FOLLOW UP ON RECENT U.S. TARIFFS

On April 2, 2025, President Donald J. Trump signed an Executive Order (E.O.) that addresses a declared national emergency stemming from a $1.2 trillion U.S. goods trade deficit in 2024, which has grown over 40% in five years, citing its detrimental impact on domestic manufacturing, economic resilience, and military readiness. The policy imposes a baseline 10% ad valorem tariff on all imports starting April 5, 2025, with higher country-specific reciprocal tariffs (e.g., the EU, at 20%) effective April 9, 2025, targeting nations with significant trade surpluses and non-reciprocal trade practices.

Calculation and Basis for Tariffs

The tariffs’ calculation blends trade deficit data with a response to perceived trade asymmetries. The baseline 10% tariff applies universally, while reciprocal rates—ranging from 12% to 49%—target 65 countries, calculated as half the rate foreign nations allegedly impose on U.S. exports, including tariffs, non-tariff barriers, and other “cheating” like currency manipulation. The White House claims this reflects a formula where the U.S. trade deficit with a country is divided by that country’s exports to the U.S., then halved for leniency. For example, China faces a 34% tariff (on top of existing tariffs of up to 45%), the EU 20%, Vietnam 46%, and India 26%. The legal basis for these tariffs rests on the International Emergency Economic Powers Act (IEEPA), invoking national security, though its novel use for broad tariffs may face legal scrutiny.

Application of Tariffs

The 10% baseline tariff begins at 12:01 a.m. EDT on April 5, 2025, for goods entered for consumption or withdrawn from warehouses, exempting those in transit before that time.  Country-specific tariffs start April 9, 2025, under the same terms, with rates detailed in Annex I of the order.  To be clear, the country specific tariffs will replace the 10% baseline from April 5, rather than apply in addition to such baseline rate.  For example, the EU tariff will be 10% on April 5, 2025, and will rise to 20% on April 9, 2025, not to an aggregate tariff of 30%.  In addition, note the following:

• The origin of imported merchandise will be determined under standard, non-preferential rules of origin (e.g., wholly originating or substantial transformation).
• All reciprocal tariffs will be applied in addition to any other tariff, duty, tax, excise, or measure applicable to the imported products, except that such tariffs will not apply to the following goods:

– Goods subject to measures under Section 50 U.S.C. 1702(b);

– Automobiles and automotive parts subject to additional, 25% tariffs introduced under Proclamation 10908 of March 26, 2025;

– Other products such as copper, pharmaceuticals, semiconductors, wood products, certain critical minerals, energy, and energy products listed in Annex II of the E.O.;

– All products originating from countries subject to tariffs under Column 2 of the Harmonized Tariff Schedule of the USA (“HTSUS”). These “Column Two Countries” currently include Cuba, North Korea, Russia, and Belarus;

– All products that may in the future be subject to tariff measures under Section 232 of the Trade Expansion Act of 1962;

– Steel and aluminum products under Proclamations 10895 and 10896, which remain subject to specific regulations applicable to them;

– Goods originating from Mexico and Canada (though the E.O. indicates that, if the standing 25% tariffs on Canada and Mexico are suspended, these jurisdictions will be subject to a 12% reciprocal tariff, bearing in mind, however, that in such case reciprocal tariffs will not apply to goods that qualify as originating under the United States-Mexico-Canada Agreement (USMCA));

• Reciprocal tariffs will apply only to the “non-US content” of the imported good, provided that at least 20% of the good’s value is of U.S.-origin. “U.S. content” is defined as the value of components produced entirely, or substantially transformed, in the U.S.
• The de minimis duty exemption (generally, goods valued at $800 or less) remains applicable under certain conditions and on a provisional basis.
• Articles subject to the E.O. must be admitted into Foreign Trade Zones (“FTZs”) as “privileged foreign status” as defined in 19 CFR 146.41, meaning that such articles will be subject, upon entry for consumption, to the reciprocal tariffs and the rates of duty related to the classification under the applicable HTSUS subheading in effect at the time of admission into the United States FTZ.
• The reciprocal tariffs shall be eligible for duty drawback, unlike other, recently announced tariffs.
• The reciprocal tariffs shall not apply to goods for which entry is properly claimed under a provision of chapter 98 of the HTSUS pursuant to applicable U.S. Customs and Border Protection (CBP) regulations (e.g, U.S. goods returned provisions, the prototype duty exemption, the agricultural actual use exemption, etc.).

Tariff Mitigation Strategies

EU exporters and U.S. importers can employ a variety of strategies to reduce the dutiable value of merchandise, mitigating the impact of the 20% reciprocal tariff.  These strategies focus on lowering the Cost of Goods Sold (COGS), leveraging customs programs, and refining valuation practices.

1. Reducing COGS in Intercompany Transfer Pricing
   • Strategy: Adjust transfer pricing between related EU and U.S. entities to lower the invoice value of goods sold to the U.S. affiliate.  For example, an EU manufacturer could reduce the markup on goods sold to its U.S. subsidiary, shifting profits to the U.S. entity.
2. Leveraging the First Sale for Export Program
   • Strategy: Under the U.S. “First Sale” rule, duties can be assessed on the price of the first sale in a series of transactions (e.g., between an EU middle entity and a Chinese factory) rather than the final sale to the U.S. importer, provided the goods are destined for export to the U.S. and documentation is robust.
3. Unbundling Non-Production Costs from Declared Value
   • Strategy: Exclude non-dutiable costs—such as design, R&D, marketing, exclusivity, or post-importation services—from the customs value.

 Additional Strategies

• Foreign Trade Zones: Store goods in U.S. FTZs to defer or avoid duties and tariffs (e.g., if goods are re-exported from the United States without ever entering U.S. commerce).  The alternative would be to pursue refunds of duties and tariffs on re-exported goods via duty drawback.
• Chapter 98 Exemptions: Review the various special provisions available under Chapter 98 of the HTSUS to determine whether imported goods are currently or could be positioned to qualify for duty and/or tariff mitigation.  Examples include goods that meet the prototype criteria, goods that meet the agricultural or horticultural actual use criteria, goods that incorporate U.S. origin content (whether advanced in value while abroad or not).
• Supply Chain Diversification: Shift production to USMCA countries to leverage tariff exemptions, though this involves long-term investment.
• Negotiation and Advocacy: EU firms could lobby for exemptions or reduced rates if trade talks resume, as hinted by the U.S. administration’s openness to “breaks” for cooperative partners.