In The Matrix, the red pill means choosing to see the real world, even if it exposes the brutality of harsh reality, whereas the blue pill means choosing blissful ignorance and returning to the simulation. In the recent ever-changing matrix of trade tariffs that we find ourselves in now in the U.S., it begs the question, which trade pill do we choose to swallow?
The Red Pill – The Harsh Reality
On April 2, 2025, President Trump issued an executive order titled “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits.” As explained by the title, Trump issued this order to increase tariffs against trade partners who export more goods to the U.S. than they import from the U.S. These trade deficits are partially caused by tariffs levied by foreign countries. Through this order, the President seeks to make trade deals reciprocal again.
First, the order imposes a ten percent ad valorem tariff—or “according to value,” meaning that the tariff is 10% of any good’s price—on any good imported from any foreign country (with certain exceptions discussed below). This 10% tariff is imposed in addition to any other tariffs to which the foreign country was already subject. The 10% imposition took effect at 12:01 am Saturday, April 5, but any goods that were already en route to the U.S. were exempt from the tariff.
Exempt from the 10% ad valorem tariffs are/were:
- communications (mail, phone calls, etc.)
- informational materials (books, CDs, etc.)
- humanitarian donations by those subject to U.S. jurisdiction
- steel, aluminum, and automobiles subject to Section 232 of the Trade Expansion Act of 1962
- copper
- Pharmaceuticals – although new tariffs are apparently coming soon
- lumber articles
- Semiconductors – although new tariffs are apparently coming soon
- minerals
- energy
- If at least 20% of the good is derived from the U.S., then the percentage of the good originating from the U.S. (In other words, if 20%+ of a finished good is composed of raw goods that came from the U.S., then that 20%+ is not subject to this tariff. This is to protect U.S. products and incentivize other countries to use U.S. products.)
- any goods otherwise subject to the Harmonized Tariff Schedule of the United States (“HTSUS”), discussed below
Second, and in addition to the baseline 10% ad valorem tariff, the President’s order imposes another tariff framework targeted to countries that the President deems the “worst offenders.” I.e., those countries that export much more to the U.S. than they import. For those countries, the new tariffs range from 11% to 50%. It appears 83 countries are affected by the new tariffs, including China, Japan, and all countries in the European Union. Note that there are specified guidelines for Canadian and Mexican goods in light of the preexisting trade agreement between the U.S., Canada, and Mexico. As such, the President addressed these two countries individually.
These tariffs were set to go into effect on April 9, 2025. Many countries retaliated almost immediately with their own tariffs against the import of U.S. goods. For example, China raised tariffs on U.S. goods to 84%. President Trump responded by raising the new tariff on Chinese goods to 125%, which will be applied on top of a pre-existing 20% tariff on Chinese goods.
However, other countries took the opportunity to come to the negotiating table to seek revised trade deals with the U.S. in response. The President then placed a 90-day “pause” on any countries that did not retaliate with additional tariffs on the U.S.
As a result, markets took a dive and only rebounded slightly at the news of the “pause.” Indeed, analysts indicate that the U.S. may be headed for another recession if the tariffs are sustained.
Lawsuits have already been filed as well, including the first lawsuit in Florida alleging the President’s tariffs on Chinese imports unlawfully bypassed required procedures. Another lawsuit was filed on behalf of a group of small business owners before the Court of International Trade in New York, alleging that the International Emergency Economic Powers Act does not empower the President to unilaterally impose tariffs. The lawsuit urged the Court to find the tariffs unlawful on various grounds, noting that they were issued with no notice, no public comment (for many of the tariffs), no phase-in or delay in implementation, (and without any apparent exclusion or exemption processes), despite “massive economic impacts that are likely to do severe damage to the global economy.”
The harsh reality is that the cost of goods and services across the board is going to increase over the next several months and may have a sustained negative impact on the U.S. economy.
The Blue Pill – The Blissful Hope for the Future
The President has already met with many leaders of foreign countries affected by the new U.S. tariffs, including Vietnam, Japan, South Korea, and others. Trade deals are being negotiated that relieve countries of certain tariffs under certain conditions; however, none have yet been officially adopted. A legal question as to how the trade deals would become ratified by Congress also remains unresolved.
Additionally, the President has shown some “flexibility” and is apparently willing to consider U.S. auto manufacturing exceptions or extensions due to the significant impact the auto industry is facing. If the goal is to increase U.S. production, the tariffs are likely to do so (albeit over time) because U.S. companies will have to fill the market where the more expensive tariff-laden goods now exist. If the U.S. goods can be made less expensively than imported goods, that would increase and protect domestic industry. U.S. production also has important implications for national security. The more self-sufficient a country is, the less it becomes dependent upon foreign goods, and thus, it is less subject to foreign influence.
Perhaps the President will strike the deals he wants with the countries that are more reciprocal in their trade policies, which will increase U.S. exports to other countries. If, in the end, U.S. goods are more likely to be sold more broadly around the world, opening a brand new area of global trade for U.S. companies, then perhaps there is a blissful future for the U.S. economy on the horizon. In fact, we might have a new trade deal with China coming soon!
Navigating the Matrix
In the past, private companies have had to take initiative to keep the costs of goods down, and they often have had to get “get creative” in finding ways to avoid paying high tariffs. From lobbying government officials, to reclassifying goods, to outsourcing labor to countries with lower tariff impositions, U.S. companies may need to take extraordinary measures to avoid the significant impacts of the new tariffs.
The “Chicken Tax” offers a great example of industry creativity, as well as an explanation as to why American companies dominate the American pickup truck market. In 1963, President Lyndon B. Johnson imposed a tax on imported trucks to retaliate against European countries’ imposition of tariffs on U.S. chicken. In response, Mercedes shipped German-imported vehicles to South Carolina in pieces to avoid the tariff.
Previously, the U.S. has allowed companies to request exclusions from tariffs where special circumstances could be shown. For example, with Section 301 tariffs, imposed in 2018 to retaliate against China, the Office of the United States Trade Representative published guidelines on exclusions. This process enables certain Chinese machinery to be imported in the U.S. “free and clear” of the tariff as a means of protecting and promoting U.S. production. Some exclusions are set to expire on May 31, 2025.
With the executive order being so recent, it remains to be seen what the exclusion process may entail, if one is even implemented. With the regulatory landscape in constant flux and enforcement and implementation protocols unclear, we recommend retaining trusted legal counsel for any trade compliance matters. Our Administrative, Regulatory & Government Law practice group and our International Business Law practice group have a wealth of knowledge and experience.
