Morgan Stanley: China Healthcare—Navigating the Latest US Tariff Situation
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Morgan Stanley assesses that the latest US tariff developments have a limited impact on Chinese pharmaceutical exports, as drugs and raw materials are exempt from the new 10-15% temporary global import tariffs implemented under Section 122 of the Trade Act of 1974. This follows a US Supreme Court ruling on February 20, 2026, which struck down President Trump's reciprocal tariffs under IEEPA. Chinese generic APIs and finished formulations still face an approximately 10% US tariff, reduced from 20% in October 2025. Meanwhile, branded (patented) drugs are subject to a 100% tariff implemented that same month to encourage reshoring. Morgan Stanley maintains an "attractive" rating on the Chinese pharmaceutical industry, noting that only about one-tenth of Chinese API exports ship directly to the US. While a 10% tariff could affect the competitiveness of Chinese finished formulations, exporters have multiple mitigation strategies. These include importing at cost for companies with US subsidiaries, shifting production to American facilities where available, sharing the tax burden with importers, or absorbing the impact within gross margins. To date, no generic drug manufacturers have announced plans to reshore production to the US. Companies producing sterile injectables hold a structural advantage due to ongoing US shortages. Furthermore, branded drug supply chains are witnessing significant capital expenditure in the US, with Chinese CDMOs actively allocating capacity for end-stage products domestically.