President Donald Trump on Feb. 1, 2025, issued three executive orders (Tariff EOs) imposing additional duties on Canada, Mexico and China pursuant to the International Emergency Economic Powers Act (collectively, IEEPA Duties).
The legal foundation for the IEEPA Duties is the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), applied in reference to the National Emergencies Act (50 U.S.C. 1601 et seq.) and Proclamation 10886 of Jan. 20, 2025 (Declaring a National Emergency at the Southern Border). The legal rationale for the permissibility of these tariffs under the United States-Mexico-Canada Agreement (USMCA) appears to be based upon the "essential security" provisions.
Duty drawback and duty-free de minimis treatment are not available to goods subject to the Tariff EOs. Additionally, goods subject to the Tariff EOs must be admitted to Foreign Trade Zones (FTZs) under "privileged foreign status," unless they qualify for "domestic status."
Pursuant to the Tariff EOs, prior to removing the tariffs, the U.S. Department of Homeland Security (DHS) Secretary must inform the president that the respective governments have taken "adequate steps," and the president must determine that they have taken "sufficient action," to alleviate the crises. It should be noted that President Trump has historically used tariffs as a negotiation tactic. In terms of legal challenges, U.S. courts tend to give the president significant deference in international trade and national emergency matters. Therefore, the outcome of legal challenges to these tariffs is uncertain.
Scope of IEEPA Duties
The Tariff EOs and their titles include:
- Imposing Duties to Address the Situation at Our Southern Border. This imposes 25 percent additional duties on all goods from Mexico (Mexican IEEPA Duties).
- Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border. This imposes 25 percent additional duties on all goods from Canada, with the exception that duties of only 10 percent placed on Canadian energy or energy resources (Canadian IEEPA Duties).
- Imposing Duties to Address the Synthetic Opioid Supply Chain in the People's Republic of China. This imposes 10 percent additional duties on all goods from China (Chinese IEEPA Duties).
Canadian Energy
Canadian energy or energy resources were singled out to be taxed at a 10 percent duty, which is lower than the 25 percent applied to all other goods from Canada. However, on Feb. 3, 2025, Canadian Prime Minister Justin Trudeau announced via social media (and the White House confirmed) that the two countries had agreed to a 30-day pause in the imposition of tariffs.
Canadian energy or energy resources are defined in reference to Section 8 of EO 14156 of Jan. 20, 2025 (Declaring a National Energy Emergency) and, "as otherwise included in the Federal Register notice." Pursuant to EO 14156, "energy" or "energy resources" means "crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals."
The term "critical minerals" is further defined as any nonfuel mineral, element, substance or material designated as critical by the U.S. Department of the Interior Secretary, who has published a comprehensive list. Critical minerals do not include "fuel minerals; water, ice, or snow; common varieties of sand, gravel, stone, pumice, cinders, and clay."
Full details of the covered U.S. Harmonized Tariff Schedule (HTSUS) codes and the new HTSUS Chapter 99 special tariff number will likely be included in a technical annex, either when the government publishes the president's order to the Federal Register or in a follow-up Federal Register notice by DHS.
Imports from Mexico
All goods from Mexico were set to be levied a 25 percent additional duty. However, on Feb. 3, 2025, Mexican President Claudia Sheinbaum announced via social media (and the White House confirmed) that the two countries had agreed to a 30-day pause in the imposition of tariffs.
IEEPA Duties and the USMCA
The United States-Mexico-Canada Agreement (USMCA) is a President Trump-negotiated free trade agreement between the U.S., Mexico and Canada. It prohibits the imposition of duties outside of those provided for in the agreement.
If implemented after the 30-day pause, the imposition of IEEPA Duties on Mexico and Canada by the U.S. may be an apparent violation of the USMCA, which provides for a dispute resolution mechanism when a member country violates the agreement. However, this mechanism will not prevent the imposition of the IEEPA Duties in the near future.
The U.S. would likely rely on the USMCA-exception available for protecting "essential security" interests to justify the IEEPA Duties. The USMCA provides that a party is not precluded from "applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests."
Chinese Imports
During his first administration, President Trump imposed tariffs on most Chinese goods, pursuant to Section 301 of the Tariff Act of 1974 (Section 301 Duties). The Section 301 Duties included tariffs ranging from 7.5 percent to 25 percent, placed on approximately $370 billion worth of U.S. imports from China. President Joe Biden maintained these tariffs.
