Tariff Talk

Tariffs

Tariffs. The word was at the forefront this holiday weekend. Talk shows told us not to worry about the impact on the current holiday shopping season, while news outlets kept us current on President-elect Trump’s day-one plans for tariffs. Tariff even slipped into casual conversations but was beat out by “demure” for word of the year. The verdict on all fronts was that life is unchanged for today, but industry and consumers should prepare for impacts to be felt in the early months of 2025.

While we can only speculate on the specifics and exact date of impact, the common message is that there will be an increase in the rates of duty paid on products made in China, Mexico, and Canada early in the second Trump administration. Those tariffs are commonly paid by the importer, who purchased the goods, close to the time of importation. Current announcements reflect campaign promises resulting in a 25% additional duty on items made in Mexico or Canada and an additional 10% on items from China; these are duties per country above and beyond the item’s current duty rate.

For businesses, the guidance is in line with a typical annual review: budget for duties and taxes on imported goods and plan for known increases, but also include a buffer for the unknown. Companies should also continue to review their supply chain options, from components to finished goods. It’s unknown what impact these duties will have on the USMCA (U.S.-Mexico-Canada Agreement). Those who export to countries flagged for increased import tariffs should brace for potential retaliatory duties and a loss of sales to those countries; sales and revenue teams should be looking at their market landscape and investing accordingly. Businesses managed these changes during the first Trump administration, with the focal point on China and increased duties ranging from 7.5% to 25%; those duties are still in effect today. Tariffs as a strategy have also been communicated as a possibility when tackling the currency market with BRIC (Brazil, Russia, India, China) nations.

The U.S. consumer should anticipate cost increases on products not previously affected, including electronics, toys, and produce, but they will not occur on day one. In nearly all cases, the goods on retail shelves through the first quarter already have their duties paid or will have them paid prior to the enactment of new duties. Should a mandate be issued “day one,” there will be bureaucratic steps to enact the mandate, along with necessary software updates for processing, industry guidance on how to handle goods in transit, and enhancements to regulations and tariff schedules. The first area to feel the impact is likely to be vehicles and parts imported from Mexico, a sector that has benefited from the USMCA deal brokered during the first Trump administration.

USMCA

A landmark accomplishment of the Trump administration was the finalization of the USMCA as a modern trade agreement between the U.S., Mexico, and Canada, replacing the 1970s-era NAFTA (North American Free Trade Agreement). USMCA resolved gaps and set standards for protecting intellectual property, defined digital trade, and prohibited the application of certain duties. If the duty-free treatment of imports is suspended under USMCA, how will other key elements be impacted? A principal objective was labor rules. Standardization of labor rights and transparency was topped off with the new Labor Value Content Rule, which requires 40–45% of all auto content to be made by workers earning at least US$16 per hour, putting the U.S. at an advantage in the local market.

A final key achievement was the increase of de minimis thresholds for Mexico (US$50 tax-free and US$117 duty-free) and Canada (C$40 tax-free and C$150 duty-free), eliminating the need for USMCA qualification, easing trade for small- to medium-sized businesses, and lowering costs when shipping directly to consumers. This element came on the heels of the increase of de minimis in the U.S. from $200 to $800 on March 10, 2016, under the Obama administration.

De Minimis

De minimis in trade represents low-value shipments that are treated as duty-free and face less processing than a shipment over the value of US$800 under U.S. rules. With the expansion of de minimis shipments through e-commerce, the U.S. is facing challenges with not only the loss of duties but also the avoidance of consumer protection and labor laws. What was envisioned as a means to help small importers and allow for the ease of importing small shipments has transformed e-commerce, and U.S. Customs and Border Protection reports that 92% of all cargo entering the U.S. is de minimis. Instead of one large shipment to one importer, there are thousands of individual shipments sent directly to consumers, each valued under US$800.

The Biden White House is now taking action to significantly decrease the privileges of de minimis. Seventy percent of textiles and apparel from China are subject to increased duties, with significant volume circumventing these duties through online retailers. Changes will also promote requirements from the Consumer Product Safety Commission (CPSC), as de minimis imports do not currently have the same potential for inspection and random testing of products such as toys, medical devices, and household goods.

With changes currently in process and the expectation of more to come, OCEANAIR will continue to keep its team and clients up to date on the changing climate in trade.