Less than two weeks after assuming office, on Feb. 1, President Trump – in line with his plans previously announced on social media – imposed “a 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China." However, President Trump announced a lower rate of a 10% additional tariff on Canadian energy resources. Within days, Trump and leaders of Canada and Mexico had already agreed on a 30-day pause on tariffs. However, on Feb. 10, President Trump announced a 25% tariff on steel and aluminum imports from Mexico.
While the news is quickly developing regarding tariffs, it is important to understand the practical implications of these tariffs. The proposed tariffs would impact businesses locally and across the nation. The tariffs would apply to all imports from the targeted countries, including items as ubiquitous as steel, energy resources and raw materials.
CHALLENGES TO THE LEGALITY OF ANNOUNCED TARIFFS
The governments of affected countries and private stakeholders, both foreign and domestic, will likely seek to challenge the legality of the announced tariffs. These challenges are likely to occur in the World Trade Organization through the U.S.-Mexico-Canada Agreement (USMCA) dispute settlement mechanism and in U.S. federal courts concerning the legality of the tariffs under the International Emergency Economic Powers Act (IEEPA) that President Trump relied upon in imposing the tariffs.
Here are some things companies can do:
Don’t ignore
As there are approximately $1 trillion in annual imports into the U.S., it is imperative that companies do not ignore the changes in U.S. policies regarding tariffs.
Tariffs on Chinese goods appear semi-permanent and likely to persist in the current geopolitical climate. There is friction between the U.S. and China on numerous issues. The end of the 118th Congress saw the introduction of companion bills in the House and the Senate that would revoke permanent normal trade relations (PNTR) with China, as well as increase duties on Chinese imports. In the 119th Congress, the refiling of similar bills may occur.
In comparison, the imposition of tariffs on exports from the European Union may not be as permanent because the geopolitical issues that exist regarding China simply are not at play. Trump’s ire with the EU is tied to a purported trade deficit of $350 billion. Complaining of the trade deficit with the EU, Trump stated that “they don’t take anything ... so we’re not going to have it with them, either.”
With respect to Canada and Mexico, the announced tariffs are less likely to persist, especially in light of the 30-day delay in their imposition already announced, but some action is threatened to occur. The announced tariffs against Canada and Mexico appear tied to potential agreements on immigration and drug trafficking.
With respect to Canada, Trump also posted that the “United States can no longer suffer the massive Trade Deficits and Subsidies that Canada needs to stay afloat(,)” indicating a separate motivation for imposing new tariffs on Canada. It remains to be seen what tariffs are actually imposed against Canada or Mexico. Hopefully, those will be a temporary pinch rather than a long-term factor with the biggest trading partners of the U.S.
Don’t panic
Despite the looming uncertainties, there is no need to panic. In further support of such measures being only a temporary pinch, it is important to note that there are substantial U.S. investments in Canada and Mexico, such as manufacturing plants, that are already in place and cannot be easily relocated. It is not simply a choice of supplier, especially as U.S. purchasers will not have many alternatives to turn to with both China and the EU under more stringent – and possibly longer-lasting – tariffs.
Additionally, the reality of these proposed tariffs is that price increases will hit U.S. consumers, which could negatively impact public perception of the tariffs.
Consider incremental measures and alternatives
The blanket nature of the proposed tariffs is unusual in trade policy. It is, however, clear that the executive branch under Trump intends to wield broad power and act unilaterally in such matters. Companies may consider what exposure they have to countries threatened with new tariffs and at what thresholds those tariffs would be material and justify seeking alternate suppliers, modifying supply chains or establishing a foreign subsidiary. For example, Canadian companies are considering U.S. subsidiaries for production and U.S. market sales. In interesting times, planning, creativity and fortitude may be rewarded.
Charles Baldwin is a partner at law firm Brooks Pierce in Wilmington and uses his experience in cross-border transactions to advise businesses on international trade, venture capital and U.S. market entry. Gabby Supak, an associate at Brooks Pierce, is involved in international trade and business litigation matters.
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