Executive summary

On 1 February 2025, the United States (US) White House released a Fact Sheet and Executive Orders imposing additional tariffs on Canada, Mexico and China. The documents outline that President Trump is implementing 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China (additional to the tariffs already in force). Energy resources from Canada will face an initially lower tariff of an additional 10%. The tariffs are a result of President Trump's national emergency declaration in response to "illegal immigration" and "drug trafficking" and will remain in place until the perceived crisis is alleviated.

In response, Canada announced their own retaliatory measures quickly after, while China denounced the tariffs but left the door open for negotiations. Following two phone calls with President Trump on 3 February, Canadian Prime Minister Justin Trudeau announced that US tariffs on Canada would be paused for “at least 30 days.” The additional tariffs on Mexican-origin goods were postponed for a month after discussions between US President Donald Trump and Mexican President Claudia Sheinbaum Pardo.

Background

Throughout his presidential campaign and since being elected, President Trump has expressed his intention to impose tariffs and target additional tariffs on countries like Canada, Mexico and China.¹ On 20 January 2025, on the day of President Trump's inauguration, he issued the Presidential Memo "America First Trade Policy" directing several government agencies to conduct reviews and propose recommendation across various trade issues.² On 27 January 2025, President Trump stated that he planned to impose tariffs on steel, aluminum and copper imported to the US as well as goods such as computer chips, semiconductors and pharmaceuticals in a push to increase US production of the products.

The partnership with Canada and Mexico was facing challenges even prior to President Trump's formal imposition of additional duties on Canada and Mexico. Trump signed the US-Mexico-Canada Agreement (USMCA) during his first presidential term. However, the USMCA has a sunset clause that introduces a mechanism mandating a review every six years when the nations could decide on an extension. If not extended, annual reviews continue until the expiration date of the agreement in 2036. During his 2024 campaign, Trump expressed his intent to invoke the six-year renegotiation provision.

Moreover, most goods of Chinese origin are already subject to additional tariffs as a result of measures under Section 301 of the Trade Act of 1974 (Section 301). These additional tariffs on Chinese goods are part of ongoing trade actions aimed at addressing deemed unfair trade practices and protecting US industries. New tariffs on Chinese-origin imports are on top of existing punitive duties.

Fact Sheet

On 1 February 2025, the White House released a Fact Sheet confirming President Trump's move to impose tariffs on Canada, Mexico and China by invoking the International Emergency Economic Powers Act (IEEPA).³ The IEEPA grants the President authority to impose economic sanctions, control foreign assets and undertake other measures to address threats to national security, foreign policy or economy. The IEEPA was enacted in 1977, but it has never before been invoked by a US president to impose tariffs.

Executive Orders (EOs)

After the Fact Sheet was released, the White House issued (1) EO Imposing Duties to Address the Flow of Illicit Drugs Across our Northern Border, addressing the additional tariffs on Canadian goods⁴; (2) EO Imposing Duties to Address the Situation at our Southern Border, addressing the additional tariffs on Mexican goods⁵; and (3) EO Imposing Duties to Address the Synthetic Opioid Supply Chain in the People's Republic of China, regarding the additional tariffs on Chinese goods.⁶

Key elements of the EOs include:

• Additional duties apply to goods imported for consumption or withdrawn from a warehouse for consumption starting at 12:01 a.m. Eastern Time (ET) on 4 February 2025.
  • However, goods that were loaded onto a vessel or were in transit on the final mode of transport before 12:01 a.m. ET on 1 February 2025, will not be subject to additional duty, provided the importer certifies this to Customs and Border Protection (CBP).
• The US may increase or expand the scope of the additional duties imposed if the countries retaliate against the US.
• Products that are admitted into a Foreign Trade Zone (FTZ) on or after 12:01 a.m. ET on 4 February 2025 must be admitted as "privileged foreign status."
  • Goods that were loaded onto a vessel or were in transit to an FTZ on the final mode of transport before 12:01 a.m. ET on 1 February 2025, will not be subject to additional duty, provided the importer certifies this to Customs and Border Protection (CBP).
• Drawback (i.e., refund) would not be available on duties paid under the three EOs.
• Duty-free treatment under 19 USC 1321 (commonly known as de minimis shipments) would not be available for the targeted goods.

Retaliatory measures

Canada quickly announced retaliatory tariffs. China denounced the tariffs and stated its intent to file a lawsuit with the Word Trade Organization (WTO). Mexico, on the other hand, announced potential retaliatory tariffs on 1 February 2025, prior to the agreement with President Trump to postpone the tariffs for one month.

Canada

On 1 February, Canada announced that it will apply a 25% tariff on CA$155b worth of goods that originate in the US.⁷ Of this amount, CA$30b will be subject to the 25% tariff effective 4 February 2025 via the United States Surtax Order (2025)⁸ and the targeted goods include: orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper.⁹

A 25% tariff will apply on the remaining CA$125b after a 21-day consultation period has concluded. Goods potentially targeted include passenger vehicles including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles and recreational boats. Non-tariff measures may also be considered; however, no further details have been provided at this time.¹⁰

On 2 February, Canada announced that, effective on 4 February, a process for considering requests for remission of the retaliatory tariffs will be available in the following instances:

• To address situations where goods used as inputs cannot be sourced domestically, either on a national or regional basis, or reasonably from non-US sources
• To address, on a case-by-case basis, other exceptional circumstances that could have severe adverse impacts on the Canadian economy¹¹

