200% tariffs! Ireland's gain but the EU's pain
Re-shoring US pharmaceutical companies
President Trump sent a letter to the EU on Saturday announcing that the US IEEPA tariff on EU goods would be increased to 30% from August 1st. This is in addition to the Section 232 25% tariffs on cars and 50% tariffs on Aluminium and Steel, and now Copper. The US administration is still investigating other goods for potential national security concerns that could require additional Section 232 tariffs. This could include pharmaceuticals. Incredibly, in a cabinet meeting attended by members of the press, President Trump suggested that the Section 232 Tariffs on Pharmaceutical products could be as high as 200%, if US National Security is at risk.
EU Commission President Ursula von der Leyen should have fainted when she heard this. Pharmaceuticals are the EU’s most valuable export to the US by some margin, but von der Leyen is still in denial about the nature of the European Customs Union, claiming instead that:
“Few economies in the world match the European Union's level of openness and adherence to fair trading practices.”
Hard not to laugh. What part of ‘CUSTOMS UNION’ doesn’t she understand? The EU was designed to keep trade inside the bloc and discourage trade with countries outside the bloc. Not exactly in order to screw the United States, as Trump claimed in his first cabinet meeting, but that has been one of the results.
The reason d’être of the EU is not the only thing that von der Leyen is confused about: she also claimed that the EU remains ready to continue working towards an agreement by August 1st, and, conversely, that the EU would take all necessary steps to safeguard the bloc’s interests, including countermeasures if required. She obviously missed the part when President Trump said that the IEEPA tariffs would increase if nations retaliated.
She also missed the press conference with NATO yesterday when Trump, obviously delighted that NATO members would be spending their increased defence budgets on US weapons, replied to a question about EU tariffs that negotiations were over and that the new tariffs would start on August 1st. The journalist asking the question seemed to have forgotten that not all members of the EU are members of NATO.
For many EU exports to the US, a 30% additional tariff would be high enough to deter exports and potentially prompt production to relocate to the US. Aircraft and aircraft engines, organic chemicals, medical equipment, tractors, buses, pumps, wine, perfumes, cosmetics, clothing, jewellery, footwear, etc, would all be priced out of the US market by a 30% tariff, apart from the most prestigious luxury products. But a 200% tariff on pharmaceutical exports would be a devastating blow to EU exports.
Whoa, 200% Tariffs.
Although a 200% tariff on imported pharmaceuticals may sound outrageous, from the US perspective, it could make sense. The US spent nearly $487 billion on pharmaceuticals in hospitals and clinics, as well as on retail prescription medications, in 2024, of which 45%, or $217 billion, was imported. Of the imported medicines, 60% came from EU member states. To be honest, 23% came from Ireland, 8.3% from Germany, 6% from Belgium, 5% from Italy and 3% from the Netherlands. So just under half of the US pharmaceutical imports came from five EU countries.
Trump has a good reason to want to change this. It must be infuriating to know that pharmaceutical companies exporting their products to the US, tariff-free, are mostly US companies that use Irish entities to hold their intellectual property, thereby reducing their US taxes. US pharmaceutical and healthcare companies with operations, manufacturing or research and development in Ireland include Pfizer, Merck, Johnson & Johnson, AbbVie, Bristol Myers Squibb, Eli Lilly, Jazz Pharmaceuticals, Horizon Therapeutics, Steris, Perrigo and Medtronic.
Initially, these multinational companies were attracted to Ireland due to its lower corporate tax rates, favourable treatment of intellectual property, and bilateral tax treaty protections. Ireland recently joined the OECD’s global minimum tax initiative and raised its headline corporate tax rate from 12.5% to 15% for large multinational enterprises with global revenues exceeding €750 million. However, to offset this, they also increased their R&D tax credits from 25% to 30%, and they still have considerable scope for base reduction through capital allowances for intellectual property, machinery, and buildings. Ireland also offers a reduced tax rate of only 6.25% for qualifying intellectual property income earned from research and development conducted in Ireland or the EU.
Pharmaceuticals have been traded for years between developed nations without tariffs. The US and the EU are both signatories to the 2004 Pharmaceutical Tariff Elimination Agreement[i], known as Zero for Zero, where developed nations agreed to eliminate tariffs on all finished pharmaceutical products in listed Chapter 30 of the Harmonised System tariff codes. The agreement also covers pharmaceuticals imported from countries that are not signatories to the agreement. With the exception of perhaps the cheapest generic drugs, which retail for a fraction of their branded equivalents, 200% tariffs would halt all trade and prompt production to be relocated back to the US. If there is a genuine National Security threat warranting the 200% tariff, then reshoring production is the desired result, which justifies the high tariff.
No such thing as a free tax break
Many US companies in Ireland may want to relocate their Irish operations back to the US, now that the One Big Beautiful Bill has extended full expensing for new plant and equipment. Although Ireland offers better tax treatments for intellectual property, and total labour costs in the US and Ireland are similar, the US also has significantly lower energy, land, rent, construction, and equipment costs.
However, moving operations back to the US to avoid the tariffs will be difficult. the Irish government has imposed an Exit Tax of up to 33% to prevent this from happening. Ireland’s Exit Tax treats a company leaving the scope of Irish Taxation as a deemed disposal of assets and is triggered when an Irish resident company changes its tax residency or transfers its Irish business to another jurisdiction. The market value of the assets is taxed at 12.5% but Ireland's Capital Gains Tax rate of 33%[ii] can be applied if, and I quote this from the Irish Tax and Customs page to avoid exaggerating the irony:
‘an anti-avoidance provision is included to ensure that the general rate of Capital Gains Tax (CGT) will apply if:
the event, that gives rise to the Exit Tax charge, forms part of a transaction to dispose of the asset
and
the purpose of the transaction is to ensure that the gain is charged at the lower rate.’[iii]
To recap, Ireland created an attractive tax system to encourage multinational companies to establish operations in the country, primarily to avoid US taxation. However, Ireland is now claiming that it needs to charge the same companies an Exit Tax when they leave, in order to prevent them from avoiding Irish taxes.
