Overview
On February 1st, 2025, President Donald Trump ended weeks of speculation by announcing 25 percent tariffs on all imports from Mexico, 25 percent tariffs on all products from Canada (other than energy resources, which are subject to a 10 percent tariff), and 10 percent tariffs on all imports from China. In imposing these actions, President Trump relied on the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA) and the National Emergencies Act (50 U.S.C. 1601 et seq.) (NEA) and identified the alleged US national security risks associated with an influx of illegal aliens and illicit opioids as the basis for his actions.
These tariffs were set to go into effect with respect to entries made on or after February 4, 2025. However, late on the morning of February 2, 2025, it was announced that the imposition of these tariffs on imports from Mexico would be delayed by a month, and later the same day, tariffs on Canadian imports were also suspended by 30 days. While no additional tariffs are currently being imposed on imports from these two countries, President Trump has indicated that such tariffs could be reinstated if either country fails to live up to its commitments. By contrast, the tariffs on Chinese imports proceeded as announced. Beijing has already taken steps to retaliate against selected US imports.
This alert summarizes the threatened tariffs, the legal basis for these Executive Orders, and the responses from each targeted country. It ends with some commentary on the tariff process being pursued by this administration and what we can expect in the coming weeks and months.
Application of the Tariffs
President Trump announced the threatened tariffs through three Executive Orders (EOs), one targeting each country. The EO with respect to China has continued and is being implemented through a Federal Register notice. The EOs with respect to Canada and Mexico have been suspended, but those tariffs could be imposed – likely consistent with the terms of the respective EO – if either country fails to live up to the commitments that led to their suspension. For that reason, an analysis of the specific terms of these EOs is useful.
Each Executive Order provides the following:
- The Executive Order covers all products from each country.
- All products from Mexico are subject to a 25 percent tariff
- All products from Canada are subject to a 25 percent tariff except “energy resources” (which are defined to include “crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals”), which are subject to a 10 percent tariff.
- All products from China are subject to a 10 percent tariff.
- The rates of duty established by these orders are additive to any other duties applicable to these goods, including the existing Section 301 tariffs on imports from China.
- All tariffs imposed by the China EO are set to go into effect with respect to goods entered for consumption or withdrawn from warehouse for consumption on or after 12:01 a.m. Eastern time on February 4, 2025.
- Goods from China loaded or in transit before February 1, 2025, may be exempt if certified to CBP as specified in the forthcoming Federal Register notice.
- These tariffs will apply based on the country of origin of merchandise, regardless of the place of final shipment or nationality of the importing company.
- No exclusion process has been established.
- The duties are not eligible for “duty drawback,” meaning that these additional tariffs cannot be refunded or remitted even upon the exportation or destruction of merchandise.
- The de minimis exception, which exempts imports under $800 from normal customs duties, does not apply to the goods subject to these tariffs. This means that all shipments must be made using the formal entry process.
- The EOs clarify that covered imports entering a US Free Trade Zone (FTZ) be classified under “privileged foreign status,”[i] meaning that once goods are classified under a specific tariff rate, that rate cannot be reduced later, even if the goods are subsequently altered or manufactured into a different product within the FTZ prior to importation into the United States.
- Finally, the EOs provide that should any government retaliate through the imposition of duties. The President may increase or expand the scope of the duties imposed.
There is no explicit timeline for the duration of these tariffs. The EOs state that the Secretary of Homeland Security shall inform the President of any circumstances indicating that the foreign government has “taken adequate steps to alleviate the crisis through cooperative actions,” and if the President determines sufficient action has been taken, the tariffs will be removed.
The Legal Basis for the US Tariffs
The International Emergency Economic Powers Act (IEEPA), codified at 50 U.S.C. § 1701 et seq., grants the President broad authority to regulate economic transactions during a declared national emergency. Specifically, it allows the President to investigate, block, or restrict financial and trade-related dealings involving foreign entities when such actions are deemed necessary to address an unusual and extraordinary threat to the US national security, foreign policy, or economy. While IEEPA itself has not been used before to impose tariffs, the statute’s language closely resembles the Trading With the Enemy Act of 1917, which was used to impose ad valorem duties within the framework of an emergency declaration in 1971.
