Tariffs 101: What you need to know about tariffs in the new Trump era

On November 25th, President-elect Trump pronounced via social media that he plans to impose a 25% tariff on all products imported into the United States from Canada and Mexico, among other countries, as one of his first executive orders on January 20, 2025. This would have a significant impact on the Canadian economy, as the US accounts for about 75% of all Canadian exports. This announcement came after a number of campaign promises by President-elect Trump that he would impose trade measures and tariffs on goods entering the US if he was elected.  

In response to these potential measures, Norton Rose Fulbright has established a US/Canada cross-border trade law task force made up of trade lawyers in its Canadian and US offices to advise on current and future international trade measures adopted in Canada and the US that will have an important impact on our clients’ supply chains and business models.  

At the time of publication, President-elect Trump has not announced any details on the potential tariffs being imposed on Canada or any other country.  While we wait for details, the cross-border trade law task force provides the following primer on tariffs and how they work based on how tariffs have been imposed by the US and Canada in the past.  

1. What are tariffs?

Customs tariffs are a duty applied to goods at the time of importation. The rate of duty is typically expressed as a percentage of the value of the good and depends on the imported good’s customs classification, value, and country of origin. Most trading nations, including Canada and the United States, use the Harmonized System (HS) as the basis for their systems of determining the customs classifications of goods. 

In Canada, the HS is set out in the Customs Tariff Schedule, which divides goods into 99 chapters and provides descriptions of goods and corresponding applicable tariff rates for: i) goods from World Trade Organization (WTO) members (called the “Most Favoured Nation” or “MFN Tariff”); and ii) goods from countries with preferential tariffs negotiated pursuant to trade agreements like the Canada-US-Mexico Agreement (CUSMA, as referred to in Canada, or USMCA, as commonly referred to in the US) and the Canada-European Union Comprehensive Economic and Trade Agreement. Many preferential tariff rates are 0% of value for duty, whereas duties for sensitive supply managed goods (such as poultry and cheese) can reach 241%. 

In the US, the HS is set out in the Harmonized Tariff Schedule of the United States 2024 (HTS), which also contains 99 chapters and explanatory notes to explain how the tariff rules are applied. Each good has three categories of duty rates: one for special trading partners with whom the US has a free trade agreement (including Canada), one for all other countries that are members of the WTO with whom the US has normal trading relations (i.e., MFN rates), and one for countries with whom the US does not have a normal trading relationship. For example, certain milk and cream products that are of Canadian origin or originate from the territory of another special trading partner are duty-free, whereas those same products that originate in the territory of another WTO member have tariffs of 17.5% ‒ increasing to 35% for goods from countries with no trading relationship with the US.

2. Who pays tariffs and who collects them?  

In terms of legal liability for payment of duties at the border for imported goods, for imports into the US, typically, the importer of the goods pays the tariffs at the border to US Customs and Border Protection (USCBP).  For goods coming into Canada, the importer typically pays the duty to Canada Border Services Agency (CBSA). However, the legal obligation to remit duties to the authorities at the border is distinct from the question of ultimate liability for customs tariffs as between contracting parties, which depends on the contractual arrangement between the parties. For example, the ultimate purchaser of the good in the destination country could agree with the importer that it will reimburse the importer for the import duties as part of the total purchase price of the goods. For more information on contractual provisions that impact tariffs, see questions 6(i) and (j) below. 

3. How are tariffs calculated?  

Tariffs are normally calculated based on a percentage of the value of the import. The value for duty of a good, in turn, is declared on the customs documentation and is determined in Canada based on the rules set out in the Customs Act. In most cases, including in the US, the value for duty is the amount paid to the vendor for the goods, subject to certain statutory adjustments. In some cases, however, tariffs are based on a dollar amount per specified unit of weight.

4. Can I avoid tariffs by declaring that their value is $0?  

Not likely.  An importer can only declare that the value of the good is $0 if it truly has no value.  The amount charged on the invoice for the good to the customer is relevant but it is not the last word on the issue.  If the product is declared as having a value of $0 (because its price to the customer on the invoice is $0), USCBP or the CBSA, depending on the import country, could re-assess the value of the good based on the applicable customs rules. For example, in Canada, the CBSA may determine that one of the other valuation methods must be used. These methods include the transaction value of identical goods method, which calculates the value for duty of the good based on the value for duty of other identical goods that were imported into Canada at the same or substantially the same time, and the computed value method, which generally reflects the cost of producing the imported goods, plus an amount for profit and general expenses. The customs duty would then be payable based on this re-assessed value.   

5. What are the current tariffs paid at the US border for Canadian goods?

Current tariff rates for imports into the US of Canadian-origin goods are set out in the HTS (and specifically in the “Special” Rates of Duty Column) and depend on the tariff classification of the good in question. The majority of Canadian-origin goods can be imported into the US duty-free, while higher duties apply to, for example, softwood lumber. However, it is important to note that, even if a good is being shipped directly from Canada into the US, if it does not qualify as a Canadian-origin good, higher duties may apply for some products.  

6. President-elect Trump has threatened to impose a 25% tariff on Canadian imports: 

a. Will it apply to all goods from Canada? Are there any specific sectors being targeted? 

President-elect Trump did not call out any specific sectors or goods in his social media post announcing the threatened tariff and implied it would be applicable to all goods. During the last Trump presidency, the US only targeted Canadian steel and aluminium products, imposing tariffs of 10-25%. 

b. What about digital goods?

