How US Tariffs on Mexican Pharmaceuticals Could Change the Market
The US administration’s push to restructure pharmaceutical supply chains through tariffs is gaining traction, and Mexico is now a key target. With existing 25% tariffs on Chinese pharmaceuticals and escalating trade pressure on Europe and India, including Mexico in this policy shift marks a major turning point.
Why Mexico Matters in the Supply Chain
Mexico plays a modest but critical role in the pharmaceutical pipeline, especially in the production of solid oral generic drugs. It holds about 2.5% of the US market share for generic tablets and capsules, according to 2024 data from the USP Medicine Supply Map. This may seem small, but if a single firm like Teva uses its Canadian and Mexican plants to supply a large share of common antibiotics such as amoxicillin, a 25% tariff on Mexican shipments can spike prices far beyond the proportional volume. Supply in generic markets is often fragile and concentrated, so even minor volume disruptions ripple across the system. More importantly, while finished drugs (FDF) may ship from Mexico, the API they contain is often manufactured in China. Under US Customs and Border Protection (CBP) rules, the origin of a drug is usually determined by where the API is produced – not where the tablet is pressed. So a pill coming from Guadalajara that uses Chinese-made active ingredient will already be subject to a Chinese tariff. Layering on a new Mexico-specific tariff could double-tax the product, creating a compounding cost burden.
The Problem with Generic Margins
Generic manufacturers, including those operating in Mexico, are operating with razor-thin margins. Unlike branded drug firms, they don’t have the price cushion to absorb tariff shocks. According to the IQVIA 2024 Generic Medicines Savings Report, generics make up 92% of US prescriptions but only a small fraction of total spending. That’s because the average generic prescription costs just a few dollars – any increase, even a few cents, is significant in volume. If generics made in Mexico face tariffs, companies may respond in two ways: either cut production or cut corners. Neither is acceptable. Cost-cutting has historically led to substandard drug quality, with cases of contamination from bacteria or metal shavings. Alternatively, discontinuing low-margin generics, especially injectables, could deepen ongoing shortages. Data from the FDA’s 2025 facility fee filings shows that US has the fewest API production sites among major markets, and domestic output simply can’t fill the gap if foreign volume disappears.
Drug Pricing Exposure in the US
The impact of tariffs on end prices depends on the type of drug and market segment. In retail, where pharmacies buy generics on the spot market, any increase in manufacturer costs appears almost immediately in wholesale prices. But reimbursement from insurers is slower to adjust, pinching pharmacies’ margins. For hospitals, group purchasing organizations (GPOs) negotiate contracts that set fixed prices, shielding institutions temporarily from spikes. Yet these agreements often last 1-3 years, and once they expire, hospitals may face steep cost increases – especially for generic sterile injectables like chemotherapy agents or IV antibiotics. Patients, especially those in high-deductible or coinsurance plans, will feel the effects fastest. For branded drugs, higher tariffs can raise list prices, translating into higher out-of-pocket costs. But for generics, the shock is less about list price and more about overall availability. When generic manufacturers exit a market or reduce volume, it’s the patients who suffer through shortages, delays, or forced switches to more expensive alternatives.
Why Onshoring Isn’t a Quick Fix
It’s unlikely that tariffs on Mexican drugs will result in significant onshoring of generics to the US. Manufacturing capacity in the US is already stretched, and building new sites is capital intensive and slow. Even if generics wanted to move production domestically, the economics don’t work. Generic facilities in India or Mexico can be built for a fraction of US costs, and the return on investment is clearer abroad. The branded sector is different. These firms have wider profit margins and strong political incentives to onshore. Announcements from Eli Lilly, Merck, and Johnson & Johnson reflect billions in recent investments into US manufacturing, especially for complex biologics. But even these projects take 3–5 years to come online due to permitting delays and workforce constraints. And for every facility added, the FDA’s inspection burden increases. Without more funding, the oversight system risks being overwhelmed.
Revisiting Tariff Strategy
To avoid making the system more fragile, policymakers need to rethink how tariffs are applied:
- Delay tariffs on inputs like API or fine chemicals that domestic manufacturers depend on, especially if sourced from China or India.
- Recognize that tariffs alone won’t spark generic onshoring – some form of direct subsidy or infrastructure support is necessary.
- Strengthen FDA oversight rather than dilute it. If margins shrink and inspections stall, quality suffers and recalls increase.
- Coordinate with partners. If Europe and India are subsidizing their own drug supply chains to reduce Chinese dependence, punishing them with tariffs could backfire. The US needs aligned strategy, not isolation.
Including Mexico in this policy shift adds risk to a system already under strain. Without targeted relief for generics and coordinated global planning, well-intentioned trade policy could leave American patients with fewer choices and higher costs.