Breaking Down the New Executive Order on Reciprocal Tariffs

Notable Takeaways:

• The tariffs impact nearly 60 countries at rates ranging from the 10% baseline to 50%
• The reciprocal tariffs are cumulative in effect, being applied in addition to existing Section 301, Section 232 or IEEPA tariffs.
• The notable exceptions are commodities listed in Annex II, and Canada & Mexico, which already incur a 25% IEEPA tariff related to the national emergency declared for fentanyl and immigration, which is still in force.
• Goods not subject to the reciprocal tariffs are as follows and are outlined in Annex II:

◦ articles that are encompassed by 50 U.S.C. 1702(b)

◦ articles and derivatives of steel and aluminum subject to the duties imposed pursuant to section 232 of the Trade Expansion Act of 1962

◦ automobiles and automotive parts subject to the additional duties imposed pursuant to section 232 of the Trade Expansion Act of 1962

◦ other products enumerated inAnnex II to this order, including copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products

◦ all articles from a trading partner subject to the rates set forth in Column 2 of the Harmonized Tariff Schedule of the United States (HTSUS)

◦ all articles that may become subject to duties pursuant to future actions under section 232 of the Trade Expansion Act of 1962

On April 2, 2025, President Donald Trump signed an executive order imposing sweeping “reciprocal tariffs” on imports from 57 countries listed in Annex I, aiming to address perceived trade imbalances and protect U.S. industries. This directive introduces a baseline 10% tariff on all imported goods, with significantly higher rates for specific nations. For instance, imports from China face a 34% tariff (in addition to the previously imposed section 301, section 232, and IEEPA tariffs), while those from the European Union are subject to a 20% tariff. Notably, Canada and Mexico are currently exempt from these new tariffs as a result of the “border emergency tariff measures” in place, which were previously imposed by invoking IEEPA with a tariff rate of 25%. The executive orderalso includes reference to three annexes detailing the specific countries affected and the corresponding tariff rates.

Annex I: Tariff Rates by Country:

Annex I establishes the new tariff rates applied to imports based on their country of origin. The rates vary significantly depending on existing trade relationships and perceived unfair practices. Some key trading partner countries are listed below:

• China – 34% tariff on all imports
• European Union – 20% tariff
• India – 27% tariff
• Japan – 24% tariff
• Canada & Mexico – Exempt
• South Korea – 26%
• Vietnam – 46%

Key takeaways: U.S. Importers should expect increased scrutiny on determining the country of origin for articles entering the United States, as well as potentially face increased enforcement around the accuracy of customs valuations to ensure importers are not artificially manipulating the system to reduce their duty exposure.

Annex II: Goods for which the tariffs shall not apply

Goods listed in this Annex are not subject to the additional ad valorem tariff rates and cover several critical categories for U.S. consumption. Such goods include articles currently impacted by the Section 232 tariffs for steel, aluminum & derivatives thereof, automobiles and automotive parts, certain articles listed in the Annex including copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy products, any countries listed under Column 2 rates of duty in the HTSUS, and lastly, any articles that may in the future become subject to Section 232 duties for national security purposes.

Annex III: Updates to HTSUS Codes

To facilitate enforcement, Annex III introduces new HTSUS classifications that importers must use when filing entries. The modifications aim to improve tracking and ensure compliance with tariff adjustments.

With respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after midnight eastern daylight time on April 5, 2025 (for the 10% baseline) & April 9, 2025 (for Reciprocal Tariffs) subchapter III of chapter 99 of the HTSUS is modified by inserting the following new codes:

• HTSUS 9903.01.25 – 10% baseline tariff
• HTSUS 9903.01.43 through 9903.01.77 – Reciprocal tariffs by country of origin outlining the rates for each.
• HTSUS 9903.01.35 & 9903.01.39 – 12% on Canada & Mexico respectively. If the IEEPA tariffs for fentanyl & immigration are terminated, then articles from Canada & Mexico will incur this 12% tariff if they are not eligible for duty free treatment under the USMCA. Imports eligible under the USMCA rules of origin remain duty free

Importers must ensure correct classification to avoid penalties, and CBP will likely conduct enhanced audits to verify compliance. Misclassification may result in fines and retroactive tariff adjustments related to negligence, gross-negligence, or fraud.

Mitigating Increased Costs from Tariffs

To navigate the financial impact of these tariffs, businesses can consider several strategies that are both technical and operational in nature:

The technical strategies are those related to global trade compliance, such as:

1. First Sale for Export:  Allows importers to use the price from the initial sale for customs purposes, potentially resulting in lower duties.
2. Tariff Engineering:  Legal strategy used by importers to design or modify products in a way that allows them to qualify for lower tariff rates or duty exemptions when entering the U.S. market.
3. Duty Drawback: A refund mechanism that allows businesses to recover customs duties, taxes, or fees paid on imported goods when those goods are subsequently exported.
4. FTZs: Foreign Trade Zones are designated warehouses within the U.S. where goods can be stored without entry into U.S. Customs Territory, nor incurring duty, until they are withdrawn for consumption or manufacturing.
5. FTAs: Free Trade Agreements are between two or more countries that aim to facilitate trade by reducing or eliminating tariffs, duties, and other trade barriers on goods and services.

Operational Solutions are strategies to build resilience in supply chains to maintain business continuity, retain market access, and contain costs, such as:

1. X-Shoring: Strategic relocation of production or sourcing activities to regions or countries that minimize exposure to escalating tariffs, trade restrictions, or unfavorable trade policies
2. Inventory Optimization: A deliberate surplus of inventory maintained to absorb supply chain shocks, such as delays, increased costs due to tariffs, or restricted imports.
3. Sales & Operations Planning: Integrated business process aligns an organization’s supply chain, production, sales, and financial goals to ensure operational efficiency and responsiveness to market changes.
4. Dynamic Optionality: Maintaining flexibility in supply chain operations by having multiple options available at various stages of production & logistics.
5. Logistics Optimization:

◦ Route & Mode Diversification

◦ Inventory Positioning

◦ Supply Chain Visibility & Flexibility

Implementing these strategies requires careful planning and consultation with trade compliance & supply chain professionals to ensure adherence to all applicable laws and regulations.

Final Thoughts

The reciprocal tariffs introduced in this executive order signal a major shift in U.S. trade policy. While they aim to balance global trade, they also introduce new challenges for businesses that will undoubtably shift global supply chains and impact market access. Companies should stay informed on evolving tariff structures, ensure compliance with the new HTSUS codes, evaluate any retaliatory tariff and non-tariff barriers in response to the executive order, and explore operational adjustments to minimize financial impact.

In the coming weeks, as the federal register notices are published and enforcement guidance is issued by Customs and Border Protection, the picture will become clearer, enabling thoughtful strategies to align with the changing landscape. As the situation unfolds expect changes in tariff rates and possibly even termination of such tariffs as nations negotiate meaningful trade agreements and compromises to balance the trading landscape.

Eric Hargraves – TSO Senior Manager