Pursuant to the Tariff EOs, the Chinese IEEPA Duties apply in addition to any other duties, fees, exactions or charges applicable to such imported articles.
Therefore, the IEEPA Duties apply in addition to the Section 301 Duties already applicable to many Chinese goods. For example, an imported Chinese good may be subject to 10 percent duties pursuant to the general duty rate, additional 25 percent duties pursuant to Section 301 Duties and additional 10 percent duties pursuant to IEEPA Duties.
Implementation of IEEPA Duties
The IEEPA Duties took effect on Feb. 4, 2025 (subject to a 30-day hold on imports from Mexico and Canada) and apply to the declared value of the import. The IEEPA Duties will likely be administered through new HTSUS codes. There is currently no mechanism for applying for exclusions to the IEEPA Duties. Whether such a mechanism is announced in the upcoming Federal Register notice remains to be seen.
Timing of Applicability
The IEEPA Duties apply to Chinese goods entered for consumption or withdrawn from warehouses for consumption on or after 12:01 a.m. ET on Feb. 4, 2025.
There is an exception to the IEEPA Duties for goods entered for consumption or withdrawn from warehouses for consumption that were loaded onto a vessel at the port of loading or in transit on the final mode of transport prior to entry into the U.S. before 12:01 a.m. ET on Feb. 1, 2025. This is applicable even if the goods are entered for consumption after 12:01 a.m. ET on Feb. 4, 2025. Importers must certify these facts to U.S. Customs and Border Protection (CBP or Customs).
Additional HTSUS Codes
The Tariff EOs direct the DHS Secretary to determine modifications necessary to the HTSUS to implement the IEEPA Duties.
The HTSUS is a list of codes, organized by product description, that are applicable to imports to the U.S. The importer of record declares the HTSUS code upon the importation of a good. Based on the HTSUS code, CBP identifies the general duty rate and any additional duties (e.g., Section 301 Duties) to calculate the total duties owed. These duties are generally applied ad valorem, based on the value that the importer of record declares to CBP upon the importation of the good.
In implementing Section 301 Duties, additional HTSUS codes were created to identify goods imported from China within the scope of the additional duties. It is likely that the DHS Secretary will adopt a similar approach, as it is simpler given the across-the-board nature of the additional duties.
No Apparent Exclusion Mechanism
Tariffs previously imposed (and still in place) under other legal authorities (Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962) required investigations before tariffs could be imposed. These tariff measures also included exclusion processes whereby U.S. entities could seek tariff relief if they could demonstrate, for example, that there was no domestic production of the imported product.
No such mechanisms or requirements exist under the IEEPA, which empowers the president to take economic actions he or she deems necessary "to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy or economy" of the country.
Limitations on Tariff Mitigation Strategies
Duty drawback and duty-free de minimis treatment are not available to goods subject to the Tariff EOs. Additionally, goods subject to the Tariff EOs must be admitted to FTZs under "privileged foreign status," unless they qualify for "domestic status."
No-Duty Drawback
The Tariff EOs provide that "no drawback shall be available with respect to the duties imposed pursuant to this order." (emphasis added)
Generally, duty drawback is granted upon the exportation of imported merchandise upon which any duty, tax or fee imposed under federal law was paid because of its importation. Exporters may claim drawback where the merchandise is exported within three years of the date of importation and the merchandise is not used within the U.S. before the exportation. Upon exportation, 99 percent of the duty paid will be refunded as drawback. The performing of incidental operations does not constitute use for drawback purposes.
Consequently, the Tariff EOs prohibit the drawback of the IEEPA Duties. Therefore, duty drawback for the IEEPA duties cannot be claimed for imports subjected to IEEPA Duties upon importation, then subsequently exported. However, because the Tariff EOs specify "duties imposed pursuant to this order," duty drawback can likely still be claimed on general duties paid on imports that were then subsequently exported.
For example, an imported Chinese good may be subject to 10 percent general duties pursuant to the general duty rate, additional 25 percent duties pursuant to Section 301 Duties and additional 10 percent duties pursuant to IEEPA Duties. Upon exportation, the exporter of record may be able to claim duty drawback on the 10 percent duties pursuant to the general duty rate and the additional 25 percent duties pursuant to Section 301 Duties. However, the exporter is prohibited from seeking duty drawback on the 10 percent additional duties pursuant to IEEPA Duties.
No Exception for De Minimis Value Entries
Additionally, the Tariff EOs prohibit the duty-free de minimis treatment for goods subject to the IEEPA Duties. De minimis treatment provides admission of articles free of duty and of any tax imposed on or by reason of importation, but the aggregate fair retail value in the country of shipment of articles imported by one person on one day and exempted from the payment of duty shall not exceed $800.
