Medical Technology Takes Hit From Tariffs While Fighting Off Tax by Ayanna Alexander
Makers of pacemakers, surgical gloves, and patient monitoring systems may have to dig even deeper in their pockets by 2020 if the federal government continues to increase tariffs on goods from China and doesn’t completely repeal the medical device tax.
President Donald Trump proposed a 25 percent tariff spike in May, affecting up to $1.3 billion worth of medical devices, according to The Advanced Medical Technology Association. At the same time, the industry has been lobbying Congress—unsuccessfully so far—to repeal the 2.3 percent excise tax on product sales imposed on manufacturers and producers.
AdvaMed and other medical technology manufacturers asked the office of the U.S. Trade Representative (USTR) to remove certain devices from the potential tariff inflation list during the agency’s June 20 hearing on the recent round of tariffs.
“If tit-for-tat retaliation continues, the administration’s objectives for a strong domestic medical technology industry will be undermined,” Ralph Ives, executive vice president of global strategy and analysis for AdvaMed, said.
Medical cameras, MRIs, and contact lenses, for example, could be subject to an increase.
U.S. sales, production time, and innovation will be significantly hurt if the tariffs are imposed, according to AdvaMed.
Medtech companies, such as Medtronic Plc and GE Healthcare, have submitted many requests to have their products excluded from any additional tariffs. The chances for an exemption from the tariffs, however, are slim. So far, USTR has approved roughly 2,421 exclusion requests from items on the first two lists of those subject to tariffs and denied 7,550 across all industries as of June, according to USTR’s tally of requests.
There are four tariffs lists in total—USTR hasn’t released the requests for the third list since it came out in May and list four is currently in the works.
“We believe our economic relationship with China has been unbalanced and grossly unfair to American workers, farmers, and businesses for decades,” Trade Representative Robert Lighthizer said during a June 19 Ways and Means Committee hearing.
“After an exhausting process, we put tariffs on certain Chinese products and are prepared to put more tariffs in place if certain issues are not resolved satisfactorily.”
Device Tax Stability
Meanwhile, the device tax, a component of the Affordable Care Act, remains a pressing problem for manufacturers of everything from bandages to surgical robots. The tax is due to come into effect in 2020 after Congress delayed it twice, but the medical device industry is pushing Congress to remove it altogether.
Medical device advocates say another delay of the tax implementation date is more likely because a full repeal of the medical device tax alone would require lawmakers to come up with some $20 billion in offsets over 10 years.
The Senate Finance Committee launched a series of task forces in May to scrutinize the medical device tax and other levies under Obamacare. The bipartisan study group includes Sens. Patrick Toomey (R-Pa.), Bob Casey (D-Pa.), Michael Enzi (R-Wyo.), and Mark Warner (D-Va.).
Democrats have been reluctant in the past to repeal the medical device tax without generating additional revenue elsewhere, but that could be shifting. Presidential candidate Sen. Amy Klobuchar (D-Minn.), for example, and other Democrats have signed on to bipartisan bills recently to do away with the tax.
Steve Kelly, a spokesman for the group’s co-chair Toomey, who favors repealing the tax, previously told Bloomberg Law that he’s encouraged by the wide bipartisan support those bills have gotten so far.
Members of the study group say they intend to have a solution to the medical device tax by the end of the year.
Congressional Pushback
Some lawmakers have asked the USTR to remove medical devices from any tariff list since July 2018, when the Trump administration’s first tariffs on Chinese goods came into effect.
A 2018 letter from lawmakers including Reps. Ron Kind (D-Wis.) and Jackie Walorski (R-Ind.) cited the possibility that the Chinese device market could present a significant growth opportunity for U.S. manufacturer as a reason for medtech to be removed from the first tariff list—especially since China imported more than 70 percent of its medical devices.
The president’s use of tariffs as a bargaining chip on different goods, in general, has prompted mixed reactions from Congress more recently.
“Any gains made with respect to the trade agenda will be eroded if the administration continues to use existing tariff authority in this manner,” Ways and Means Chairman Richard Neal (D-Mass.) said during the June 20 committee hearing.
The medical technology industry may not be able to count on Neal as an advocate for medical device tax repeal, though, due to lack of cost offsets. That’s despite Massachusetts being the home of major device makers like Boston Scientific Corp.
BSCI is slated to lose up to $25 million if the tariffs are approved, according to Jason McGorman, a Bloomberg Intelligence analyst.
The Ways and Means committee’s ranking member, Kevin Brady (R-Texas), applauded the president’s decision to take China to task during the recent hearing.
“President Trump is the first president to truly take China straight on,” Brady said. “Tariffs are the tool that the president has chosen to bring China to the table for constructive discussions.
Brady has also been a huge supporter of repealing the device tax repeal and tried to appease both industry and congressional counterparts with another delay in the medical device tax in the 115th Congress.
The package, which wasn’t well received by Senate Democrats, failed to gain enough support to overcome procedural roadblocks and come to a vote.
Should the tariff increase go into effect on device makers, there are other ways the industry can reduce some of the impact, said Francesca Guerrero, of counsel with Winston and Strawn LLP.
“There may be free or reduced duty rates for devices used for patients with disabilities, for example. There’s also ways you can change your supply chain, in order to mitigate having to pay the tariffs,” she said. “Some of the Chinese manufacturing companies have operations in other countries. You could be working with the same company but if it’s made in other countries, it’s no longer of Chinese origin.”