Leveraging the USMCA to strengthen pharmaceutical manufacturing and supply chains in North America

1. Introduction

Pharmaceuticals occupy a unique position in the North American economy. They are simultaneously a high-value traded good, a strategic industry for innovation, and an essential component of public health security. Over the past several decades, the region has benefited from U.S. leadership in pharmaceutical research and development, as well as from integrated supply chains that draw on Canadian and Mexican capabilities in generics, regulatory oversight, and manufacturing. Yet, the COVID-19 pandemic underscored the fragility of global pharmaceutical supply chains and raised difficult questions about North America’s reliance on foreign suppliers for active pharmaceutical ingredients (APIs) and finished drugs.12

The upcoming 2026 Joint Review of the United States-Mexico-Canada Agreement (USMCA) provides an opportunity to reexamine these dependencies and to propose cooperative reforms. While recent industrial policies in the United States have emphasized reshoring, including through executive orders on critical supply chains, regional coordination has lagged.3 Meanwhile, tariff proposals targeting pharmaceutical imports highlight the political salience of supply chain security but also raise concerns about higher consumer costs and potential disruptions to access.4

These debates are likely to intensify as the U.S. undertakes a forthcoming Section 232 national security review of the pharmaceutical sector.5 Although its findings have not yet been released, the review is widely expected to evaluate the feasibility of global, sector-wide tariffs on APIs and finished drugs as a tool for reducing foreign dependence. This development underscores the increasing role of national security framing in pharmaceutical supply chain policy and raises the stakes for coordinated regional strategies under USMCA.

In this context, strengthening the resilience, competitiveness, and equity of North America’s pharmaceutical sector is not only an economic imperative but also a test of the credibility of USMCA as a framework for regional cooperation.

2. The state of pharmaceutical manufacturing in North America

North America’s pharmaceutical sector combines world-leading innovation capacity with persistent structural gaps in manufacturing. The United States dominates global research and development (R&D), accounting for nearly half of worldwide pharmaceutical innovation spending, yet its domestic manufacturing base has steadily eroded since the 1990s as companies relocated API and generic drug production overseas. Today, most raw materials and chemical precursors for U.S.-consumed pharmaceuticals are imported, particularly from China and India, leaving the system vulnerable to global disruptions.6

In contrast, Canada and Mexico play more limited but strategically significant roles in the regional pharmaceutical landscape. Canada has a well-developed regulatory system and serves as a center to produce generic drugs and specialty pharmaceuticals, including vaccines and biologics. However, Canadian manufacturing operates on a relatively small scale and is insufficient to offset U.S. import dependencies. Mexico has emerged as a promising nearshoring hub. Its lower labor costs and geographic proximity to the U.S. market have attracted investment in generic medicines and medical devices, though the country has yet to fully develop advanced API capacity.7

Recent policy developments have emphasized the need for greater self-sufficiency in pharmaceutical production. In the United States, executive actions and legislative initiatives such as the Defense Production Act and supply chain reviews have highlighted pharmaceuticals as a sector critical to national security.8 These measures echo industrial policy approaches taken in other sectors, such as semiconductors, with the goal of reshoring essential production. Canada and Mexico have been more cautious, focusing on regulatory reforms and targeted investments rather than large-scale industrial policy interventions.9

Despite these initiatives, the region remains fragmented. Unlike the European Union, which has coordinated procurement and stockpiling strategies, North America lacks a coherent trilateral framework for pharmaceutical security. Instead, each country has pursued its own priorities, reflecting differences in political economy and health system design. This divergence risks undermining the resilience of the entire region. For instance, U.S. efforts to incentivize domestic manufacturing could inadvertently weaken opportunities for Canadian and Mexican producers unless harmonized with USMCA partners.

The state of pharmaceutical manufacturing in North America is thus characterized by innovation strength, persistent dependence on foreign suppliers, and uneven industrial strategies. Addressing these gaps will require not only national initiatives but also a regional strategy that leverages the complementary strengths of the three economies.

3. Supply chain dependencies and vulnerabilities

The pharmaceutical supply chain in North America is deeply intertwined with global production networks, particularly in Asia. Estimates suggest that 70% to 80% of APIs used in U.S. medicines originate abroad, with China and India serving as dominant suppliers.10 While some advanced biologics and high-value drugs are imported from the European Union, the dependence on Asian suppliers is most acute for generic drugs, and the APIs required to produce them. This heavy reliance creates vulnerabilities that extend beyond economics into the realm of national and regional security.

The COVID-19 pandemic served as a stress test, exposing weaknesses in the pharmaceutical supply chain. In 2020, India imposed export restrictions on several generic drugs and APIs to secure its domestic supply, while the European Union temporarily restricted exports of certain medical products.11 These measures highlighted how quickly national interests can override international supply agreements during crises. For North America, such restrictions translated into shortages of essential medicines, particularly sterile injectables and antibiotics, which were already prone to supply disruptions.

