Tariffs and Trump: Preparing your business to mitigate duties
In the months leading up to his inauguration, President-elect Donald Trump has repeatedly signaled that he may impose various tariffs on US imports. Further, President-elect Trump has nominated several policymakers known for their pro-tariff stance to key positions in his new administration. These nominations include Senator Marco Rubio, nominated as Secretary of State; Jamieson Greer as US Trade Representative; and Peter Navarro as Trade Counselor.
These selections, coupled with President-elect Trump’s use of tariffs as a foreign policy tool during his first term, suggest that the incoming administration could bring significant, fast-evolving changes to US tariff policy.
Moreover, President Joe Biden’s decision to maintain the tariffs imposed during President-elect Trump’s first term (and even raise them in some cases) suggests that politicians from both parties have embraced the practice.
In light of this potential new normal, US importers and their business partners are encouraged to keep tariff policy front of mind as they navigate potential upcoming changes and seek to grow their businesses.
What we may expect
President-elect Trump has said he may impose further tariffs on China with the hope that the country will then reform its trade practices and curb the illegal importation of drugs like fentanyl into the US.
He also indicated he might impose a 25-percent tariff on imports from Canada and Mexico if those countries do not address the new administration’s illegal drug trafficking and immigration concerns. While Canadian representatives have discussed these topics with the incoming administration, and announced a $1 billion dollar investment in border security and the immigration system, Mexico’s President has suggested the country could impose retaliatory tariffs on the US, showcasing the variety of potential responses to US tariffs.
While some proposals may never materialize, others could result in significant changes to tariff rates that would greatly affect a business’ bottom line. An understanding of the legal authorities President-elect Trump may leverage – along with the factors that influence the tariff rate on a company’s particular supply chains and products – may help businesses identify opportunities to mitigate duty liability.
Legal authorities President-elect Trump can use to impose new tariffs
The Constitution grants Congress the power to levy duties and regulate commerce with foreign nations. Congress has also passed various laws granting the President direct authority to impose tariffs. With a slim Republican majority in Congress, President-elect Trump could look to Congress to pass tariff legislation or increase presidential authority – alternatively, the Trump Administration may use some combination of the following authorities to achieve its agenda:
Section 301 of the Trade Act of 1974
Section 301 gives the President broad authority to impose tariffs following an investigation by the Office of the US Trade Representative (USTR) that finds a foreign country has violated US trade agreements or acted in an “unreasonable” or “unjustifiable” manner which burdens US commerce. President-elect Trump used Section 301 to impose the current tariffs on Chinese goods during his first term.
Section 232 of the Trade Expansion Act of 1962
Section 232 allows the President to impose tariffs or other trade restrictions if the Department of Commerce conducts an investigation and finds that a particular import poses a threat to national security. President-elect Trump used Section 232 to impose tariffs on steel and aluminum imports during his first term.
International Emergency Powers Act (IEEPA)
IEEPA grants the President broad authority to declare a national emergency via executive order and regulate international commerce in response to unusual and extraordinary threats to national security, foreign policy, or the economy. While IEEPA has never been used to impose tariffs, President-elect Trump considered using it during his first term and, in the past few months, discussed declaring a national emergency for this reason. The President can impose tariffs pursuant to IEEPA with immediate effect.
Section 122 of the Trade Act of 1974 and Section 338 of the Tariff Act of 1930
While the President could potentially use these provisions, both Section 122 and Section 338 are limited in scope, and President-elect Trump could opt for a more flexible approach under IEEPA.
Potential ways to mitigate duty liability
Given the possibility of upcoming tariff hikes, US importers are encouraged to consider ways to mitigate tariff liability. DLA Piper is well positioned to help clients consider the following strategies:
Tariff engineering and supply chain planning
Businesses with a keen understanding of the way tariffs function can design or modify their products to classify them as products that are subject to lower tariffs, import components subject to lower duty rates and assemble them domestically, or shift key manufacturing steps to a country subject to lower tariffs to change a product’s country of origin (COO) and therefore avoid the higher rate. Tariff engineering and supply chain planning generally requires a thorough understanding of the Harmonized Tariff Schedule’s product classifications and what constitutes a “substantial transformation” for COO purposes.
Free trade agreements
The US’s many existing free trade agreements (FTAs) greatly reduce or eliminate tariffs on imports from member countries. Businesses can restructure their supply chains to manufacture products in member countries and leverage FTAs and the lower duty liability associated with them.
Foreign trade zones
Foreign trade zones are designated areas within the US where imported goods can be stored, processed, assembled, or manufactured without being subject to customs duties until they enter US commerce. Utilizing these zones can defer, reduce, or even eliminate duty payments, providing substantial cost savings for businesses.
Section 301 exclusions
Businesses can request exemptions from Section 301 tariffs by demonstrating the economic impact or lack of alternative sources for the tariffed goods. USTR has granted a number of exclusions to the current Section 301 tariffs.
Chapter 98 provisions
Chapter 98 of the Harmonized Tariff Schedule includes special provisions that allow for reduced or eliminated duties on certain goods under specific conditions. These provisions cover a wide range of scenarios, such as products assembled abroad using US components and products used for agricultural purposes. By understanding and utilizing Chapter 98 provisions, companies may achieve substantial duty savings.
Going forward
While the Trump Administration’s tariff policies remain uncertain, tariffs will likely take center stage in 2025 and beyond. In the coming months and years, US tariff policy may be an amalgamation of targeted and broad tariffs levied under different authorities. These evolving policies could create opportunities for proactive businesses with a thorough understanding of tariff rules to reduce their duty liability and gain a competitive advantage.
Please do not hesitate to reach out to DLA Piper’s National Security and Global Trade team to help you navigate this changing landscape.