New Administration, New Tariff Increases?

In all the years of my career, I don’t think I have seen so many articles or news stories on tariffs as I have since Donald Trump won the election in November.  Everyone is trying to speculate on what he is going to do and if he will follow through with his promises on increasing the tariffs for China, Canada and Mexico. You would probably get a better answer by consulting a magic 8 ball to find out what his plans will be.

With the inauguration just around the corner, there is a chance that we will finally find out what he plans to do on his first day in office, but for now let’s look at some of the speculation, expert opinions, and what you can do for your business.

What do we know?

President Trump has said that he plans on increasing tariffs from Mexico and Canada to 25% on all products coming into the US and for China an increase of 10% above any existing tariff on day 1. If he goes through with his plan, experts have determined that there are 7 products that would become more expensive. Those are automobiles and automotive parts, Agricultural products, electronics, mineral fuels and oils, plastics and plastic products, machinery and industrial equipment and aluminum and steel products.

With this increase that would hit so many different sectors, there has been a lot of chatter on the downside of what these tariffs can bring about. However, there are some upsides to an increase in tariffs as well and if implemented correctly it could actually reduce the federal deficit, create jobs and help to strengthen domestic industries that manufacture in the sectors that are affected.

There are some experts that have noted that even with Trump’s first term tariff increases there was only a one time price increase and then leveled off for the price of those goods, they are not a continuous rise in the general price level, which is inflation.

Currently, the China Section 301 tariffs that he had put in place during his first term are still enforced. This increase in tariffs stemmed from a USTR investigation that found that China engaged in unfair tactics to obtain U.S. technology and intellectual property that benefited Chinese companies. President Biden continued these Section 301 tariffs and utilized the findings to increase some of these tariffs from 7.5% to 25% and others up to 100%.

How can Trump implement these additional tariffs?

If you remember from your government class in high school, the US Constitution grants Congress the power to impose taxes or tariffs. Although in the 1930s, Congress began delegating portions of its tariff authority to the president. This authority is still subject to certain conditions and restrictions. There are two primary mechanisms that exist for imposing tariffs.

Trade laws from the 1930-70s permit tariffs to protect US workers from unfair trade practices. However, for this mechanism it requires investigations by the Department of Commerce (DOC) or US Trade Representative (USTR) and a public notice period. This route for imposing tariffs is not immediate.

On the other hand, the International Emergency Economic Powers Act of 1977 (IEEPA) allows the president to act quickly to address “unusual and extraordinary” external threats to national security, foreign policy or economy of the U.S. upon declaration of a national emergency under the National Emergencies Act (NEA). Once a president makes this declaration he may impose sanctions, freeze assets and prohibit or regulate the importation of any property in which a foreign country or foreign national has any interest.

If President Trump makes a declaration of an IEEPA national emergency, he does not need congressional approval to act. He does have to regularly consult Congress and submit periodic reports explaining why it is necessary. Under Section 122 of the Trade Act of 1974, it authorizes the president to impose unilaterally across-the -board tariffs without congressional approval of up to 15% on all imports to mitigate a serious balance of payments deficits. The tariff may last for a maximum period of 150 days, after that Congress must approve the continuation of the tariff. However, this section does not specify any time limitation on Congress, so Congress may extend the authorized tariff for any desired period.

To date, NO president has imposed tariffs invoking the authority of IEEPA or has invoked Section 122 to impose an across-the-board tariff.

What can importers do?

Some importers decided to frontload inventory, but this is just a short-term solution. There have been reports that the number of imports has increased recently. This is due to importers trying to stock their inventory prior to January 20 to avoid the possibility of increased tariffs. This might help them initially, but eventually they are going to run out of that product. What will they do then?

Here are ways some companies are adapting.

Alternative sourcing and supplier relationships

Some companies have looked to get out of China altogether and moving manufacturing to another country that wouldn’t be affected by these tariff increases. Although this can be time consuming to do and isn’t an easy fix, it could be beneficial long term, especially if the country it is moving to has a Free Trade Agreement that can be utilized. This might not be a solution for all companies, especially if there is a strong relationship with the supplier. One expert suggested that companies could negotiate on sharing the burden of the increased tariffs.

Improving  visibility

There are several ways that suppliers can improve their visibility on a product that is imported. One would be to fully map out their supply chain to understand where all of the products originate from, this would include basically doing a bill of material scrub down to find out where every piece of the product comes from. This would definitely be beneficial since there have been more companies added to the Uyghur Forced Labor Prevention Act (UFLPA) list. Another way companies can improve visibility is to review product classifications to ensure the proper expectations for tariff impacts.

Lastly, importers could look to using a foreign trade zone also known as a Free Trade Zone (FTZ).   FTZ’s can differ in the benefits they provide. Most FTZs provide one or more of the following advantages:

• Duty Reduction – This is also known as “inverted tariff,” which means users do not pay duty on labor costs, overheads, or profit from production within the zone.
• Duty Deferral – Duty is deferred until goods move outside of the FTZ. In other words, goods moved and exchanged within the zone are duty-free until they leave.
• Duty Exemption – No duty is payable on exports, re-exports, or imports.
• Merchandise Processing Fee (MPF) Reduction – Instead of paying MPF on all goods exiting the FTZ, one payment is charged per shipment, at a reduced rate.
• Streamlined Logistics – Users of the FTZ can deliver directly within the FTZ, with a single entry for multiple days of import and export.
• Quota Avoidance – Imported goods that have an entry quota placed on them can be retained in an FTZ and can be manufactured into items that are not under an imposed quota within the zone. It also means that users can allow entry for merchandise as soon as the new quota year starts.
• Other Benefits – Some free trade zones offer other benefits such as reduced harbor fees or reduced insurance costs.

Domestic sourcing

One of the safest and easiest ways for a company to protect itself from tariffs is to utilize domestic production. This can be done by finding US-based manufacturers that can supply the same good as the one that is being imported. This could be challenging as well, since some of those companies might be importing from foreign sources to make the good and could be subject to the tariff increases as well.

Companies could also look to utilize an exemption that would provide some relief. Under President Biden’s 2024 tariff increases, the Office of the United States Trade Representative authorized exemptions for certain inputs for domestic manufacturing equipment. They set a March 31, 2025 deadline for companies to submit these requests.

Another way for companies to get relief from the potential increase in tariffs is to utilize duty drawback. Currently, Section 301 duties are eligible for duty drawback. There are several types of duty drawbacks that a company can use. Of course, this would only be able to be used if the goods that are manufactured are then exported.

Conclusion

Anytime there is a change in the administration, there is always speculation of what the incoming president may or may not do. President Trump has been very vocal about wanting to increase tariffs. No matter what happens or when it happens, it is always a good idea for companies to review their supply chain, classifications and overall structure of the imports. Just because things have always been done a certain way, doesn’t always mean that they can’t be changed. Maybe in the process companies might find a better supplier or a more cost-effective way to manufacture their goods.

I consulted my magic 8 ball about whether the tariff increases are going to happen on day 1 of Trump’s presidency and got the reply “Cannot predict now”. So, I guess we are just going to have to wait and see.

If you need help in navigating these potential tariff increases or need to review any of your import procedures or classifications, schedule a no-charge consultation with one of our experts today.