Medical device makers in Minnesota, U.S. brace for tariff fallout

The medical device industry, a big player in the Minnesota economy, is bracing for the financial fallout from tariffs on goods imported from Mexico, which are set to begin Monday.

The U.S. imports more medical devices and device components from Mexico than any other country, and barring a diplomatic breakthrough, the cost of those devices could increase by tens of millions of dollars a month.

The 5% tariffs that go into effect Monday are set to escalate to 25% by October unless the Trump administration is satisfied that Mexico has "alleviated" the flow of illegal immigration into the U.S.

Companies affected by the tariffs include Medtronic, which is run from operational headquarters in Fridley. It has more than 750,000 square feet of manufacturing space in Mexico, roughly 8% of the $30 billion company's global manufacturing footprint. Boston Scientific, which has major operations in Minnesota, doesn't directly manufacture devices in Mexico, but the company will have to manage the expenses related to imported components.

While all goods brought in from Mexico could be affected by tariffs, medical technology stands to be particularly affected because of the outsize nature of its trade involving Mexico.

As much as 90% of the medical devices made in Mexico end up in the United States, said Shaye Mandle, chief executive of Minnesota's health care technology trade group, the Medical Alley Association.

Conversely, the United States imports more medical devices from Mexico than from any other country, including China. Of the $51.7 billion worth of medical devices brought into the U.S. last year, more than $8.5 billion came from Mexico, according to research firm Fitch Solutions. (China is the No. 4 med-tech importer to the U.S., behind Mexico, Ireland and Germany.)

Using last year's figures, a 5% tariff on medical devices would create about $35 million in additional monthly expenses that would have to be borne by someone. At 25%, that total climbs to $177 million per month.

When possible, manufactures are likely to try to shift the cost of the tariffs to insurers and consumers, which would make health care more expensive, Mandle said. If insurers and device buyers won't accept the price increases, manufacturers may have to absorb the cost, likely forcing cuts in expenses they can control, like research and personnel.

"While the president has made a public proposal for tariffs, we will need to monitor precisely which products are affected and how it's actually applied, and only then will we be able to quantify impact to Medtronic," company spokesman Jeffrey Trauring said in an e-mail. "Mexico is an instrumental partner in our supply chain, and the imposition of tariffs on trade with Mexico should be avoided, if possible."

Despite the White House's encouragement to companies to avoid the higher trade taxes by moving production to the United States, Mandle said medical device production locations are highly regulated and cannot be moved quickly or easily.

"There is zero chance that the medical device industry is going to move anything from Mexico back into the U.S. in the short term," Mandle said. "But over the long term, you will definitely start to see the evaluation of the supply chain change if companies believe this is going to continue to change the economics and dynamics of the relationship that the United States has with Mexico."

Like many industries, medical-technology makers began to invest heavily in Mexico in the 1990s following passage of the North American Free Trade Agreement (NAFTA), which loosened border controls to promote trade and also created financial incentives to foster trade and investments across the entire continent.

Trump has been an outspoken opponent of the trade effects of NAFTA and has pressed for a renegotiated pact that now awaits ratification. But the Mexican tariffs slated to start Monday are framed politically as an effort to stem the tide of immigrants through Mexico to the U.S.

Several news outlets reported Wednesday that U.S. and Mexican diplomats were meeting at the White House to try to avert the economic consequences of Trump's threatened tariffs. Senate Republicans have voiced opposition to them.

No one is sure what will happen. Meanwhile, medical device makers join farmers, automakers and other businesses waiting to see how the numbers will add up. The additional expenses might be absorbed by health care consumers, or it might force cost-cutting in areas like jobs and research if the companies bear the brunt of the expenses.

Mandle noted that businesses have welcomed some changes under the Trump administration, such as the recent corporate tax cuts, but the tariff talks send jolts of uncertainty through businesses that work against the goals of tax cuts.

"So if the end goal is to have more money to invest in more R & D and more job growth, then introducing another element of unpredictability certainly runs counterproductive to what the ultimate goal was with corporate tax cuts," he said.