Understanding the Impact of U.S. Investigations into HEC Trading Practices

Global trade has been a vital element of successful industries for centuries, from common spices to advanced technology and pharmaceuticals. The larger a particular economy gets, the more involved with international trade they usually become. Over time, the landscape of trade has seen major transitions and regulations to ensure fair value for products and services from country to country.

Despite good intentions, not all regulations are mutually beneficial for the parties involved. A recent contentious area for trade regulations includes that of the pharmaceutical industry and the various products needed to aid in the development of life saving treatments. The United States is heavily involved with trading partners in this industry that include but are not limited to China, India, Brazil, and Vietnam.   

The U.S. government is currently investigating an ongoing antidumping (AD) and countervailing duty (CVD) action looking into hard empty capsules (HECs) from  major trading partners (China, India, Brazil, and Vietnam) which has reached a critical juncture. Preliminary findings indicate that some of these imports are being sold at unfairly low prices and/or benefit from government subsidies, potentially distorting the competitive landscape for capsule buyers and manufacturers in the U.S.

Following these affirmative preliminary findings, U.S. Customs and Border Protection (CBP) will now require cash deposits on imported HECs in amounts equal to the preliminary dumping/subsidy rates. As pharmaceutical and nutraceutical stakeholders await final determinations, they should prepare for a possible extended cost and sourcing shift. 

What is AD/CVD

First, it is important to understand what exactly AD and CVD are and why they are under investigation to better understand why this shift may be occurring.

Antidumping and countervailing duty laws are trade regulations that the U.S  and other countries around the world utilize to defend domestic industries from unfair foreign pricing practices that are beyond the reach of domestic companies. AD duties are imposed when a foreign producer sells a product in the U.S. at less than fair value (often below its price in the home market or cost of production). CVD duties apply when foreign governments subsidize their producers, giving them an artificial cost advantage over their trade partners.

The investigation into this specific issue with HECs is being led by the U.S. Department of Commerce (DOC) and the International Trade Commission (ITC). The investigation can result in implemented changes on specific products from these named countries in the form of duties such as tariffs. For U.S.-based buyers and manufacturers, the outcome can affect pricing, sourcing strategies, and supply chain risks.     

The Timeline and Key Developments within the HEC Case

The investigation into HECs began in late 2024 following a petition filed by a global manufacturer of pharmaceutical capsules. The company alleged that capsule producers from multiple countries including China, India, Brazil and Vietnam were exporting HECs to the U.S. market at unfairly low prices and receiving subsidies from their respective governments. The timeline of events for both the AD and CVD investigation following the petition filed can be found in Table 1 below.

The preliminary determinations that were published found that imports from China, India, and Vietnam were being dumped in the U.S. marketplace at margins as high as 172%. The early results of the investigation from the CVD side indicate that these countries’ governments are subsidizing capsule production through a variety of means such as favorable tax treatment, energy subsides, and export financing.

Why This Matters

The intricacies of the legal and trade implications remain complex, but the broader context is pretty straightforward. In recent years with the COVID-19 pandemic, the demand for HECs has increased significantly as pharmaceutical and nutraceutical production has really ramped up to accommodate the demand in this field. This prompted heavy investment in capsule manufacturing in lower-cost regions of the world like China, India, Vietnam, and Brazil. 

While the post-pandemic landscape has normalized demand in this industry, overcapacity became a big issue. In order to deal with these changes, some manufacturers greatly reduced their prices in the global markets to mitigate idle costs. Unfortunately, this created a flood of low-cost imports that raised concerns among domestic producers about fair competition.  

The original petition for this investigation was filed to bring attention to this market disruption in order to preserve a fair playing field within this space. For capsule buyers including those in development and manufacturing organizations, the availability of cheaper imported capsules was a short-term cost benefit.

Who Pays the Duties

During the investigation, the U.S. government will analyze if either dumping or subsidizing is involved. If both are confirmed in their report, the DOC will likely impose additional duties on affected imports. This action could even be retroactive to earlier shipments if they can delineate the time in which it occurred — for example, if companies rushed to export products ahead of the rulings. The big question then becomes who pays for it? 

In most of these cases, the exporter or importer of record bears the cost of the duties and not the U.S. consumer. It is the job of the U.S. Customs and Border protection to collect on these after entry similar to other tariffs that have been imposed this year.

There still remains an outside chance that these costs could be passed along to the supply chain depending on contracts and sourcing structures with these specific products. If this is the case, U.S. consumers may eventually see price adjustments reflecting this outcome. Much the same as tariffs, the imposed duties will become part of the normal import/export flow and will not cause delays at ports. Eventually, the effect of this case could erode the unfair price advantages for HECs in these named countries, creating a shift in wher products come from in the future. 

Implications for Buyers and Supply Chain

It is always difficult to say exactly how these things will play out, so it is best to plan for all the potential outcomes to be ready for anything. Obviously, the stakes are high for pharmaceutical and nutraceutical manufacturers who rely on a steady and affordable supply of HECs. It is best for them to plan on various scenarios arising from the final determinations within this case that could reshape this entire market.

One outcome is to expect a cost increase on capsules sourced from these four countries under investigation if the duties are finalized. This would put pressure on these foreign manufacturers that would likely cause an increase in the price of goods given they represent a large portion of the global capsule market.

The supply chain for this market could be completely reassessed with some stakeholder likely already reviewing their sourcing models. This may even mean diversifying suppliers or completely moving towards domestic sources to reduce the dependency on these foreign suppliers and risks that other countries may be involved in the same or similar issues at some point.

Another outcome could be regulatory change within this industry. It is not an easy task to just switch capsule supplier for major manufacturing companies. These changes may trigger a need for regulatory filings, testing, and validations that could be very costly and time consuming.

It is important to evaluate these scenarios to aid in the planning of future production. Incorporating both compliance and price, decisions must be made to mitigate risk while maintaining operations to meet long-term goals.   

What Buyers Should Be Doing Now

While the final decision in this case is still pending, it is vital for buyers to set plans in motion to readily adapt to the outcomes. Now would be a great time to audit company supply chain, especially if receiving these products from China, India, Brazil, or Vietnam. It might even be a good idea to ask suppliers direct questions related to this investigation to see if the impact will affect current or future shipments, if duties will be passed on, and if it will affect transport time or availability.

The best plan is to have options for alternative suppliers that won’t be affected by this investigation or its outcome. Before a decision is made may be the best time to negotiate new contracts that could serve to be mutually beneficial. Also, it is important to be cognizant of regulatory changes that may occur or even drug applications. It is key to stay up to date on these changing landscapes to remain compliant while operating.   

What Comes Next?

If both agencies affirm their preliminary findings, duties will be finalized and possibly extended for up to five years (subject to periodic review).

The outcome of the investigation will likely have a major impact across the entire global capsule market. This could entail foreign producers with high duties being pressured into contracts outside the U.S. to take advantage of more cost-effective trade. On the flip side, U.S. producers could enter a HEC market with renewed competition and stability that could help reduce the price of precursor products.

For pharma and nutra manufacturers, it will come down to balancing price and quality while trying to mitigate risk in this volatile sourcing environment.