In a historic “first,” President Trump signed three Executive Orders (EOs) on February 1, 2025 imposing new tariffs of 25% ad valorem that will apply to all merchandise imported into the U.S. from Canada and Mexico starting on February 4, 2025 (it was announced February 3rd that the tariffs on Mexico would be delayed for one month to allow for further negotiations). These duties will be imposed in addition to any Normal Trade Relations or other trade remedy tariffs that might apply. China was also the target of an EO, with new tariffs of 10% ad valorem to be imposed starting on February 4, in addition to any other tariffs that might apply, e.g., the Section 301 “China tariffs” already in place at 100%, 50%, 25%, or 7.5% (depending on the imported item’s classification code under the Harmonized Tariff Schedule of the United States (HTSUS)).
The only products garnering special treatment in the EOs are certain oil and gas imports from Canada, with duties to be imposed at 10% ad valorem instead of 25%. President Trump took this step to “minimize any disruptive effects we might have on gasoline and home heating oil prices,” said a senior administration official.
The new tariffs arose from candidate Trump’s oft-repeated promise during his campaign for a second term in the White House to respond to an increased flow of migrants and illegal drugs crossing borders into U.S. territory. The tariffs will remain in effect until President Trump determines that the Canadian, Mexican and Chinese governments have taken “sufficient action to alleviate the crisis,” including through cooperative enforcement actions (see also the Fact Sheet released by the White House).
Left unclear in the language of the EOs is which products will be covered by the new tariffs; e.g., will only products that “originate” in the three targeted countries be covered and, if so, which rules will govern the determination of origin? For instance, the U.S. employs the “substantial transformation” test for goods produced outside of North America but uses special United States-Mexico-Canada Agreement (USMCA) “marking rules” to determine origin for goods produced in North America, except for purposes of applying trade remedy tariffs (such as the Section “China tariffs”), when the rules revert back to substantial transformation. In any event, an upcoming Federal Register notice is expected to clarify this all-important issue.
Announcement of the tariffs elicited immediate responses from the governments of Canada, Mexico and China.
International Emergency Economic Powers Act
In announcing the new tariffs, the President relied on the International Emergency Economic Powers Act (IEEPA) as the legal basis for allowing him to take such actions. The IEEPA was enacted in 1977 and cited in 2019 during the first Trump administration as the basis for threatened tariff increases of 25% on all goods exported from Mexico unless Mexico addressed illegal immigration issues at the border. In the EO, President Trump claimed to have declared such an emergency with respect to an “influx of illegal aliens and illicit drugs” on his first day in office.
Many legal scholars question whether the IEEPA allows the President to impose tariffs to counter “economic emergencies” that must be declared before any economic measures can be taken. IEEPA has traditionally been viewed as the heart of the U.S. sanctions regime targeting countries, entities, organizations, and individuals that pose a national security threat to the U.S. by, for example, freezing bank accounts and adopting embargoes. IEEPA has never been used to impose tariffs, especially on two of America’s closest trade and security partners (Canada and Mexico).
At least one member of the U.S. House of Representatives (Gregory Meeks, the ranking Democrat on the Foreign Affairs Committee) has announced that he will introduce a resolution to disapprove of the Trump’s proclaimed “national emergencies.” If the Senate follows suit and both houses vote to nullify them, the new tariffs will end.
Retaliatory Tariffs and Other Measures
Swift retaliation from all three targeted countries is expected.
Canada announced on February 1 that it will impose retaliatory tariffs of 25% on C$ 30 billion worth of imports beginning February 4, 2025 covering Florida orange juice, Kentucky peanut butter and bourbon, Tennessee whiskey, coffee, appliances, apparel, cosmetics, motorcycles, and pulp and paper. It is anticipated that Canada will add an additional C$ 125 billion more of targeted U.S. merchandise categories that will be subject to the 25% tariffs. This second wave of tariffs will target products such as passenger vehicles and trucks (including EVs), recreational vehicles, steel and aluminum products, aerospace products, designated produce, beef and pork, and dairy products. The Canadian government is also considering other countermeasures—including non-tariff options—if the U.S. government continues with its tariffs on Canadian goods.
