Tariffs?

President Trump's plans for tariffs against Mexico and Canada have been paused for 30 days. On Monday, President Trump had discussions with Mexican President Sheinbaum and Canadian Prime Minister Trudeau, just one day before the 25 percent tariffs on goods imports were to take effect. Both Mexico and Canada have agreed to do more to curb the flow of fentanyl into the U.S. The president used his power to leverage some concessions from Canada and Mexico, but allowed a 10 percent tariff on China. The new tax affects more than $400 billion of goods that Americans purchase from China each year. The U.S. took steps to close a loophole that allows Chinese e-commerce companies to avoid tariffs by shipping packages worth less than $800 into the U.S. duty-free. Beijing moved swiftly to retaliate, by including additional 15 percent tariffs on liquefied natural gas and coal. It imposed restrictions on the export of certain critical minerals, many of which are used in the production of high-tech products. Finally, China launched an anti-monopoly investigation of Google.

Lots of questions on tariffs and not enough answers. This is still an evolving situation, but here is the update if and when President Trump announces 25% tariffs on imports from Mexico and Canada, he will use the legal authority of the International Emergency Economic Powers Act (“IEEPA”).  Additionally, imports of energy products from Canada will be assessed a 10% tariff.  As justification for a national emergency under IEEPA, the President is citing the “extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl.”

Here are the key points for consideration:

• The Executive Orders (Eos) do not provide for a product exclusion process. President Trump is the first president to impose tariffs under IEEPA and the statute does not specifically require a product exclusion process. So, it is at President Trump’s discretion whether or not to provide for a product exclusion process.  Since it is the first time IEEPA has been used for this type of tariff imposition, we expect that lawsuits will follow – but it is impossible to assess any litigation until it’s been filed in court.

• The IEEPA tariffs appear to cover every imported product from Canada, Mexico, and China. Again, the EO’s cite to a future Federal Register Notice that will likely be more specific, but the EO language says “all products that are products of Canada/Mexico/PRC.”
  • “All articles that are products of Canada as defined by the Federal Register notice”
  • “All articles that are products of Mexico, as defined by the Federal Registernotice”
  • “All articles that are products of the PRC, as defined by the Federal Register notice.”

• The EO’s include a retaliation clause that should Canada/Mexico/China retaliate against the U.S. in response (i.e. tariffs on U.S. exports), then the “President may increase or expand in scope the duties imposed under this Executive Order to ensure the efficacy of this action.”
  • Mexico could implement tariff and non-tariff measures to defend Mexico's interests.
  • Canada also posted its CA$30 billion retaliation list that will be subject to a 25% tariff. It’s a long list, but generally seems to cover food and drink, toiletries/beauty products, building goods, tires, travel goods, lumber and wood products, toilet paper, cardboard boxes and containers, printed products, carpets, apparel, jewelry, household appliances, tools, motorcycles, unmanned aircraft, firearms, furniture, mattresses, light fixtures, video game consoles, lighters, and paintings. The Canadian government is standing up a “remission process,” which sounds like an exclusion process from the retaliatory tariffs.

• Moreover, the EO’s state that “No drawback shall be available with respect to the duties imposed pursuant to this order.”  (i.e., no refunds of duties, taxes, and fees paid to import goods that are then exported or destroyed).

• Finally, the EO’s restrict the use of de minimis treatment for imports that are less than $800.  Previously, certain qualifying shipments valued at $800 or less were eligible for duty-free de minimis exemption – but that is not an option for the newly enacted tariffs.

Tariffs - A Primer: When EOs are issued by President Trump, it will impose a 25 percent tax on most imports from two of the country's biggest trading partners, Canada and Mexico, while goods from China will be charged a 10 percent tax. Canada, Mexico and China are America’s three largest trading partners, supplying the U.S. with cars, medicine, shoes, timber, electronics, steel and many other products. Together, they account for more than a third of the goods and services imported to or bought from the U.S., supporting tens of millions of American jobs. (President Trump said he would also impose tariffs on the European Union—probably in mid-February—on chips, oil and gas as well as later levies on steel, aluminum and copper.)

Why impose tariffs now? President Trump said he's taking the action in an effort to address the illegal flow of drugs and immigrants across the U.S.’ northern and southern borders. The president said the tariffs are also meant to address the trade deficits that the U.S. has with a number of foreign countries.

What are the immediate effects of the tariffs? The tariffs would immediately add a surcharge for importers, who bring products across the border, most of which are U.S. companies. In the nearer term, that could disrupt supply chains and lead to shortages, if importers choose not to pay the cost of the tariff. If importers do pay the tariff, it will probably translate into higher prices for some American goods, as those companies generally pass the cost of tariffs on to their customers.

Canadian crude oil, for example, would be subject to a lower, 10% tariff, which could mitigate the effect on U.S. gasoline prices, but mid-western oil refineries are heavily dependent on Canadian crude. The import taxes could result in higher prices for a wide range of products, including fruits and vegetables, flat screen TVs, and auto parts. The targeted countries have said they will respond with retaliatory tariffs of the own on U.S. exports.

What’s the economic fallout? That depends on how the tariffs are structured, but the ripple effects could be broad. Canada, Mexico and the U.S. have been governed by a trade agreement for more than 30 years, and many industries, from automobiles and apparel to agriculture, have grown highly integrated across North America. Some say the tariffs would be very costly for U.S. businesses. U.S. factories rely heavily on inputs from both countries, including minerals and timber from Canada and auto parts from Mexico. The tariffs would also go against efforts that U.S. companies have made in recent years to move out of China, at the urging of both the Biden and Trump Administrations. ING estimates based on the latest quarterly trade data the potential economic impactcould work out to roughly $835 per person, or $3,242 for a family of four.

What about fuel prices? While the U.S. is the world’s largest oil producer, refineries need to mix the lighter crude produced in domestic fields with heavier oil from places like Canada to make fuels like gasoline and diesel.

What’s the bottom line? On balance, most economists expect higher trade barriers to raise prices for U.S. businesses and households, which could lead to a temporary burst of higher inflation. Whether that escalates into a more pernicious problem will depend on whether Americans’ expectations about future inflation start to shift higher in a meaningful way.