken under Section 301 of the Trade Act of 1974 after a US Trade Representative (USTR) Report asserting instances of unfair Chinese trade practices related to critical technologies and intellectual property.[5]

The Trump administration proposed a third round of tariffs in July on approximately $200 billion of additional China products, initially proposed to be at 10% but which could be raised to 25%. These additional tariffs were proposed to include hundreds of chemical substances used in many US Food and Drug Administration (FDA) regulated products, including as active pharmaceutical ingredients (APIs) in OTC drugs and in dietary supplements and cosmetics. A final list of those products subject to the additional $200 billion of tariffs will be issued shortly by USTR.

During a six-day hearing held by USTR, several trade associations for the dietary supplement and consumer healthcare industries voiced concerns that the tariffs could disrupt supply chains, raise the costs of products made from chemical substances that are imported from China, and result in potential product shortages. Because of FDA’s extensive regulatory requirements relating to manufacturing and sourcing, finding, qualifying, obtaining FDA inspection and clearance to manufacture at new manufacturing facilities outside China, and changing suppliers would be both expensive and time consuming and, in many cases, impractical for manufacturers. For example, a change in a supplier of one ingredient could require revising or initiating a new Drug Master File or amending a New Drug Application. Documenting the changes could take several months to finalize with FDA. Similarly, FDA’s good manufacturing practices requirements for dietary supplements require that a manufacturer’s ingredient supply chains and facilities comply with FDA standards, including audits and verification of foreign suppliers.[6] These arrangements have been developed over many years, and will be difficult and time-consuming to change in response to the substantial increase in ingredient costs.

In the event that a chemical substance included in the new tariffs list is crucial to continued manufacturing and availability of an FDA-regulated product, manufacturers can consider submitting a request to exclude a particular substance from the list. USTR issued a Federal Register notice in July outlining the criteria and process for a product exclusion request which, if granted, will be effective for one year after the publication of the exclusion.[7] In making its determination on each request, USTR will consider whether a product is available from a source outside of China, whether additional duties would cause severe economic harm to the requestor or other US interests, and whether the particular product is strategically imported or related to Chinse industrial programs. The product exclusion request period will end on October 9, 2018.

However, experience with the exclusion request process in the context of the Trump administration’s imposition of steel and aluminum tariffs is not encouraging. Reports indicate that, as of August 20, the US Department of Commerce has received approximately 38,000 tariff exclusion requests on these products, and 17,000 objections to the requests, with action on only about 2,900 of the requests.[8]

For FDA-regulated products, the “transition period” of less than four months before the tariff rate rises to 25% will likely be inadequate to develop and qualify alternative supply sources. Consequently, as a practical matter, in the shorter term, many manufacturers of FDA-regulated products affected by these impending tariffs will need to consider negotiations with Chinese suppliers and US customers regarding sharing of the increased costs resulting from the new tariffs.

Key Highlights and Takeaways

  • Manufacturers should review supplier contracts and consider initiating negotiations with both suppliers and customers regarding current agreements and the feasibility of cost sharing once the tariffs go into effect.
  • To the extent ingredients can be sourced from suppliers outside of China, manufacturers should consider what supplier agreements, audits, and notices to FDA are required before initiating any supplier changes, and the length of time necessary to arrange such re-sourcing.
  • Manufacturers should notify distributors and customers of any anticipated disruptions in manufacturing or proposed price changes for the finished products.
  • If a particular ingredient cannot be sourced from anywhere other than China, manufacturers may want to consider submitting an exclusion request to USTR before October 9, 2018, recognizing that the process is likely to be quite lengthy.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Stephen Paul Mahinka
Suzanne Bassett



 

[1] US Trade Representative, Tariff List (Sept. 17, 2018).

[2] US Trade Representative, Request for Public Comment Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation (July 17, 2018).

[3] Vivian Salama, Trump Says He’s Preparing Tariffs on Further $267 Billion in Chinse Imports, Wall Street Journal (Sept. 7, 2018).

[4] US Trade Representative, USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices.

[5] US Trade Representative, Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974 (March 22, 2018).

[6] Food & Drug Admin., Current Good Manufacturing Practice (CGMP) In Manufacturing, Packaging, Labeling, Or Holding Operations For Dietary Supplements, 72 Fed Reg. 34752 (June 25, 2007).

[7] US Trade Representative, Procedures to Consider Requests for Exclusion of Particular Products From

the Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 83 Fed. Reg. 32181 (July 11, 2018).

[8] Opposition Prompts Tweaks to Metal Tariff Exclusion Process, Law 360 (Sept. 10, 2018).