Trade and tariffs under Trump

The Trump Administration’s planned tariffs have been widely reported and discussed. The present article quickly summarizes the lay-of-the land in this respect, and then discusses strategies and mitigation measures that Canadian and international businesses can employ in the face of such tariffs.

Overview of tariff announcements

The United States is on the cusp of imposing a 25% tariff on all imports from Canada and Mexico. While initially slated to go into effect on February 4, 2025, President Trump and Prime Minister Trudeau reached a last-minute agreement on February 3, 2025 pausing the imposition of the 25% US tariffs and corresponding 25% Canadian retaliatory tariffs for 30 days. Presently, the new tariff implementation date is set for March 4, 2025.^[1]

The Executive Order announcing these tariffs is broad and allows for very few exceptions. The tariffs will apply to Canadian imports valued less than $800 (which are currently duty free and receive de minimis treatment), and duty drawbacks (read: refunds, including where goods are re-exported from the United States) are expressly not available under the Executive Order.

Statements by President Donald Trump suggest that the new US Administration is now including trade deficits and protection for US industries, in addition to border security as issues factoring into whether the Trump Administration will ultimately impose these tariffs. The uncertainty posed by these contemplated tariffs underscores the need for businesses to prepare to act quickly.

The "America First Trade Policy" executive order, issued on January 20, 2025, directs an investigation into the causes of US trade deficits and their economic and national security implications. The order raises the possibility of additional measures, including supplemental tariffs, as the administration seeks to address these deficits. The investigation will culminate in a report due on April 1, 2025, which could provide the impetus for further trade actions or heightened scrutiny on imports, including those from Canada.

On February 9, 2025, President Trump also announced that the US will be implementing 25% tariffs on all steel and aluminum imports from any country into the US.^[2] These tariffs will take effect on March 12, 2025. Statements from the White House suggest that these steel and aluminum tariffs would be cumulative with the 25% across-the-board tariffs against Canada and Mexico that are currently paused, meaning 50% tariffs for steel and aluminum from Canada.^[3] Canada’s domestic steel industry will be greatly affected by this as Canada is the largest exporter of steel to the US.

Additionally, on February 13, 2025, President Trump announced that the US would develop policy to implement reciprocal tariffs to match any tariffs or trade barriers on US goods from foreign trading partners. Details on how this policy will be implemented are scant. At present the policy directs investigations into non-reciprocal trade arrangements with remedies to follow. While the impact will remain to be seen, this policy creates enormous uncertainty for US trading partners and risks upending the global trading system.

Finally, the Trump Administration has further announced that automotive imports would be subject to additional duties in the coming weeks.

Whether some, or all, of the announced tariffs are ultimately imposed, businesses should use the time wisely to assess their exposure and plan for different scenarios.

Canada’s planned retaliation

The Canadian government has announced plans for retaliatory tariffs on US goods entering Canada. This retaliation could further disrupt supply chains and raise costs for Canadian businesses reliant on US imports.

While these tariffs have now been paused pending whether the US tariffs are ultimately implemented, they include a 25% tariff on $155 billion worth of US-origin goods. The initial implementation of Canada’s retaliatory tariffs will be on $30 billion of US goods (a list of goods on the $30 billion list has been published by the Department of Finance). The remaining $125 billion list of US goods is expected after a 21-day public consultation. Canada’s retaliation plans could also be taken faster, depending on the tariffs that are imposed by the United States.

At present, Canada’s planned retaliatory tariffs will not apply to goods in transit to Canada on the day that tariffs come into force and there is no indication that the tariffs will apply retroactively.

How businesses can prepare

There are various steps that parties transacting across the border may take to understand their exposure and mitigate risks. We address some useful approaches below.

1. Import and do business prior to the tariffs

Businesses in some sectors may be able to move shipment dates forward and build inventory in the other country to beat the tariff implementation dates. At the time of writing, the following dates are relevant:

• March 4, 2025: This is the new implementation date for the tariffs on Canada and the first round of Canada’s retaliation. Businesses should be prepared for immediate impacts on pricing, supply chains, and trade relationships. The goods to be covered by this first round of Canadian retaliation were published, and this list can be consulted to obtain some idea of which products are affected.
• March 12, 2025: This is the implementation date for the additional US steel and aluminum tariffs.
• April 1, 2025: The America First Trade Policy executive order mandates an investigation into US trade deficits, with findings potentially leading to additional tariffs or trade measures. Businesses should develop contingency plans in advance of this date.

2. Review contracts and incoterms

Businesses should carefully review contract terms and Incoterm usage (discussed below) in their contracts to understand who will be liable for duties and tariffs. Adjusting Incoterms or renegotiating contracts to align with new tariff risks may be prudent.

• Understand incoterms and duty liability: Contracts often use Incoterms (International Commercial Terms) to define the responsibilities of buyers and sellers in cross-border transactions. Certain Incoterms may shift the liability for customs duties and tariffs. For example:
  • Delivered Duty Paid (DDP): The seller is responsible for paying all customs duties, including any applicable tariffs. Canadian exporters using this term may bear the direct cost of US tariffs.
  • Free on Board (FOB) or Ex Works (EXW): The buyer assumes responsibility for importing the goods and paying duties. Under these terms, US importers would typically absorb the 25% tariffs.
  • Cost, Insurance, and Freight (CIF): The seller covers costs up to the arrival of the goods at the port, but the buyer is responsible for customs duties and tariffs.
• Anticipate potential termination or disputes: Buyers or sellers may seek to terminate agreements or adjust terms if tariffs significantly impact costs. Parties should carefully review their contracts to consider whether tariffs may be considered a force majeure event, and contracts should be reviewed for clauses that allow price adjustments or terminations in such scenarios.
• Negotiate duty remission or drawback terms into future contracts: The party liable for paying any tariffs may consider incorporating terms into future contracts contemplating remission or drawback of duties paid if new US tariffs are imposed.