Unlike other trade authorities used to impose retaliatory measures on trading partners, like Section 301 of the Trade Act of 1974, which requires an investigation before tariffs can be imposed, no such formal investigation is required under IEEPA. IEEPA requires that the President make a formal emergency declaration to take action, but it does not specify the nature of the threats that can justify such a declaration. Congressional approval is also not required, though IEEPA does require the President to report to Congress in a timely manner on the use of this authority.
Judicial review of Executive Branch actions under IEEPA has been deferential. Courts have consistently upheld the President’s broad discretion under IEEPA, deferring to executive determinations regarding national security threats. The burden of persuasion for a successful challenge to the legitimacy of an emergency declaration or the measures imposed under IEEPA is particularly elevated, as courts generally refuse to second-guess the President’s political and security determinations.
While IEEPA has been used in the past, it is fair to say that President Trump’s actions represent the broadest and most expansive use of this authority to date. This may raise concerns over executive overreach and could lead to legal challenges from affected businesses that may seek to question the validity of the EOs in court. The rationale outlined in the EOs for President Trump’s finding of an unusual and extraordinary threat would be scrutinized closely in such a scenario.
While each Executive Order targets a distinct facet of the US drug crisis and migration challenges, they share a common theme: holding foreign governments responsible for illicit activities that have a negative impact on the United States. The PRC EO attributes the fentanyl crisis to Chinese government subsidies and regulatory failures; the Mexico EO links drug trafficking and illegal migration to cartel influence and government inaction; the Canada EO criticizes lax enforcement that exacerbates fentanyl smuggling into the United States.
Options Under USMCA
Since 2020, USMCA has governed trade among the United States, Canada, and Mexico and guarantees no- or low-duty trade for a wide range of imports from those countries to the United States. It also generally prevents the USMCA Parties from increasing tariffs on imports from the other Parties except in certain instances, such as the use of antidumping and countervailing duty remedies. At first blush, if duties had been imposed against Canada and Mexico through these EOs, that would appear to violate the basic terms of the USMCA.
Under Articles 31.4 to 31.6 of the USMCA, either Canada or Mexico has the right to initiate a state-to-state dispute settlement with the United States to address a violation of a Party’s rights. But if a dispute settlement panel had been constituted, the United States almost certainly would have invoked Article 32.2(b) of the USMCA, which states that “{n}othing in this Agreement shall be construed. . . to preclude a Party from applying measures that it considers necessary for . . . the protection of its own essential security interests.” Since this clause is “self-judging” – meaning the United States would have the right to assess its own “essential security interests,” not a neutral third-party arbitrator – it is nearly certain that any dispute settlement action under the USMCA would have no effect.
Current Outlook
All three countries targeted by the Executive Orders responded swiftly to the proposed actions.
Canada: Prime Minister Trudeau announced retaliatory tariffs of 25 percent on US$155 billion worth of US goods over two tranches. The first would include a list of imported goods worth $30 billion, with tariffs effective from February 4thto mirror US tariffs to be applied on Canadian imports. The second tranche of 25 percent duties on $125 billion in US imports would follow after 21 days to offer some leeway for Canadian businesses to adjust their supply chains and, as Prime Minister Trudeau said, to find alternatives. The Canadian government also established an exclusion process to exempt tariffs where, inter alia, the goods are not available domestically or the imposition of tariffs could have severe adverse impacts on the Canadian economy. After a conversation with President Trump on the afternoon of February 3rd, Prime Minister Trudeau indicated that the imposition of reciprocal tariffs would be suspended for 30 days while a cooperation plan to counteract the flow of fentanyl is undertaken.
