Practical Steps to Take After Trump Tariffs
US President Donald Trump signed three executive orders late Saturday imposing 25% tariffs on Canada and Mexico and 10% on China based on declared national emergencies associated with illegal immigration and fentanyl imports from each country.
Canada responded the same day announcing retaliatory tariffs.
On Monday, the United States agreed to a one-month delay to the effective date for the tariffs on Canada and Mexico.
The executive order directed at Canada can be found here. The executive order directed at Mexico can be found here.
China has yet to announce any substantive response to the tariffs and, as of late Monday, the tariffs on Chinese-origin goods are still set to become effective on February 4, 2025. The executive order directed at China can be found here.
In this article, members of our cross-border trade law task force break down what you need to know about the announcements.
A list of practical steps that companies should take in response to the tariffs is in the last section of the article.
What tariffs is the US imposing?
The order targeting Canada creates a 25% duty on imports into the US of Canadian-origin products, except energy resources, which are subject to a 10% duty.. The tariffs could increase in response to Canada’s proposed retaliatory measures.
“Energy resources” that are subject to the 10% tariff are defined as "crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals."
In addition, the order removes the de minimis exemption for low-value imports, meaning imports of Canadian-origin goods that are valued at less than $800 will be subject to the new tariffs.
There is no mention in the order of a process to request exclusions from the tariff for particular goods. A White House official told various news organizations that there will be no such process.
Not all goods shipped from Canada to the US are Canadian-origin. The order specifically targets “all articles that are products of Canada,” which depends on the application of complex rules of origin. For example, goods manufactured in other countries that simply transit through Canada are not considered of Canadian-origin and presumably would avoid the tariffs. Similarly, goods manufactured in the US that are exported to Canada and returned to the US, so long as not improved in value, would not be subject to the new tariffs. (For more detail, see here.)
The order also excludes from the tariffs the following four types of goods: personal communications, donations of food, clothing or medicine, informational materials (such as publications, films, music, art and news) and personal baggage when traveling.
The orders related to China and Mexico, which apply to goods of Chinese and Mexican origin at a rate of 10% and 25%, respectively, are similar in scope and with similar exclusions, but do not assign any distinct rate to energy resources.
What authority was used to impose the tariffs?
President Trump is imposing the tariffs based on his authority to address national emergencies under the International Emergency Economic Powers Act.
IEEPA grants US presidents broad authority during national emergencies, among other steps, to investigate, regulate and prohibit imports and exports involving any property in which any foreign country or national has an interest.
The use of IEEPA to impose universal tariffs on imports from a country in these circumstances is novel, and there is a widespread assumption that Mr. Trump's authority to issue these tariffs under the IEEPA will be challenged in US courts.
What counter tariffs is Canada imposing?
Hours after the order was released, Canada announced that it would respond by imposing 25% tariffs on $155 billion of US imports, starting with $30 billion worth of goods and potentially adding another $125 billion worth of goods later. The Canadian order can be found here. The effective date for the Canadian counter-measures, like the tariffs themselves, is suspended for at least 30 days.
The first package of tariffs is weighted toward goods from US states that supported President Trump and includes orange juice, peanut butter, wine, spirits, beer, coffee, motorcycles, appliances, apparel, footwear, cosmetics, and pulp and paper.
The Canadian tariffs specifically target goods “marked as goods of the United States” in accordance with the rules of origin in the US-Canada-Mexico free trade agreement. Tariffs will not apply to goods “that are in transit to Canada” on the day that tariffs come into force.
What is the rationale for the US tariffs?
The executive orders imposing the US tariffs say that the primary rationale for the tariffs is to end the flow of fentanyl and other synthetic opioids from China into the US via Canada and Mexico and that this is a national emergency under the IEEPA.
How can the US impose tariffs if we have a free trade agreement?
Generally speaking, imposing new tariffs runs contrary to the US-Mexico-Canada free trade agreement that the first Trump administration negotiated to replace an earlier North American free trade agreement and whose terms it said were a "tremendous victory" for the United States.
Article 2.4 of the USMCA says, “Unless otherwise provided, no party shall increase any existing customs duty or adopt any new customs duty on an originating good.”
However, there are exceptions, including an exemption in article 32.2 for “essential security,” which provides as follows: “Nothing in this Agreement shall be construed to . . . (b) preclude a Party from applying measures that it considers necessary . . . [for] the protection of its own essential security interests.” Framing the tariffs under the IEEPA as a response to fentanyl and a border crisis suggests that the Trump administration is positioning itself to invoke the essential security exemption if challenged under the USMCA.
A challenge under the state-to-state dispute resolution provisions in chapter 31 of the free trade agreement would take months and would likely result, at most, in Canada being authorized under the terms of the agreement to take retaliatory measures, which Canada has already taken.
Will drawback be available?
The US maintains duty drawback and duty deferral programs that allow importers to seek deferrals, refunds, reductions or waivers of customs duties that were paid on goods that are re-exported from the US. However, the Trump executive order blocks access to such drawback relief on any tariffs paid under the orders on imported goods of Canadian, Mexican or Chinese origin.
What else will Canada do in response?
If the tariffs are ultimately imposed after the suspension, Prime Minister Trudeau said Canada may take “non-tariff measures” related to exports of energy and critical minerals, and that the provinces may take additional measures. For example, Ontario Premier Doug Ford and Nova Scotia Premier Tim Houston suggested they will direct provincially run liquor stores to remove US alcohol from store shelves.
The Canadian government has hinted that “pandemic-level” relief may be available for Canadian businesses, since the tariffs could significantly shake up cross-border supply chains and the Canadian economy more generally, particularly highly integrated sectors, like the auto sector, in which products pass the Canada-US and US-Mexico border multiple times before the finished product is ready for consumers.
No similar relief has been announced yet by the US government for US companies that are affected by the tariffs.
What should businesses consider in the days and weeks ahead?
With the first blows in a trade war now fired, and an uncertain period of time ahead, Canadian and US businesses should consider a number of actions.
Review contract clauses in current and upcoming supply or purchase contracts, particularly change of law, force majeure and similar provisions that assign risk of tariff changes to one or the other party to the contract.
Reconsider the country of origin of potentially affected goods.
Consider whether supply chains can be diversified and investigate alternate sources of supply.
Draw on free trade agreements with other regions, like the Canada-European Union Comprehensive Economic and Trade Agreement, when considering alternate markets for exports.
The authors would like to thank articling students Ian Chesney and Jonah Secreti for their assistance with this article.