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2018 Tariffs and the Effects on the Healthcare Industry

Chinese Che$$

Chinese Che$$

Growing up, I remember playing Chinese Checkers, which appeared to me to be a more interesting version of checkers that I’d play with my grandfather. When I got older, I found out that Chinese Checkers was actually a German game, and though similar in many ways, it wasn’t checkers. Much later, I saw some gentlemen in San Francisco’s Chinatown play what I thought was chess- but it was Chinese Chess. Chinese Chess (Xiangqi) is similar to Western Chess, but with a few variations. The rules prohibit the main pieces (generals) "...from facing each other directly; areas on the board called the river and palace, which restrict the movement of some pieces (but enhance that of others); and placement of the pieces on the intersections of the board lines, rather than within the squares..."* . I was trying to identify the pawns and Queen- their game had different pieces and moved in strange ways according to my knowledge base of what I thought I was seeing.

All of this is very analogous to the current burgeoning trade war between the United States and China, which has very real ramifications for the medical imaging industry- and virtually everything in between.

We may think we know what’s going on, but, we only understand some of what’s happening.

First some basics:

What exactly is a “tariff”? Tariffs, in short, are taxes imposed on an imported good. Tariffs have been around since the 18th century and were a major producer of revenue for the countries involved. Remember the Boston Tea Party? In fact, until the 16th amendment to the Constitution in 1913 which established the Federal Income Tax, the United States received most of its revenue from tariffs. The main purpose of modern tariffs is to protect domestic industry from foreign competitive activities. Lobbyists have long cajoled Congress to protect specific industries vital to the local congressional districts or in support of different trade organizations. These translate into real jobs- and votes.

Frequently, a trade deficit (an economic measurement in which a country’s imports more than they export) ensues. Why is this important? It goes to the matter of debt, in which more dollars are leaving to pay for goods and services that are coming in. Increase the debt, increase the borrowing of money to finance that debt. Enough said.

In 2017, the total U.S. trade deficit was $566 billion. It imported $2.895 trillion of goods and services while exporting $2.329 trillion. The deficit is higher than in 2013 when it was $478 billion. One reason is that the dollar strengthened 28 percent between 2014 and 2016. A strong dollar makes imports cheaper and exports more expensive

"The trade deficit with China is $375 billion. It's responsible for 66 percent of the total U.S. deficit in goods. The other U.S. trading partners don't create much of a deficit." **

How it impacts the Medical Imaging Industry

Effective July 6, 2018, the Trump administration put into effect tariffs ranging to 25% on over 800 products-including many items that are commonplace in the Medical Imaging industry. They are called Section 301 tariffs due to the provision of U.S. law that allows U.S. presidents to impose duties on nations that violate fair trade practices. What is in question, in the Administration's view, is that China has explicitly routinely violated these practices, particularly in the areas of intellectual property.

You may be aware or not, but almost all CT’s, many product lines from GE, Carestream, and others are manufactured in China- and have been for some time. Aunt Minnie published the list below of the products included:***

  • CT apparatus based on the use of x-rays
  • Apparatus based on the use of x-rays for medical, surgical, or veterinary uses (other than CT apparatus)
  • Ultrasonic scanning electrodiagnostic apparatus used in medical, surgical, dental, or veterinary science
  • MRI electrodiagnostic apparatus used in medical, surgical, dental, or veterinary sciences
  • Scintigraphic electrodiagnostic apparatus used in medical, surgical, dental, or veterinary sciences
  • Apparatus based on the use of alpha, beta, or gamma radiations for medical, surgical, dental, or veterinary use
  • X-ray tubes
  • Radiation generator units
  • Radiation beam delivery units
  • X-ray generators, high-tension generators, desks, screens, examination or treatment tables, and chairs and similar apparatus, not elsewhere specifie
  • Parts and accessories of x-ray tubes
  • Parts and accessories of apparatus based on the use of x-rays
  • Parts and accessories of apparatus based on the use of alpha, beta, or gamma radiations

Both the National Electrical Manufacturers Association (NEMA) and the Medical Imaging and Technology Alliance (MITA) have been quite active and vocal in lobbying for either lessening the tariffs or delaying their implementation. To avoid what would primarily be a tax increase of over $2 billion on U.S. manufacturers and customers, tariffs, should be narrowly targeted and time-limited to produce negotiated outcomes that restore and, whenever possible, advance openness and fairness, according to NEMA.

"If the purpose of these tariffs is to get the other party to the negotiating table, our industry for one would like to know when those negotiations are to begin," NEMA President and CEO Kevin Cosgriff said in a statement.

The dispute is part of broader U.S. complaints about global trading conditions that have prompted Trump to raise duties on steel, aluminum, washing machines or solar panels from Canada, Europe, Japan and South Korea. ****

In a countermove, China announced increased tariffs on imports from the United States and is proposing almost $60 billion increases from agricultural items, to whiskey, to snowblowers. The tariffs will range from 5% to 25% if the second wave of Administration tariffs goes into effect. The challenge China faces is that going back to the trade deficit; they don’t import as many American goods. However, the products they are targeting covers a broad swath of American commerce- from farmers to car manufacturers.

Here is the effect in real dollars to the Medical Imaging Market:

Cost of US-China tariffs by
medical imaging modality *****

Annual value before tariff

Additional cost with tariff

X-Ray parts $178.2 million $44.6 million
CT $134.26 million $33.7 million
Ultrasound $86 million $21.5 million
MRI $44.9 million $11.2 million
X-Ray (medical, veterinary, etc. $40.1 million $10 million
Scintigraphy $403,000 $108,000

Going forward

In my view, this new reality may force the supply chain, and imaging departments look to more domestic or non-Chinese manufacturers of imaging equipment as a solution. At the very least, a deeper dive into the component/replacement costs of high-end equipment becomes much more of a focus.

Trust me, they are out there and make some very good equipment. In light of the new tariffs, this may prove to be a real opportunity to be creative and look beyond the manufacturers that facilities have defaulted to using in the past when factoring in the total cost of ownership. Also, with the other changes in the recent months, it might be time to re-examine sole-sourcing contracts.

The bottom line is that this increased tariff-affecting parts, tubes, and finished systems-will add to the cost of healthcare in the near future.

Hopefully, trade talks will start sooner rather than later and real progress will occur. No one on either side wants to hear “Checkmate.”

*Wikipedia. 2018. "Xiangqi"
**Kimberly Amadeo. 2018. "The U.S. Trade Deficit and How It Hurts the Economy" Published by The Balance. July 19,2018
***Erik L. Ridley. 2018. "U.S. finalizes tariff list of Chinese products" Published by Aunt Minnie. June 15,2018
****Associated Press. 2018. "China announces $60B of U.S. goods for tariff retaliation" Published by Newsday. August 3,2018
*****Brian Casey. 2018 "Tariffs could add $400M to medical equipment costs." Published by Aunt Minnie. July 13, 2018