Remission will only be considered if the Canadian federal government deems it is required to address exceptional and compelling circumstances that, from a public policy perspective, are found to outweigh the primary rationale behind the application of the tariffs.¹²

The Department of Finance Canada, in consultation with other relevant federal departments, will assess requests for remission. These requests may be subject to consultation with other interested parties. Under section 115 of the Customs Tariff, the Minister of Finance has the authority to recommend remission to the Governor in Council. For a request for remission to take effect, the Governor in Council must approve an Order in Council.¹³

All requests for remission must include information as outlined in the Department of Finance Canada's notice.¹⁴

Provincial Canadian governments have also announced the implementation of non-tariff measures, such as banning the sale of American alcoholic beverages and canceling public procurement contracts with US businesses.

Discussions between President Trump and Prime Minster Trudeau on 3 February 2025 ultimately produced a 30-day pause of US tariffs, according to a statement by the Canadian leader.

Mexico

On the evening of 1 February 2025, Mexican President Claudia Sheinbaum Pardo declared on her social media platform that Mexico rejects the claims made by the US regarding the fight against drugs. She emphasized the need for both countries to work together in a comprehensive manner, guided by the principles of shared responsibility, mutual trust, collaboration and respect for sovereignty. Additionally, she proposed the establishment of a working group to address these issues.

The Mexican President also instructed the Minister of Economy to implement a plan that includes both tariff and non-tariff measures against the US to defend Mexico's interests.

However, on 3 February 2025, President Sheinbaum and President Trump confirmed that they had a conversation that led to the additional tariffs being postponed for one month. During this one-month period, both countries are going to participate in further negotiations.

China

China's government condemned the Trump Administration's implementation of additional tariffs on Chinese imports while remaining open to negotiations to prevent escalating tensions. Instead, China plans to challenge the tariff at the WTO and will implement unspecified countermeasures. This reaction is more measured than China's previous responses during Trump's first term.

Future of tariffs

Even prior to the announcement of additional tariffs on goods from Canada, Mexico and China, US President Trump demonstrated a clear intent to leverage tariffs as a tool for influencing trade policy during his term. On 26 January 2025, the US and Colombia de-escalated a potential trade war after Colombian President Gustavo Petro refused two US military planes carrying deported Colombian migrants, prompting President Trump to threaten tariffs and sanctions. The situation was later resolved when Colombia agreed to accept the deportees, and both sides expressed a willingness to continue diplomatic dialogue. This incident, and the measures announced against Canada, Mexico and China, highlight the potentially precarious balance of international relations and trade policies expected during Trump's presidency.

Action for businesses

Immediate actions to consider for companies that have North American import and export operations, as well as those that import into the US from China, depending on their specific situations, include:

• Analyze both financial and physical flows for imports and exports into and out of North America and China, as well as the import duties paid, to assess the potential total landed cost including duty impact of the new tariffs.
• Review contracts with suppliers and customers to clarify contractual liability for duties and taxes.
• Consider renegotiating supplier and customer pricing agreements and/or cost-splitting arrangements.
• Evaluate current domestic or alternative sourcing options for the impacted countries and consider country-of-origin planning to mitigate duties.
• Evaluate product Bill of Materials composition and evaluate alternate substitute materials.
• Assess operational impact of elimination of de minimis duty-free treatment for the impacted products.
• Consider valuation planning, such as bifurcating product and non-product costs and other country-specific planning, such as first sale for export in the US, to mitigate the increase in duty.
• Consider using the US FTZ program for duty deferral on long-lead-time inventory items to provide cash-flow benefits as well as to help mitigate duties to the extent the imported items are ultimately exported from the FTZ — either re-exported without any change or re-exported after being incorporated into other manufactured articles. Using the FTZ program requires applying special considerations on a case-by-case basis; being able to utilize the program may provide a reduced effective tax rate in certain circumstances, despite the restrictions that the EO imposes on subject merchandise.
• Identify potential approaches to leverage under Chapter 98 Special Classification Provisions to partially or fully mitigate duties for certain products based on their use or condition (e.g., goods returned after having been exported, goods being temporarily imported, goods imported for the use of certain nonprofit institutions).
• Flag related-party entries imported into the US for Reconciliation to account for potential retroactive reductions in transfer price to enable filing the adjustments and securing potential refunds.
• Review US-continuous-import-bond sufficiency to help prevent goods' being stuck at the border due to insufficient bond and stacking liability.
• Consider aligning customs valuation with transfer pricing policies. US tax reform has resulted in companies' migrating intellectual property (IP) back to the US. With IP in the US, and in a direct-import model, customs value is decreased. For customs value, certain design and development cost must be added to value, but US research and development (R&D) can be excluded. For R&D-intensive companies with significant R&D in the US, value reduction can be significant
• Canadian producers who export to the US and consider availing themselves of transfer pricing policies to determine a transaction value for customs likely need to include certain Canadian R&D costs and possibly other statutorily required additions to the transfer price.
• Consider applying, for Canadian duty, drawback of duties for export-oriented production in Canada.
• Apply for a request for remission of Canadian retaliatory tariffs (Canada).
• Consider impacts of provincial-level non-tariff retaliation measures (Canada).
• Keep up with the latest news and developments in trade policies and stay adaptable to quickly respond to changes in trade regulations and tariff rates.