While there is still uncertainty around the final tariff rates, it is pretty clear that tariffs are here to stay and that they will be substantial. Unlike Trump’s first term, when he initiated a trade war with China, this time the trade war is global. Rather than “near-shoring” or “friend-shoring” being encouraged, “on-shoring” will be the de facto policy push for the next 4 years.
So far, it looks like the only area where there might be containment is Mexico and Canada, who signed a new trade agreement with the US in 2020 called the United States-Mexico-Canada Agreement (USMCA). Currently, as long as goods fall under the USMCA, they are governed by it; all other unqualified goods are subject to tariffs, per the most recent April 2 “Liberation Day” executive order (EO).
Obviously, it’s not easy to switch manufacturers suddenly, and SMBs will be hit the hardest, as they don’t have the resources to spin up new manufacturing plants. If you can’t build new factories, what can you do? Here are 3 things you should do immediately:
The Harmonized Tariff Schedule of the United States (or HTS) is what is used by US Customs and Border Patrol (US CBP) to classify and collect tariffs on imported goods. Companies assign HTS codes to all of their products, and often do not think to re-assess these codes unless tariff rules have changed. If you were previously relying on Section 321 De Minimis exception for your goods you also may not have a clear understanding of what HTS code to use for your goods.
While it’s still unclear whether or not the Trump administration will introduce more nuance into their tariff strategy, you want to be ready if there are any exceptions for certain industries. Industries likely to get a second look are auto manufacturing, semiconductor chips, and groceries, amongst others. Historically, blanket tariffs are rare and tariffs are usually targeting certain industries. As countries head into negotiations with the Trump administration, we may find that more nuance is introduced into tariff policies going forward.
Currently, tariffs are enacted through EOs using the International Emergency Economic Powers Act (IEEPA); this is at odds with history, where tariffs usually were determined by congress. Thus, it is possible that legal challenges to the tariff executive orders will prevail, and the Trump administration will have to use other means to enact tariffs. There are various ways through Sections 201, 232, and 301, as well as other provisions of the Tariff Act of 1930 that the administration may use to push tariffs through. Additionally, Trump may use Section 122 of the Trade Act of 1974 (“Section 122”) or Section 338 of the Tariff Act of 1930 (“Section 338”) to impose more immediate tariffs until Sections 201, 232, and 301 are approved by congress.
Historically, there have been exclusion processes available for Section 201, Section 232, and Section 301 tariffs for importers to request that certain products be excluded from the imposition of additional tariffs. In many cases, these exclusions were tied to the type of item, the tariff classification of a product under the HTS, and other factual information regarding the product, as well as the availability of the items from U.S. suppliers. Thus, it is worth it to re-examine your HTS codes and make sure they are up to date.
Lastly, there are already some product-specific exemptions built into the EO. Exemptions are primarily for products covered by other tariffs, as well as special rules for products of Mexican and Canadian origin. Specifically, exemptions cover informational materials (as defined in IEEPA), steel and aluminum products subject to Section 232 Duties, automobiles and automotive parts subject to Section 232 Duties, and products listed in Annex II of the E.O., which include various minerals (including copper and zinc), pharmaceuticals, semiconductors, lumber, and energy products. Additionally, products that “may become subject to” future Section 232 Duties are likewise exempt.
Here are some companies and resources that can help you with navigating tariffs:
The “substantial transformation” test is generally used to determine the country of origin of a particular product. This is a complex test, and oftentimes importers may have arguments that would allow them to take the position that a different country (i.e., a country that is not subject to new or additional tariffs) is the correct country of origin for a particular imported product.
Seeing as Mexico and Canada under the USMCA have substantial tariff carveouts, it could make sense to move at least part of production to these countries to allow for significantly lower tariffs. Products protected include groceries, CPG goods, textiles, and many others.
To see if your products might qualify, use the tariff tool here or scan the full list here.
Currently, products protected by the USMCA have strict tests for determining that their country of origin is Mexico or Canada. Some categories have category-specific tests, so make sure you review those before claiming any exemptions under USMCA.
Additionally, products of Canadian and Mexican origin that do not qualify under the USMCA are subject to a 25% tariff, with the exception of Canadian-origin energy products, which are subject to a 10% tariff.
Duty Drawback is the refund of certain duties, internal revenue taxes and certain fees collected upon the importation of goods and refunded when the merchandise is exported or destroyed.
Drawbacks are relevant for brands that sell their products internationally. Even brands that produce in the US, such as many CPG companies, often use raw materials sourced globally that now have hefty tariffs. If you find that your duties on raw materials are now impacting your margins, duty drawbacks could be an area of significant savings for goods that go on to be sold internationally.
Drawbacks are also relevant for brands that experience significant overstocks, especially cases where destroying goods may be cheaper than holding costs and duties.
Here are the 3 main types of duty drawbacks:
Important Note: Apply for the Accelerated Payment Privilege
The Accelerated Payment privilege allows you to receive duty drawback payment based on when the claim is filed, which can be as soon as 4-6 weeks. Without this, you would need to wait until the entry has liquidated, which can take 1-2 years or more.
Under normal circumstances, after the applications are submitted, it can take from 3 to 6 months for approval. Given that there is likely an influx of applications, we suggest that you file immediately and budget extra time for approval.
Duty Drawbacks can be difficult to navigate; we recommend using a service like Caspian to manage drawbacks.