Over the past few years, the de minimis program has been criticized for presenting security issues as low-value shipments are subject to fewer inspection requirements. This has created a perception that the exemption facilitates violation of U.S. trade law, particularly by Chinese e-commerce platforms. The IEEPA Duties will have an immediate effect on e-commerce trade, specifically low-value shipments from China directly to a U.S. consumer in the U.S. – these now are subject to a 10 percent duty, regardless of value.
FTZs: Privileged Foreign Status Only
Once the Tariff EOs took effect, any imports being brought into a FTZs must be brought in under privileged foreign status. This applies unless the imports qualify for domestic status.
Use of an FTZ allows duty payment to be deferred until the import enters U.S. customs territory. FTZs are secure areas under CBP supervision that are generally considered outside of the customs territory of the U.S.
Foreign and domestic merchandise may be moved into zones for operations, including storage, exhibition, assembly, manufacturing and processing. Formal CBP entry procedures and payments of duties are not required on the foreign merchandise unless and until it enters the customs territory of the U.S. for domestic consumption. The importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. FTZs typically have no time restrictions on merchandise remaining in a zone.
Pursuant to privileged foreign status, the merchandise is classified and appraised, and duties and taxes are determined as of the date the application is filed. When such merchandise is transferred from the zone for U.S. consumption, either in its original state or after manipulation or manufacture, the applicable duties and taxes would be paid based on the rate established when privileged foreign status was granted – that is, at the time the product was brought into the FTZ.
The IEEPA Duties are ultimately due at the time that the goods are entered into the U.S. from the FTZ (but not at the time that the goods are originally admitted into the FTZ). If the goods are exported from the FTZ rather than being entered into the U.S., no IEEPA Duties will need to be paid.
Mitigation Strategies: A Systematic Approach
In the short term, businesses that import products subject to these new tariffs should consider the following mitigation strategies.
The first step is to know your products and components and where they come from. This includes analyzing the supply chain for each part, component and finished product. Who is the supplier, what is the country of origin, are there U.S. or other country alternatives? Are we the importer-of-record, or do we buy duty-paid in the U.S.? Do we have the right HTSUS classification of their products to ensure they are not paying higher duties unnecessarily? If we are the importer of record, have we got Customs valuation right (and is it as low as possible under the regulations)? Have we taken advantage of the fact that there are U.S. components in the imported item?
The second step is developing messaging to key administration officials and policymakers who advocate for tariff exclusions for certain products, emphasizing the impact the duties will have on U.S. consumers and the economy.
The third step is to consider the contractual terms for imported items that are critical and for which there are no U.S. third-country alternatives. Are we locked into the price, and can we terminate the contract?
The fourth step is price negotiations with our suppliers and customers. Depending on the company's market power, some of the increase may be passed off to the supplier and some to the customer. This will vary widely depending on the product, supply chain and ultimate consumer.
Retaliation
All three countries targeted by the Tariff EOs issued statements indicating they would retaliate in some form. The EOs provide that in response to retaliation, the president may increase or expand the scope of the IEEPA Duties to ensure their efficacy.
On Feb. 3, 2025, President Sheinbaum and Prime Minister Trudeau announced via social media (and the White House confirmed) that Canada, Mexico and the U.S. had agreed to a 30-day pause in the imposition of tariffs.
According to President Sheinbaum, Mexico agreed to deploy 10,000 members of its national guard to its northern border to address the drug trade. The U.S. agreed to work to stem the flow of weapons to Mexico, and Mexican and U.S. officials said they would intensify collaborative efforts on security and commerce.
According to Prime Minister Trudeau, Canada agreed to deploy a $1.3 billion border plan, which included 10,000 personnel, and to appoint a "Fentanyl Czar."
Nothing prevents President Trump from reinstating the threatened tariffs on Canada and Mexico once the 30 days have expired or at a later date.
On Feb. 4, 2025, shortly after the U.S. tariffs entered into force, the Chinese Ministry of Commerce announced retaliatory tariffs, set to take effect Feb. 10, 2025. The ministry also announced an antitrust investigation into Google, imposed export controls on some critical minerals and added two U.S. companies to its blacklist of unreliable entities.
Clients should take immediate steps to determine whether and to what extent their business operations will be impacted by these tariffs or the retaliatory tariffs likely to be imposed on U.S. exports.