Geopolitical tensions further heighten these risks. As strategic competition between the United States and China intensifies, pharmaceuticals and medical products are increasingly seen through the lens of economic statecraft. Analysts have warned that Beijing could leverage its position in global API production in the event of escalating conflict or trade disputes.12 Climate-related disruptions also threaten pharmaceutical supply chains, from droughts affecting chemical feedstocks to shipping bottlenecks in global chokepoints such as the Panama Canal and the Red Sea.13

These vulnerabilities are not limited to the United States. Canada and Mexico, while less dependent on Chinese APIs due to smaller markets, face similar exposure to global disruptions since both import significant volumes of finished drugs and raw materials. The trilateral dependence on non-North American suppliers suggests that without coordinated regional strategies, all three USMCA partners remain susceptible to external shocks. These shared vulnerabilities have also helped motivate recent U.S. inquiries, most notably the forthcoming Section 232 national security review of the pharmaceutical sector, which reflects growing bipartisan concern about the strategic risks associated with foreign API dependence.14

4. Innovation, prices, and access

North America plays a leading role in global pharmaceutical innovation, but this strength exists alongside persistent challenges of affordability and equitable access. The United States is the world’s largest funder of pharmaceutical R&D, accounting for nearly half of global investment.15 American firms are particularly dominant in biologics, oncology therapies, and mRNA vaccine platforms. Canada and Mexico contribute more modestly to global innovation, but Canadian universities and firms have strong capabilities in vaccine research and biosimilars, while Mexico is increasingly active in clinical trials and contract manufacturing.16

Drug pricing highlights stark contrasts across the region. U.S. consumers pay substantially more for medicines compared with peers in Canada and Mexico. A 2021 RAND study found that U.S. prescription drug prices were more than 250% of those in 32 OECD countries, whereas Canadian and Mexican prices were closer to the OECD average.17 These disparities have contributed to cross-border purchasing, with Americans importing lower-cost medications from Canada and Mexico to mitigate out-of-pocket expenses.18

The USMCA itself reflects these tensions. The original agreement included provisions for extended data exclusivity on biologics, which would have strengthened intellectual property protections but risked raising drug costs. Under political pressure, these provisions were rolled back prior to ratification. This episode underscores the ongoing balancing act between rewarding innovation and ensuring affordability within a trilateral trade framework.

The affordability challenge also intersects with manufacturing security. Policies aimed at incentivizing reshoring, such as subsidies or tariffs, could raise production costs. Without coordinated strategies across the three countries, such measures may exacerbate price differentials and limit access, particularly for vulnerable populations. Effective policy must therefore address both the innovation strengths of the region and the affordability constraints that shape public acceptance of pharmaceutical trade policy.

5. Trade policy and the tariff debate

The debate over tariffs on pharmaceutical imports has grown more salient as U.S. policymakers grapple with vulnerabilities in global supply chains. During the first Trump administration, proposals surfaced to impose tariffs on imports of APIs and finished drugs, particularly from China. Advocates argued that tariffs could incentivize reshoring of production and reduce dependence on foreign suppliers. However, the effectiveness of tariffs as a policy tool for the pharmaceutical sector is highly contested.

The debate is further sharpened by the upcoming Section 232 national security review of pharmaceuticals, which is expected to consider global sectoral tariffs as a means of compelling reshoring.19 While the intent of such tariffs is to mitigate dependence on China and other suppliers, the review’s potential recommendations highlight the tension between national security objectives and the economic and public health risks associated with broad-based trade restrictions.

First, the structure of the pharmaceutical supply chain limits the immediate impact of tariffs. The United States imports a substantial share of its APIs, and domestic manufacturing capacity is insufficient to replace these imports in the short term.20 Tariffs imposed without complementary subsidies or industrial policy could therefore raise drug costs for consumers without meaningfully expanding domestic production.21 Higher prices would exacerbate affordability challenges already evident in the U.S. market, with disproportionate effects on patients with chronic conditions who rely on generics and essential medicines.

Second, tariffs risk provoking retaliatory measures or disputes under World Trade Organization (WTO) rules. Pharmaceuticals have traditionally been subject to very low tariffs under multilateral agreements, including the WTO Pharmaceutical Agreement.22 Unilateral tariff action by the United States could trigger countermeasures from major suppliers such as China or India, potentially disrupting supply further.

Finally, tariffs carry implications for USMCA partners. Mexico and Canada could benefit from diverted production if firms shift operations into North America to avoid U.S. tariffs on Asian imports. Yet absent trilateral coordination, tariff policies could also generate new trade frictions within the region, particularly if supply chains fragment rather than integrate.