Mexico: President Claudia Scheinbaum instructed the Mexican Minister of Economy to implement a package of tariff and non-tariff measures in response to the threat of additional tariffs. The details, scope, and scale of the Mexican retaliation plan were not published. On the morning of February 3, 2025, President Trump and President Claudia Sheinbaum announced that the proposed 25 percent tariffs on Mexico would be suspended for one month until March 1st, based on an agreement by both countries to stem the underlying drug, immigration, and gun trafficking issues. Negotiations on a further agreement will be led by Secretary of State Marco Rubio, Treasury Secretary Scott Bessent, and Secretary of Commerce nominee Howard Lutnick.
China: China’s Ministry of Public Security expressed opposition and dissatisfaction with the measures taken by the United States. The State Council’s Tariff and Tax Committee of the PRC released two lists of goods subject to retaliation effective February 10, 2025, and mirrored the scope of application of US tariffs. These apply in addition to existing levies, with no reductions or exemptions permitted under the current policy. The Chinese Ministry of Finance list reflects that (i) certain US energy exports, including coal and liquefied natural gas (LNG), coking and unprocessed coal, briquettes, and similar solid fuels, would be subject to an additional 15 percent tariffs, and (ii) other US exports, including crude oil, various agricultural machinery, large-displacement passenger vehicles and SUVs, trucks, certain food processing equipment will be subject to a 10 percent tariff. China also formally challenged the US action at the WTO, expanded certain export controls on critical minerals, and added two US companies (i.e., PVH Group (US) and Illumina, Inc.) to its Unreliable Entities List.
Future Measures
While much about President Trump’s trade policy is uncertain, a few things are clear.
First, since the early days of his campaign, President Trump has stated his intention to impose tariffs on imports from numerous countries to address a wide range of concerns. This suggests that the Trump administration’s drive to impose tariffs is unlikely to end with these announcements. Next up are likely to be tariffs on imports from the EU. President Trump has specifically mentioned the EU’s reluctance to accept American agricultural products, EU barriers to bringing goods into Europe, and the US trade deficit with the EU as practices that unfairly burden US commerce. The European Commission has warned that firm retaliation would follow if President Trump made good on EU tariff threats.
In addition to the EU, President Trump has set his sights on the BRICS alliance, comprising Brazil, Russia, India, China, and South Africa. President Trump has repeated his threat to impose 100 percent tariffs on BRICS nations in the face of a plan to create a new currency to challenge the US dollar's dominance.
Second, early indications are that the Trump administration likely views even the threat of the imposition of tariffs as an effective tool to change behavior. In addition to Canada and Mexico, Colombia avoided similar tariffs only last week, and businesses were fortunate that a seemingly escalating dispute over the return of deported Colombian nationals was resolved before the measures could be implemented. Nonetheless, the fact that President Petro of Colombia appeared to defy the United States means that the country is now likely on the radar screen of the United States, and not in a positive way. These recent examples likely demonstrate to this administration that the threat of tariffs can be quite effective in achieving US ends, at least in the short term.
Next Steps for Companies Subject to Additional Tariffs
Whether these tariffs achieve their intended security goals or lead to prolonged economic strife, recent history suggests that countries and companies involved in international trade must take any threat of increased tariffs seriously.
First, companies reliant on imports should explore how they could restructure their supply chain networks to reduce the impact of these tariffs, such as by changing or diversifying their sources of supply or by revisiting contract terms to manage pricing risks.
Beyond these operational adjustments, businesses should consider engaging in Congressional outreach to emphasize the economic consequences of these tariffs, given that Congressional oversight of executive trade actions is an essential element of IEEPA-based duties. For affected businesses, it is advisable to explore legislative remedies or advocate for executive relief, such as carve-outs or exclusion processes, and coordinate with trade associations to amplify these concerns. With retaliatory measures already in motion and potential escalations on the horizon, businesses must proactively adapt supply chain strategies while engaging policymakers to mitigate long-term disruptions.
