While Canada was given a short reprieve yesterday from the tariffs threatened by US President, Donald J. Trump, President Trump appears to have doubled-down signalling that these 25% tariffs will be coming by February 1.  If this is to be believed, the days of US and Canadian weighted average tariffs in the 2.2-3.4% range are over, and Canadian businesses need to begin preparing for the challenges these sorts of significant tariffs will bring – including the likelihood of Canadian retaliatory measures, which we reported on here. 

In this Report will review basic preparation steps for “right now”.

Contract Review

Purchasers and sellers engaged in the international trade in goods will be impacted by tariffs no matter which side imposes them and should take the time to review sales and transportation contracts to ensure these tariffs are planned for in the pricing of the goods.  Attention should be paid to how contracts address price, and the expected impact of future tariffs, and the indirect effect of these tariffs on things like raw materials, and whether these additional costs can be passed on.  While gross-up clauses can work in these situations, there are also some hidden issues involved in gross-ups, which will need to be addressed by competent professionals.  Also consider whether the contract allows for the ability to renegotiate or terminate for these unexpected disruptions.  Expansion of “Force Majeure” clauses might also be called for!  The ultimate question is which party ultimately has responsibility for these additional costs.

Use of Proper Incoterms®

The International Chamber of Commerce’s Incoterms® are used internationally to ensure the obligations for both purchasers and sellers are clear to each other.  The proper use of Incoterms can help prevent confusion regarding the responsibility for additional costs resulting from increased tariffs, although care also needs to be taken in their use – especially if being used inconsistently with the underlying contractual agreements, or where they are being misunderstood by those in sales!

A good Incoterm for sellers looking to avoid obligations in a customs tariff environment might be Ex Works (EXW).  Purchasers looking to do the same might be thinking about DDP (Delivered Duties Paid).  But the right Incoterm really depends on the deal, and misuse of these terms can lead to unexpected consequences, quickly erasing one’s expected profits by unexpectedly increasing one’s costs.

Other Considerations

Other considerations for dealing with Trump and/or Canadian Retaliatory Tariffs are many and would include review of Valuation Methodologies for the imported goods (which will directly affect the amount of tariffs payable), preparing to advocate for exemptions during and after public consultation periods, monitoring for remission orders, investigating duty-deferral programs, and sourcing alternative options for materials.

We will be reporting on some of these in more detail later this week.

Takeaways

While the Trump Tariffs remain uncertain, if they are implemented, it seems that Canada will follow with its own Retaliatory Tariffs.  The key to surviving this new protectionist regime will likely be preparation, including contractual review and amendment.

Steps taken TODAY can lessen the burden later, and experience professional advise will be required!

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