Overall, tariffs are a blunt instrument for strengthening pharmaceutical security. While they may have symbolic appeal as a signal of policy resolve, the economic risks and trade tensions they could generate underscore the need for more nuanced strategies that combine targeted incentives, regulatory cooperation, and trilateral frameworks.

6. Opportunities in the 2026 USMCA Joint Review

The 2026 Joint Review of USMCA represents a pivotal opportunity to strengthen regional cooperation on pharmaceutical security. While national strategies in the United States, Canada, and Mexico have highlighted vulnerabilities in drug supply chains, the lack of a trilateral framework has limited progress. A coordinated approach could transform pharmaceuticals into a cornerstone of North American resilience.

One opportunity lies in creating a shared early-warning system for drug shortages. The European Union’s Health Emergency Preparedness and Response Authority (HERA) provides a useful model, integrating supply monitoring, demand forecasting, and crisis coordination across member states.23 A North American equivalent could reduce duplication and allow the three countries to respond collectively to disruptions.

Another priority is investment in API and generic drug production capacity within North America. A trilateral investment fund or incentive program could support facilities in Mexico and Canada while leveraging U.S. demand, creating a more balanced distribution of production. This approach would not only reduce reliance on Asia but also foster economic development across the region.

Regulatory harmonization is also critical. Mutual recognition of good manufacturing practice (GMP) inspections, streamlined approval processes for generics, and closer alignment on intellectual property rules would lower transaction costs and accelerate market entry.24 By reducing regulatory fragmentation, USMCA could enhance competitiveness and make regional production more attractive to firms.

Finally, the Joint Review provides a chance to institutionalize a North American supply chain security council, tasked with coordinating policy, monitoring vulnerabilities, and advising on crisis response. Such a body would anchor long-term cooperation and ensure that pharmaceutical resilience remains a sustained priority beyond moments of crisis.

The success of the Joint Review will be measured by whether the USMCA can move from a trade framework to a platform for regional security. By addressing pharmaceutical supply chains directly, the three countries can demonstrate the agreement’s relevance to both economic competitiveness and public health.

7. Policy recommendations

The analysis of pharmaceutical supply chains in North America highlights the need for a strategic, coordinated response that balances security, innovation, and affordability. The following recommendations are proposed for consideration during the 2026 USMCA Joint Review:

1. Prioritize regional incentives over tariffs. Instead of unilateral tariffs, the three countries should develop targeted incentives for production of APIs and essential generics. Such measures would reduce dependence on Asia while avoiding the consumer cost increases associated with tariffs.25 This approach takes on added urgency in light of the forthcoming Section 232 national security review of pharmaceuticals, which may recommend global sector-wide tariffs; USMCA members should therefore proactively advance coordinated alternatives that strengthen resilience without elevating drug prices.26
2. Advance regulatory harmonization. Mutual recognition of GMP inspections, streamlined generic drug approval, and closer intellectual property alignment could lower compliance burdens and accelerate regional integration.27
3. Establish a North American supply chain security council. Modeled after the European Union’s HERA, this body could coordinate monitoring, crisis response, and long-term resilience planning.28
4. Support Mexico’s role as a nearshoring hub. Mexico’s cost advantages and geographic proximity position it as a critical partner for API and generic drug production. Coordinated investment could expand its role while creating regional redundancy.29
5. Balance resilience with affordability. Any policies aimed at strengthening supply chains must also account for drug pricing, particularly in the United States, to maintain public support and ensure equitable access.30

Together, these recommendations offer a pragmatic roadmap for USMCA members to enhance security of supply while preserving North America’s leadership in pharmaceutical innovation.

8. Conclusion

Pharmaceuticals represent a vital intersection of trade, health, and security in North America. The United States leads the world in innovation, yet the region as a whole remains highly dependent on foreign suppliers for APIs and many essential medicines. The COVID-19 pandemic, coupled with growing geopolitical tensions, revealed how fragile these supply chains are and how quickly disruptions can translate into shortages that threaten public health.

The 2026 Joint Review of USMCA offers an opportunity to confront these vulnerabilities. By moving beyond national approaches toward a coordinated regional framework, the three countries can leverage their complementary strengths: U.S. research leadership, Canadian regulatory capacity, and Mexico’s manufacturing potential. Establishing mechanisms for shortage monitoring, regulatory alignment, and trilateral investment in critical medicines would signal that North America is prepared to address health security as a collective priority.3132

Pharmaceutical supply chains are thus more than an industrial concern. They are a test of USMCA’s ability to evolve into a platform for resilience and cooperation. A forward-looking strategy will be essential to safeguard innovation, affordability, and public trust in the North American partnership.

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