Over the weekend, President Trump first issued a fact sheet and thereafter signed three executive orders imposing new tariffs on imports from Canada, Mexico, and China:
- 25% tariff on imports from Canada will take effect at least 30 days from Feb. 4, 2025.
- 25% tariff on imports from Mexico are now scheduled to take effect on March 4, 2025.
- 10% tariff on imports from China will take effect on February 4, 2025.
Energy resources from Canada will have a lower 10% tariff. Duty-free de minimis treatment under 19 U.S.C. 1321 will not be available for products subject to these additional tariffs. Tariffs will be on top of any other in place (301, 232, ADD, etc.) The Federal Register Notice for Canada can be found here and the Federal Register Notice for China can be found here. Customs and Border Protection (CBP) issued guidance on the additional tariffs on imports from China and Canada which can be found here and here. CBP also issued guidance on the processing of de minimis shipments, available here.
Policy Rationale & International Response
The Administration said the tariffs are aimed at curbing the flow of undocumented immigrants and drugs into the U.S. The White House Fact Sheet said the tariffs will hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping fentanyl and other drugs from flowing across the border. The tariffs will remain in effect “until the crisis is alleviated.”
Canada and China immediately vowed to impose retaliatory tariffs and countermeasures. Canadian Prime Minister, Justin Trudeau, announced tariffs starting at 25 percent on approximately $30 billion worth of U.S. goods, with $85 billion more to follow within three weeks. China announced it would implement a 10% tariff on crude oil, agricultural machinery and large-engine cars, as well as a 15% tariff on coal and liquefied natural gas. China’s commerce ministry also said they would file a case against the U.S. at the World Trade Organization.
Following a meeting between President Trump and Mexico President Claudia Sheinbaum, tariffs on Mexico will be paused for one month. Sheinbaum vowed to immediately reinforce Mexico’s northern border with 10,000 National Guard soldiers to curb drug trafficking from Mexico to the U.S. Following a meeting between President Trump and Canada Prime Minister Justin Trudeau, tariffs on Canada will be paused for one month. Trudeau announced Canada will implement their $1.3 billion border plan which includes reinforcing the border and increased resources to stop the flow of fentanyl. CBP subsequently issued issued guidance pausing the application of additional duties on imports from Canada.
What Importers Should Do:
While these increases will undoubtedly have a significant impact on any business involved in importing goods into the U.S. from these countries, importers are not without options.
Now is the time importers should audit their operations and compliance program and ensure they are operating in the most efficient way possible. There are also several ways to legally minimize tariffs.
Duty Drawback
If you import products into the U.S. only to export them to another country, you may be entitled to compensation for the duties paid upon importation to the U.S. Duty Drawback provides for the refund of up to 99% for certain duties, internal revenue taxes, and fees collected by CBP upon importation. The drawback may be granted only after the subjected item(s) have been either exported or destroyed (under CBP supervision). Note: importers may not utilize duty drawbacks to mitigate the new tariffs discussed above.
Tariff Engineering
Tariff engineering involves altering the condition of a good before it is imported so that it is legally classified under a favorable Harmonized Tariff Schedule of the U.S. (HTSUS) classification to benefit from a lower duty rate. Since CBP can only levy tariffs based on the condition of goods at the time of importation, tariff engineering gives importers the opportunity to redefine their imported products and pay lower duties.
Country of Origin Change
While potentially costly to initially relocate, changing the country of origin will allow you to import the exact same item(s) without paying the additional duties. If considering this option, one must be cognizant of the list of nations that have a free-trade agreement with the United States. Even though another nation may not be subjected to substantial duties, shifting your supply chain to a nation that has a formal, free and fair-trade agreement with the U.S. ensures accountability and reliability.
Per the “America First Trade Policy” memorandum issued by the White House on January 20, 2025, all free trade agreements are under review by the United States Trade Representative, with a report expected by April 1, 2025.
First Sale
First Sale is a system that decreases the dutiable value of imported goods by authorizing importers to use the price paid in the first sale. It allows an earlier sale to be used in declaring customs value as long as that sale can be documented as a sale for exportation to the United States and the importer meets all other Customs requirements.
Consequently, that equivalent value is assigned according to the transaction between the manufacturer and the middleman, not between the middleman and the new buyer.
Duty Deferral
If an importer cannot lower the tariff burden, they can consider deferring the cost of duties through Foreign Trade Zones and/or Bonded Warehouses. Note: importers may not utilize foreign trade zones to defer the recently imposed tariffs discussed above.
Foreign Trade Zones
Foreign Trade Zones (FTZs), although technically within the geographic limits of the U.S., are secured areas considered outside U.S. Customs territory. Foreign and domestic merchandise may be admitted into an FTZ for operations such as storage, exhibition, assembly, manufacture, redistribution, processing, and more. FTZs allow users to defer, reduce, or eliminate Customs duties. Prior to any manipulation or manufacture of merchandise, which would change its tariff classification, importers may also apply for merchandise in the zone to be given privileged foreign status. Merchandise with privileged foreign status is classified and appraised and duties and taxes are determined as of the date the application is filed.
Bonded Warehouse
Unlike FTZs, bonded warehouses are within U.S. customs territory. A customs-bonded warehouse is a secured area in which imported merchandise may be stored without payment of duty for up to 5 years.
Importers may repackage, sort, or label imports at these locations under the supervision of U.S. customs officials. Manipulation of merchandise is generally prohibited unless approved by U.S. Customs.
Negotiate DDP Incoterm
International commercial terms (“Incoterms”) are published by the International Chamber of Commerce (ICC) as a commitment to facilitate international trade and promote open markets. The ICC developed Incoterms to provide a common language for traders and to establish a global system of rules to govern trade. Incoterms are not law, and instead are designed to prevent confusion between global traders by clarifying contract obligations of buyers and sellers.
Negotiating Incoterms with partners is another way to minimize import costs. Importers should review their contracts and negotiate a “delivery duty paid” (DDP) incoterm. DDP terms place the responsibility (including export and import clearance, transport costs, import duties, and packaging costs) for the delivery of goods on the seller. The seller acts as the importer of record and has the ability to deduct costs like freight, duty, and insurance from the dutiable value. Another advantage of the DDP term is that, if properly structured, it can reduce the total impact of the tariffs.
Proceed with Caution When Attempting to Minimize Tariffs
Importers exploring options to minimize tariff liability should always work with an expert to ensure they continue to meet all U.S. Customs regulations. Duty evasion is a serious crime and can result in serious monetary penalties or even prison time in the case of fraud.
At Diaz Trade Law, we have a strong track record in tariff minimization and customs compliance. To learn more about how we can help, contact us at [email protected] or call us at 305-456-3830.
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