The Effect of Tariffs on Supplement Prices
This newsletter is about the effect that proposed tariffs are likely to have on the cost of pretty much all supplements you buy--assuming the tariffs are implemented as proposed. But before we go there, we need to discuss an important concept: connecting action and results. As babies, at around 8-9 months, we are first able to understand the connection between action and result even when there is a gap between the two events. Unfortunately, that ability comes with two weaknesses:
- Sometimes we connect an action and a result that are unconnected simply because the two events occur in close temporal proximity. For example, I can't tell you how many times we've received questions at the Foundation along the lines of, "I started taking a new vitamin pill a couple of days ago, and I just came down with the flu. Do you think the vitamin caused the flu?" (And no, it didn't.)
- But more relevant to today's discussion is the other side of the equation. If a result doesn't occur within a few days of an action, most of us have a hard time connecting the two events. This is the main reason that people still start smoking cigarettes, for example. The negative results of smoking are several decades down the line from the action of smoking. But boy, those long-term results are a killer.
So, what is the relevance of temporal proximity to tariffs and nutritional supplements? And the answer is that the results of the proposed tariffs on the cost and availability of nutritional supplements is likely to be far enough down the road that most people will be unable to connect the two events on their own. And that's why we're going to discuss them now, so that you'll recognize the connection if/when the tariffs on supplement ingredients are imposed. I am not going to discuss the effectiveness of tariffs in terms of extracting concessions from other countries and the larger economic picture. (I'll leave that to others to sort out.) My goal today is merely to illuminate for you the impact those tariffs will have on the cost and availability of nutritional supplements that you may already be buying, or plan to buy in the future.
Docket No. USTR-2018-0026
The Office of the United States Trade Representative (USTR) is the United States government agency responsible for developing and recommending United States trade policy to the President of the United States--or, as in this case, developing trade policy according to the President's direction. As most of you are aware, the President has already implemented tariffs against the importation of some goods from China and has proposed to significantly increase them as leverage in his trade negotiations. As part of its office then, the USTR requested comments concerning the "Proposed Modification of Action Pursuant to Section 301: China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation."
Daniel Fabricant, the former Director of the Division of Dietary Supplement Programs at the FDA, is currently the Chief Executive Officer and President of the Natural Products Association. On July 27, 2018, he electronically submitted a letter to docket USTR-2018- 0026's comment section regarding the consequences of said actions as stated in Section 301.1 And then on August 20th,2 appeared before the USTR to address the committee and answer any questions they might have. Since he explained things about as succinctly as possible, I'm simply going to draw from his statements.
Daniel Fabricant Explains the Impact of Tariffs on the Supplement Industry
HEARING BEFORE THE UNITED STATES TRADE REPRESENTATIVE SECTION 301 COMMITTEE
August 20, 2018
Testimony of Daniel Fabricant, Ph.D.
Chief Executive Officer and President, Natural Products Association
Thank you for the opportunity to testify. NPA was founded in 1936 to promote and protect the unique values and shared interests of retailers and suppliers of natural nutritional foods and natural products. We are the oldest and largest trade association in our industry and represent over 1,100 members in retail, manufacturing, wholesale, and distribution of natural products, including foods, dietary supplements, and health/beauty aids. NPA is the leading trade association for the dietary supplement industry, which is an estimated $45 billion-dollar industry in the U.S.
What's important in the context of today's hearing is to emphasize that our industry is made up mainly of small and medium sized businesses. And while the industry has existed for many years, it has only recently -- really since the late 1980s -- transformed into a major engine of economic growth, customer satisfaction, and job creation in the U.S. Today, America is the undisputed global leader in natural products and dietary supplements, we are The Champs. But that leadership position could be lost forever if these tariffs are put into effect.
There are three main reasons why our members are so concerned and why we are seeking exemptions:
First is that many businesses could be forced to close up shop altogether, and that is not meant to be hyperbole. These tariffs are simply unsustainable and unaffordable for them, since China is the single largest global supplier of safe, reliable, and costs-effective raw materials for their products.