3. Engage with customers and suppliers

To prepare for and mitigate the effects of these tariffs, businesses should assess their best path forward and consider the following steps:

• Negotiate duty liability in advance: Proactively communicate with customers and suppliers to establish clarity on who will bear the responsibility for tariffs if imposed. This may involve renegotiating existing agreements to ensure there is no ambiguity about duty liability.
• Focus on shorter-dated contracts: Given the potential for frequent changes in tariff policies, businesses should aim to negotiate shorter-term contracts. This allows greater flexibility to adjust terms in response to new tariffs or regulatory changes.
• Preempt pricing disputes: Address potential pricing impacts of tariffs during negotiations to minimize disputes. By setting expectations and clarifying responsibilities upfront, businesses can reduce the risk of disruptions to supply chains and customer relationships.

Engaging with counterparties early may prevent costly disputes or litigation.

4. Mitigate the duties by considering transfer-pricing arrangements

Value for duty and transfer-pricing agreements can help manage duty costs by establishing a lower value for the goods on importation. By reducing the underlying base value of the goods on which the tariff would be applied, companies may be able to minimize and mitigate the extent of the duties.

• Consult with US counsel regarding transfer-pricing arrangements: Canadian exporters may wish to consult with competent US counsel to structure sales to the United States to flow through a US affiliate as a first sale before that US affiliate ultimately sells the goods to the final US customer. If the first sale is a bona fide arm’s length transaction for export, and the US affiliate incurs costs in the United States, such as selling, general and administrative expenses, it may be possible to reduce the value for duty payable by relying on the lower-priced first sale.  US importers can request advance rulings from US Customs and Border Protection (CBP) to confirm eligibility for this valuation method.
• Value for duty and transfer-pricing arrangements for Canadian importers: Canadian importers may also be able to structure importations in a similar manner to minimize duties through a value-for-duty optimization strategy by relying on an appropriate transfer price. Tax considerations are also paramount as companies structure their transfer prices to minimize both customs and tax liability.

Tailoring such arrangements with legal counsel can optimize duty payment and provide greater pricing certainty for customers.

5. Assess duty relief options

There are several options that may be open to importers seeking relief from Canadian retaliatory tariffs:

• Clarify whether goods are of “US Origin”: Canada’s retaliatory tariffs only cover goods that “originate in the United States” pursuant to the Determination of Country of Origin for the Purpose of Marking Goods (CUSMA Countries) Regulations. Whether the goods are physically shipped from the United States or are under US ownership does not determine whether tariffs apply. There is a specific legal meaning to US-origin goods in this situation and companies should ascertain whether goods they may import meet US-origin.
• Look to applicable exceptions: The Canada Border Services Agency (“CBSA”) issued Customs Notice 25-03 (which has since been archived) indicating that there are certain exceptions to the application of the retaliatory tariffs, such as for goods that are temporarily imported for repair in Canada or re-imported into Canada after being exported for repair. Should the tariffs come into effect, exceptions may be available for Canadian importers to rely on to avoid duty liability.
• Duty drawbacks may be available for eligible imports: Duty drawbacks are available when the imported goods are later exported as-is, or when goods are used to produce other goods for export. Canadian manufacturers importing inputs for products that are later exported from Canada may be able to avail themselves of the CBSA’s Duty Drawback process.
• Canadian importers may be able to request remission of the retaliatory tariffs: An application for duty remission can be sought to avoid the payment of duties altogether (both forward or retroactive duties may be eligible for remission). Remission is distinct from duty drawback in that it is not limited to goods that are ultimately exported (whether as an input or not). This is an exceptional process where importers or other Canadian parties are able to show that there are compelling reasons why the duties should not apply to a given product (such as if there is no alternative replacement and the goods are used as an input into Canadian manufacturing).

6. Engage with governments

Engaging with governments on both sides of the border may assist businesses secure exemptions or affect the scope of goods subject to the tariffs (such as Canada’s as-yet disclosed full retaliation list), or access other support to offset increased costs. Collaborative approaches through industry groups can maximize the effectiveness of these efforts.

The Government of Canada has indicated that it may provide a stimulus package to help Canadian businesses if the United States imposes tariffs on Canadian goods, with the scale of the relief to vary based on the scope and quantum of the tariffs.^[4]

7. Diversify markets

Businesses heavily reliant on US trade may wish to further explore opportunities to expand into other markets and deepen relationships with existing non-US partners. Federal and provincial support programs may assist with market diversification initiatives. Canada is well-positioned for tariff-free access to Europe under the CETA and to many Asian countries under the CPTPP as well as its bilateral trade agreement with South Korea, and numerous South American countries.^[5]

Canadian businesses may also want to strengthen their domestic market presence. Protecting domestic market share might involve initiating trade complaints against unfair foreign competition under Canadian trade laws, particularly if faced with US exports that are not subject to retaliatory tariffs. In sectors where there are significant interprovincial trade barriers, the decreased US market access may provide a catalyst to remove impediments and increase efficiencies of trade within Canada.

Conclusions and key takeaways

In summary, to prepare for potential tariffs on Canadian exports to the United States, as well as Canadian  retaliatory tariffs, businesses should assess their exposure and duty liability under contract, including by understanding use of Incoterms, and further consider termination and renegotiation clauses under their contracts, which they or their counterparties may consider. Businesses may also wish to import products in advance of the duties, communicate proactively with customers or suppliers, and optimize the value of the goods for customs purpose and assess whether a transfer price strategy is appropriate to minimize duties. Certain businesses may also wish to engage proactively with government officials on both sides of the border, and also consider diversifying trade to reduce dependency on the US market, where possible.