MARKET UPDATE: DECEMBER 27TH, 2024
CT MarketWatch: Impact of Rising Tariffs Under the New Administration
As President-elect Trump prepares to take office, his administration is set to implement significant changes to U.S. trade policy, with tariffs playing a significant role. His proposed tariff increases target imports from Canada, Mexico, China, and the BRIC nations, aiming to address issues such as illegal immigration, fentanyl control, and challenges to the U.S. dollar’s global dominance. These measures could have far-reaching effects on businesses, potentially raising consumer prices and disrupting supply chains. With retaliatory actions expected from affected countries, companies will need to adapt quickly to this evolving trade environment. This article outlines the key proposals, legal considerations, and potential impacts on both businesses and consumers.
What We Know…
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Canada and Mexico Tariffs (25%):
- The proposed 25% tariffs on all goods from Canada and Mexico are set to take effect on day one of the Trump administration (January 20, 2025).
- These tariffs are intended to pressure Canada and Mexico to do more to control illegal drugs (like fentanyl) and undocumented immigration.
- Tariffs will be assessed based on “country of export,” rather than “country of origin,” potentially disrupting business plans for Canadian and Mexican exporters who currently benefit from duty-free access under the US-Mexico-Canada Agreement (USMCA).
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BRIC Nations Tariffs (Up to 100%):
- Trump has proposed 100% tariffs on goods from the BRIC countries (Brazil, Russia, India, China, and South Africa), with the additional inclusion of Egypt, Ethiopia, Iran, and the UAE.
- This move is motivated by concerns over these countries’ attempts to replace the U.S. dollar as the world’s reserve currency.
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China Tariffs (Additional 10%):
- A further 10% tariff on Chinese imports is aimed at pressuring China to control the flow of fentanyl into the U.S.
- The tariff will apply to goods based on the “country of export” criterion, in addition to existing duties like Section 301 tariffs and antidumping duties.
Legal Basis for Tariff Increases:
- The proposed tariffs are expected to be implemented under the International Emergency Economic Powers Act (IEEPA), which allows the president to impose tariffs during a national emergency, such as those related to security, foreign policy, or the economy.
- Critics have questioned whether IEEPA is an appropriate legal basis, as it historically addresses issues like sanctions rather than tariffs. The president can invoke these tariffs immediately upon sending a report to Congress, but they can only be stopped by a joint resolution from Congress.
Export Controls:
- Under the Biden administration, the U.S. has implemented stricter export controls on advanced technology to China, particularly targeting semiconductors critical for military applications.
- In December 2024, the U.S. Department of Commerce tightened these controls, aiming to impede China’s ability to produce next-gen semiconductors, artificial intelligence, and advanced weapon systems.
- In response, China has retaliated by banning the export of key rare minerals and imposing stricter controls on graphite and other critical materials used in semiconductor chips and advanced electronics.
Mexico Border Import Loophole Closed:
For many years, U.S. companies have been importing goods from China to Mexico, then shipping them one order at a time to the U.S., effectively avoiding tariffs under the Section 321 provision. This loophole has allowed duty-free entry of shipments valued at $800 or less, making it an attractive option for e-commerce businesses looking to minimize costs.
The new decree introduces several significant changes:
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Tariff increases:
Import duties on 121 apparel products and 17 made-up textiles have been raised from 20-25% to 35%. Additionally, 17 tariff headings related to textiles now face a 15% duty, up from 10%.
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IMMEX program restrictions:
The decree excludes certain finished products, including clothing and textile articles classified under HTS Chapters 61, 62, and 63, from temporary importation under the IMMEX program.
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Immediate effect:
These changes are effective immediately, affecting even goods currently in transit.
Impact on Businesses and Consumers:
- Businesses importing goods from Canada, Mexico, China, and the BRIC nations will face higher costs, which may be passed on to consumers.
- Products affected include electronics, pharmaceuticals, fresh produce, and consumer goods, with significant price hikes expected. For example, laptops and smartphones could see price increases of $350 and $200, respectively.
- American manufacturers will be hurt by higher costs for intermediate goods, reducing their competitiveness globally. Additionally, retaliatory tariffs from foreign countries could target U.S. exports, further complicating trade relations.
Mitigation Strategies for Businesses:
- Review Tariff Codes: Ensuring accurate classification can avoid unnecessary duties.
- Speak to your suppliers and clients: Work to create a framework for how things might work if any or partial tariffs are implemented.
- Have a potential US-based 3PL: Have a local US based 3PL to fulfill your products if you currently ship to the US from Canada or Mexico.
- Evaluate Customs Values: Aligning transfer pricing with CBP rules can reduce tariff exposure.
- Supply Chain Adjustments: Exploring production in regions with fewer tariff risks, such as Southeast Asia, could reduce costs.
- Use Duty Deferral Programs: Foreign Trade Zones and Bonded Warehouses can help businesses defer or eliminate duties.
- Consider Duty Drawback and Exclusions: Businesses can apply for tariff exclusions and reclaim duties on exported products.
Building a nimble and flexible supply chain requires proactive planning and strategic adjustments to mitigate tariff risks and optimize operations. By leveraging tools like duty deferral programs and aligning with regulatory frameworks, businesses can enhance resilience and maintain cost efficiency in a dynamic trade environment.
Navigating Upcoming Changes:
With tariffs set to increase significantly under the new administration, businesses must prepare for a shifting trade landscape. Proactive steps, such as reviewing supply chains, classification codes, and exploring exemptions, will be crucial to managing costs and ensuring competitiveness.
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