Digital goods are protected from the imposition of tariffs under CUSMA/USMCA. Article 19.3 of the agreement provides that neither Canada nor the US shall impose customs duties, fees or other charges on or in connection with the importation or exportation of digital products transmitted electronically, between a person in Canada and a person in the US. A digital product includes a computer program, text, video, image, sound recording, or other product that is digitally encoded, produced for commercial sale or distribution, and that can be transmitted electronically. The restriction under the trade agreement, however, does not prevent the imposition of GST/HST on digital goods.

c. Will it become effective immediately?  

President-elect Trump threatened in his social media post to impose the new tariff on his first day in office, January 20, 2025. 

In practice, how quickly any new US tariffs take effect will depend on what legal route President Trump uses to implement the tariffs. Many of the typical tariff-making powers under US law involve procedural steps that could not happen overnight – meaning President Trump could announce the tariffs on his inauguration day, but they likely wouldn’t take effect for at least several months. If President Trump took the unprecedented step of invoking emergency powers as a basis for implementing tariffs, they could be imposed much faster. President-elect Trump’s reference to a border crisis of fentanyl and illegal immigrants in his social media post announcing the tariffs may have been intended to set the stage for invoking emergency powers to implement tariffs quickly. However, declaring a state of emergency to implement tariffs quickly would expose the measures to a court challenge.  

d. Will there be a process to get exemptions or exceptions?

It depends how any new tariffs are implemented. When the US has imposed special tariffs in the past, it has done so after a public notice and comment period, after which time there is an exclusion protocol pursuant to which companies or individuals can seek exclusions from the tariffs. An imposition of tariffs under emergency provisions would not necessarily involve such a public consultation and exclusion process, but there could be stipulations in any such order regarding how to seek an exemption for goods that do not contribute to the emergency, for example. 

e. Will the new tariff apply to US-origin goods?

It may be possible to re-export US-origin parts from Canada back to the US without paying the threatened new tariff, but it will depend how the tariff is designed and implemented (if at all).

f. Will the tariff apply to goods produced using US parts and inputs?  

It depends how the tariff is designed and implemented, but generally, if an importer imports a good, it pays import duties on the good itself, based on the classification, value, and origin of the finished, imported good (it does not typically pay separately for all the parts). Once any US-origin parts are incorporated into another good that is Canadian origin, the tariff may apply regardless of the origin of the parts.

g. Can the tariff be deferred or reimbursed if the Canadian goods are re-exported or used to make something that is exported out of the US?   

The US maintains duty drawback and duty deferral programs that allow importers to seek a deferral, refund, reduction, or waiver of customs duties that were paid on goods that are re-exported from the US. Depending on how the tariff is imposed, if an importer imports a Canadian-origin good into the US to be used as an input for further processing of a product in the US which is then exported, it may be possible for the importer to seek duty drawback (i.e., a duty refund of any customs duties paid pursuant to the new tariff on the basis that the imported good was later exported from the US). Duty drawback and duty deferral programs, which also exist in Canada, are intended to support and protect domestic manufacturers and are contemplated in USMCA/CUSMA, subject to limitations (including the “lesser of two duties” rule that limits the amount of the drawback in certain cases). 

h. Will the tariff apply to goods already sold to a US customer under an existing contract or purchase order (but not yet delivered) or in transit to the US?

We would not expect there to be an exemption for deliveries contracted to before the duties came into effect. Rather, we expect the new duties to apply at the border for any goods imported after the effective date. That being said, the US could implement the tariff however it sees fit and exempt certain goods – for example, Canada’s recent surtax against Chinese EVs did not apply to goods that were in transit to Canada when the duties took effect.

i. Who will ultimately be responsible for paying the tariff between various commercial parties?

Contracting parties can determine ultimate liability for customs tariffs as between themselves via contractual provisions.  Absent that though, importers are liable for tariffs.

j. What contractual provisions should I look for to determine how the tariff will be treated for orders processed after this new tariff takes effect?  

Parties entering into contracts for the supply or delivery of goods should pay particular attention to contractual clauses regarding import taxes, duties and fees, including any references to whether the delivery price is inclusive of all taxes, duties, tariffs or fees (including Delivered Duty Paid [DDP] terms, for example). Parties should also review change of law clauses to determine whether they apply to changes in tariffs. 

7. What are some other measures President-elect Trump might impose on Canadian goods and services?   

There are a number of exceptional tariff or duty measures that the US could theoretically impose against specific Canadian products in addition to tariffs, including quotas, anti-dumping or countervailing duties, or surtaxes (which Canada recently imposed against Chinese EVs, aluminium and steel to mirror similar US measures). While these alternative mechanisms are a possibility, President-elect Trump so far has focused his attention on discussion the imposition of tariffs primarily at this point.  

8. What else should I keep in mind when importing/exporting goods between Canada and the US?

There are a range of other restrictions and potential duties, taxes or other fees when importing or exporting goods, including anti-dumping duties, export controls, sanctions (increasingly used by Canada and the US as a foreign policy and national security tool to respond to events on the world stage like Russia’s invasion of Ukraine), surtaxes (see our recent article on Canada’s imposition of surtaxes against EVs, aluminium and steel from China) and restrictions on importing goods made using forced/child labour (to respond to concerns about working conditions in places like the Xinjiang region of China).