Tax cuts work
However, in defence of Ireland’s corporate tax rates and its generous IP incentives – they have worked. Ireland’s economy was in serious trouble before its tax reforms: with stagnant growth, soaring public debt, high unemployment and mass emigration. Now Ireland is a global hub for US and EU pharmaceutical, technology and finance multinationals. There are currently 1,700 multinational companies with operations in Ireland, employing approximately 21% of the country's workforce. Despite lowering its headline tax rate, Ireland’s corporate tax receipts increased from €4 billion in 2014 to €23.8 billion in 2023, with ten multinationals paying over half of Ireland's corporate tax revenue and more than a third of total government income.
So, it is unsurprising that Ireland’s Foreign Affairs Minister, Simon Harris, is so concerned about the prospect of 30% IEEPA tariffs on EU exports to the US, and I imagine he is terrified about a possible 200% tariff on Pharmaceuticals.
Pharmaceutical and healthcare companies form a crucial part of the Irish economy. In 2022, pharmaceutical and chemical companies contributed 25% of Ireland’s total corporation tax revenues, directly employing over 50,000 people and supporting more than twice that number through indirect jobs in suppliers, business services, and logistics. Jobs within the pharmaceutical sector are well-paid, with average earnings roughly 50% higher than Ireland’s national median for full-time employees across all sectors. Ireland urgently needs the EU to agree to a trade deal with the US. However, this is also why most EU members might be frustrated with Ireland.
This brings us back to the EU.
Ireland is still a member of the EU; therefore, the negotiations with the Trump Administration are technically out of Ireland’s control. And the negotiations will at best be centred on what is best for Germany – the economic engine of the EU, and presently in dire straits, having lost much of its Chinese export business, and now its US exports are being taxed out of existence. German exports to the US constitute 26% of all EU exports to the US, 56% of all EU car exports, 26% of EU steel exports, 33% of steel articles exported, 24% of EU aluminium exports, and 51% of EU copper exports to the US. However, with 25% tariffs on cars and 50% tariffs on steel, aluminium and copper, German manufacturers must also be praying that Brussels can swallow its pride and negotiate a trade deal with the US.
However, most other countries in the EU have not benefited from US trade to the same extent as Germany and Ireland have and may be less inclined to display the EU’s ineptitude so obviously. As former European Commission Chief of Trade, Jean-Luc Demarty noted, the EU has limited ability to retaliate with tariffs on US goods because:
“the EU cannot significantly exceed around €100 billion without shooting itself in the foot — since the rest are imports it depends on,”
He suggests instead that the EU target US digital and financial services to discourage equally coercive trade tactics by China.
But would all members of the EU want to retaliate?
Although Ireland has benefited enormously from hosting foreign companies, these benefits have not been passed on to other EU members. Some have also lost corporate tax revenue, as their own multinationals take advantage of Ireland’s generous tax system.
Most EU members export very few pharmaceuticals to the US; Ireland’s $51 billion pharmaceutical exports to the US do not benefit them at all. Additionally, eight members have trade deficits with the US in pharmaceuticals, but they will still suffer because of Ireland’s $46 billion pharmaceutical trade surplus with the US. This trade surplus is a significant factor in President Trump’s ire, and why he wants to impose high tariffs on the EU. Admittedly, Trump is also unhappy about the US car trade deficit with the EU, and the EU’s incredibly high tariffs and non-tariff barriers on US agricultural goods, as well as the EU’s Digital Markets Act, its Digital Services Act, its AI Act, Digital Services Taxes, and so on.
United they fall
The EU is a customs union; it encourages free trade within the bloc and imposes high tariffs on trade with countries outside the bloc. The EU requires all its members to charge the same tariffs and apply the same trade barriers, even though many of them do very little trade outside the bloc, with 75% of the tariffs collected going straight to Brussels.
Two-thirds of EU exports to the US come from just four countries: Germany (26%), Ireland (17%), Italy (13%), and France (10%). However, all 27 EU countries are about to be hit with even higher US tariffs without benefiting from significant exports to the US. Meanwhile, of the four countries that do benefit, German car exports are already suffering from 25% tariffs, and 50% tariffs are wiping out their steel, aluminium, and copper exports. Italian and French food, wine, and luxury goods currently face a 10% tariff, which will increase to 30% in August. But ironically, Ireland’s primarily pharmaceutical exports will remain tariff-free until the outcome of the US Section 232 investigation is known and the new tariff rate is announced.
Alternative approach with a better result
A more effective approach to onshore pharmaceutical production may be for the US to match Ireland's IP allowances, thereby encouraging pharmaceutical companies to bring their production, research, and development onshore. The US already has full expensing for new manufacturing, production, or refining facilities, now made permanent as part of the One Big Beautiful Bill. While this will lower effective tax rates for US-based manufacturers, Ireland still offers more generous research and development (R&D) credits.
[i] European Parliament, “The Pharmaceutical Tariff Elimination Agreement (Zero for Zero)”, E-0213/2004, 21 January 2004 Parliamentary question | The Pharmaceutical Tariff Elimination Agreement (Zero for Zero) | E-0213/2004 | European Parliament
[ii] Irish Tax and Customs, Gains, Gifts and Inheritances, How to calculate CGT
[iii] Irish Tax and Customs, Revenue, Exit Tax provisions