President-Elect Trump Announces Pick for Commerce Secretary to Advance Tariff and Trade Agenda

On November 19, 2024, President-Elect Trump announced his selection of Howard Lutnick to be his Secretary of Commerce. In selecting the Wall Street billionaire, Mr. Trump stated that Mr. Lutnick “will lead our tariff and trade agenda, with additional direct responsibility for the Office of the U.S. Trade Representative [‘USTR]’.” The latter comment has already sparked concern in Congress because USTR is a cabinet-level position created by Congress within the Executive Office of the President. By statute, USTR reports directly to the President, not to another Cabinet Secretary. President-Elect Trump has yet to announce his selection of the USTR.

The incoming Commerce Secretary will have the benefit of working closely with a Congress controlled by Republicans in both chambers but will likely face opposition from many quarters in advancing the President-Elect’s trade agenda, including significant tariff increases that, if imposed, will approach levels not seen since the late 19th century.

Throughout his campaign, Mr. Trump emphasized his commitment to revamping U.S. trade policies to prioritize American manufacturing and reduce trade deficits. Central to his strategy is the imposition of tariffs, which are viewed as a tool to extract concessions from trading partners and protect domestic industries. The proposed tariffs range from 10% to 20% on all imports from all countries, with more severe tariffs of 25% on goods from Mexico (with 100% on automobiles assembled in Mexico) and between 60% to 100% on goods from China. These measures are intended to address perceived imbalances in trade relationships and incentivize the return of manufacturing jobs to the U.S. An analysis of these proposed tariffs is discussed in this recent BDO Insight. 

Implications for Businesses

The potential implementation of these trade policies carries significant business implications, especially with any tariff hikes that could lead to increased consumer prices for imported goods and decreased margins for importing companies. Multinationals reliant on global supply chains may face disruptions as they navigate new tariff structures and potential retaliatory tariffs from trade partners. The uncertainty surrounding these policies could also lead to market volatility, thus negatively impacting investment decisions and business planning.

Strategies for Businesses

To navigate these challenges, businesses should consider several strategic actions, including specific mechanisms for customs cost savings and refunds:

1. Supply Chain Diversification: Explore alternative sourcing options to mitigate the impact of any new tariff increases, especially on Chinese imports or downstream steel and aluminum products, e.g., any article made of these raw materials.

2. Supply Chain Mapping: Utilize supply chain mapping software solutions (such as mesur.io) to document the entire supply chain. Complete visibility to the sources of all raw materials and finished goods has never been more critical, especially given the plethora of global laws seeking to prevent the importation, sale, or distribution of any merchandise made in whole or in part with forced labor (see the BDO article on forced labor).

3. Customs Cost Savings:

• First Sale Rule: Utilize this principle to reduce the dutiable value of goods by basing them on the price paid by the first buyer in a series of sales leading to an importation into the U.S. (Note: other countries do not follow this rule).
• Duty Drawback: Leverage duty drawback programs to recover duties paid on imported goods that are subsequently exported in some form (as the same item or as a further manufactured good) or destroyed. Collaboration with vendors and customers is key given that the importer and exporter are often not the same party, but savings can be shared to incentivize use of this program.
• Foreign Trade Zones: Establish new or expand the use of FTZs to defer or avoid payment of U.S. customs duties. For goods admitted to a zone and later exported, no duty is owed; for goods admitted to a zone and later entered into the U.S., duty is only owed when the goods leave the zone and enter the U.S. Take advantage of weekly MPF benefits and the flexibility to make entry on existing FTZ inventory prior to effective dates of tariff increases.
• Tariff Classification and Country of Origin Analysis: Conduct thorough analyses to ascertain accurate tariff classifications and verify the true country of origin for goods to assess if more favorable tariffs can result from shifting the country of origin, or even re-engineering the item to take advantage of a more favorable tariff code description and duty rate.

4. Transfer Pricing:

• Be aware that traditional function/risk analyses to benchmark arm’s length pricing between related parties will be upended by any significant tariff increases on tangible goods transactions, which could wipe out profit margins altogether.
• Closely coordinate new transfer pricing studies with customs valuation rules for related party pricing to achieve the lowest possible value for customs without running afoul of income tax rules which could lead to “double taxation” (paying indirect tax, i.e., duties, and income tax) on incorrect values.
• Include a cost-unbundling review to carve out any elements of a product’s unit price which could be characterized as non-dutiable or create new services/intangibles that could escape inclusion in the duty basis.

5. Cost Analysis: Calculate potential financial impacts of tariffs and adjust purchasing and pricing strategies accordingly. Key to this calculation is obtaining the business’ import data from CBP; every importer can sign up for a free account with the agency’s Automated Commercial Environment. Various reports offer voluminous import and export data by shipment and provide the granularity needed to accurately measure the potential impact of tariff increases by, e.g., tariff code or country of origin.

6. Section 301 Product Exclusions: Anticipate a new process for product exclusions if any Section 301 tariffs on goods of Chinese origin are put in place. Although no exclusion process exists for the current Section 301 tariffs, many expect that a second Trump administration will quickly move to create one, especially if the anticipated tariffs hike to 60% or more. This requires confirmation of the tariff code and country of origin and strict adherence to any newly created criteria needed to avoid paying these trade remedy tariffs.

7. Section 232 Product Exclusions: Although a process currently exists at the Commerce Department for petitioners to seek relief from the 25% tariffs on steel and 10% on aluminum, new “downstream” products made of steel and aluminum may be added to the current list of items covered by the Section 232 “national security” tariffs. Get ahead by verifying the correctness of the tariff code(s) of any new items potentially subject to the trade remedy tariffs.

8. Engage in Advocacy: Collaborate with industry groups and elected officials to influence trade policy discussions and advocate for favorable outcomes.

9. Stay Informed: Monitor policy changes and engage with trade experts to adapt quickly to new regulations and tariff rates. Create an account on bdo.com and sign up for BDO’s Trade Alerts so you can be updated as soon as news breaks.

How BDO Can Help

For further assistance and detailed analysis tailored to your business needs, please visit BDO’s International Tax Services page. We are here to help you assess key vulnerabilities, ensure compliance with new measures, and identify opportunities for tariff relief and supply chain diversification moving forward.