Second is that these tariffs -- for our industry -- could have the exact opposite result of their intent. They could actually reduce finished-product manufacturing jobs here in the U.S. and send those jobs overseas, as it would be cheaper to do that than to pay the tariffs being proposed.
And finally, our economic competitors in Europe, Asia and South America would be the big winners, as they would be able to maintain supply to meet the growing demand for these products.
We are also seeking guidance from the government on how the exclusion process will work, what the standards will be for granting exclusions and how the government will collect the required data from companies while keeping confidential commercial information protected.
The U.S. domestic natural products industry is not a legacy industry and operates far differently than steel and aluminum. The U.S. actually has a trade surplus with China when it comes to finished dietary ingredients and natural products -- that's right, a trade surplus. We do not want to turn a current trade surplus into a trade deficit.
The issue at hand is whether these raw materials are available in safe supply from other sources, and I'm here to tell you that they simply are not. China has and will continue to be THE virtual sole source on the globe that can handle the large-scale demand of finished product manufacturers in the U.S. This is the result of years of collaboration between our two countries, including the development of quality assurance, safety, good manufacturing practices, and regulatory compliance. As a result, the largest FDA foreign office is located in China. In short, we have largely built today's positive and proven supply chain, and we want to continue being the primary beneficiary of that hard work.
A good example of this is amino acids which are a fundamental ingredient in many of our products. A number of our members are now contemplating moving their U.S. manufacturing to China to circumvent the tariffs, this isn't the intended result of this endeavor.
This American innovation, like in so many other areas, is why we are the world leader. This is what drives future product sales for this industry, and it is why industry analysts currently project a 10% compound annual growth rate over the next ten years. That impressive future, and the jobs and economic growth it would provide, would go straight from the U.S. to our economic competitors if we are not provided the justified relief we are seeking. It's as simple as that.
So again, thank you for the opportunity to testify, and I'd be happy to answer any questions as this is a complex issue. We applaud the Administration's effort to help American jobs and businesses, and we want to work with you to maintain our global leadership in this area.
Daniel Fabricant, Ph.D. CEO & President
Natural Products Association
The bottom line is that imposing tariffs on dietary ingredients, as currently proposed, will result in a significant financial burden for consumers like yourself who will bear the increased costs of products. And said tariffs will also reduce product choice as small-and medium-sized companies shutter their doors.
It also should be noted that although China has developed a reputation over the years for low-quality ingredients--and still does produce many contaminated ingredients--there is a growing cadre of companies in China now producing some of the highest quality, cleanest nutritional ingredients in the world. These companies follow strict cGMP guidelines because they want to sell in the major European and U.S. markets. In addition, any serious U.S. company tests these same imported ingredients for quality and toxicity before they ever get used in an herbal or nutraceutical formula here in the U.S. because that too is a requirement of cGMP. If you're buying from a company that follows cGMP, then these are good ingredients, which is a good thing since many of them, as Dan Fabricant indicated, are now available only from China.
Make no mistake, these proposed tariffs will predominantly affect small business, as defined by the Small Business Administration (SBA). The dietary supplement industry receives significant ingredient innovation from new, small business start-up companies. It is that ingredient innovation which drives future product sales for this industry. Any disruption of the raw material supply chain through tariffs on ingredients sourced from China will curtail innovation, decrease future sales, and flatten the expected compound annual growth rate (CAGR) for the dietary supplement and natural product industries. The 10% CAGR in the future global market over the next 10 years means that any proposed tariffs on dietary ingredients will lead to strong sales for the rest of Europe, South America, and Asia, and a lack of growth for the U.S. for the first time. It is an action which the U.S. dietary supplement industry may not be able to recover from.
If you use dietary supplements and higher prices and fewer choices are not something that you particularly want, then you probably should let both your U.S. Senators and your Congressional Representative know that you oppose tariffs on any and all nutritional ingredients and products: https://www.contactingcongress.org/. And you probably want to do it ASAP before these changes take place and you can no longer connect the results to the actions that precipitated them--or more notably, are too late to effect any changes and are forced to live with the results. And keep in mind that even if the supplements you buy don't contain ingredients from China, your American made supplements will eventually follow the price increase. As the saying goes: a rising tide lifts all boats.