Mexico’s President Sheinbaum had previously announced that if the U.S. chose to proceed with the 25% tariffs, Mexico would retaliate with similar tariffs on a wide range of products imported from the U.S. Following the announcement of the U.S. tariffs, the Mexican president ordered the economy minister to respond with proposals for both tariff and non-tariff measures. Retaliatory tariffs of 25% on U.S. goods are expected.
The Chinese government also responded immediately saying that it would take retaliatory action but did not announce any tariffs. China’s Commerce Ministry has stated that it intends to file a lawsuit against the U.S. at the World Trade Organization (WTO) on the grounds that the blanket 10% tariff constitutes a “serious violation” of international trade rules. While China took steps in 2024 to limit exports of the chemicals needed to produce fentanyl, the government has made it clear that any further efforts to curb exports of these precursor materials to the U.S. will be tied to progress on the overall U.S.-China relationship, not just trade.
The EOs discourage any retaliation and indicate that if such measures to counter the U.S. tariffs take place, the U.S. reserves the right to increase the new tariffs above the 25% and 10% levels, respectively, on imports from Canada and Mexico, as well as China.
No Exclusion Process
In addition, unlike the process the U.S. enacted in 2018 to allow exemptions from the trade remedy tariffs (Section 301 “China tariffs” and Section 232 “national security tariffs” on steel and aluminum raw materials), Trump Administration officials announced that no such exclusion process would be considered in connection with the new tariffs.
Impact on Duty Drawback and De Minimis Shipments
All three EOs make it clear that the new tariffs will not be eligible for duty drawback (a program under which 99% of U.S. Customs duties paid are refunded if imported goods are exported (either in the same condition as imported or as further manufactured articles) or destroyed). In addition, the EOs end the ability of exporters in Canada, Mexico, and China to use the de minimis exemption for low-value shipments under $800. This action was aimed primarily at Chinese e-commerce platforms, which have reportedly used this procedure to evade the legal payments of duties on goods that would otherwise be subject to formal entry and reporting procedures when valued over $2,500.
A New Universal Tariff?
Lurking in the background is another tariff gaining traction on Capitol Hill: the 10% “universal tariff” that would apply to all imports from all countries, in addition to the current Normal Trade Relations duties imposed by the HTSUS code and any trade remedy tariffs. Most believe that such sweeping tariffs could only by imposed by Congress (and not by the President via another IEEPA-type declaration of a “national emergency,” which could not plausibly be used to target every nation in the world).
However, given the current negotiations to replace the revenue that would be lost by enacting the second version of the 2017 Tax Cuts and Jobs Act (otherwise set to expire at the end of 2025), everything is “on the table.” Because the Congressional Budget Office has estimated that a new universal tariff would bring in $1 trillion annually in new revenue, lawmakers seem to be warming to this initiative. While enacting such new Normal Trade Relations duties would violate the obligations the U.S. agreed to as a member of the WTO, many in Congress and most in the new administration seem to disregard these obligations as counter to U.S. sovereignty.
BDO Insight
As President Trump seeks to stop the flow of undocumented immigrants and illicit narcotics into the U.S. (such as fentanyl and its precursor agents), uncertainty abounds not only about the legal authority (IEEPA) he used to impose the new tariffs, but about the retaliatory measures that Canada, Mexico, and China will adopt in response.
The overriding question facing U.S. companies (and nonresident companies, which include many Canadian entities that import into the U.S.) is whether the cost of the new tariffs which are paid by the U.S. importer of record can be passed on to U.S. consumers in whole or in part. Canada, Mexico, and China account for more than 40% of all U.S. imports and include motor vehicles, pharmaceuticals, shoes, electronics, lumber, steel and aluminum and a host of other products ultimately purchased by American retail consumers.
In sum, many view these new tariffs as the opening “salvo” in a new global trade war in which all major trading nations will ultimately become enmeshed. Multinational companies trading in goods should consider mitigation strategies to lessen or eliminate the impact of these significant new tariffs for merchandise imported into the U.S.
How BDO Can Help
The BDO Customs and International Trade team is closely monitoring the rapidly evolving trade landscape relating to the newly announced U.S. tariffs and the expected responses from the targeted countries.
For further assistance and detailed analysis tailored to your business needs, please contact our team of international trade experts at BDO. 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.
Please visit BDO’s International Tax Services page for more information on how BDO can help.