In this episode of Tax Notes Talk, Mat Mermigousis of BDO discusses the Trump administration’s ever-changing tariff policies and what they may mean for U.S. businesses.
Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: operation reciprocity.
On April 2 President Trump announced the official tariff rates affecting every country importing goods to the U.S., though they were later put on pause.
But this wasn’t Trump’s first move on tariffs. Back in February, the administration imposed individual tariffs on Canada, Mexico, and China. The negotiations following that announcement were still unfolding when Trump unveiled his larger slate of tariffs.
So how are countries dealing with the news and what does this uncertainty mean for the future of U.S. trade? Here to talk more about this is Tax Notes legal reporter Michael Smith. Michael, welcome back to the podcast.
Michael Smith: Thanks for having me, Dave.
David D. Stewart: So there are a lot of moving parts on all of this tariff news. Could you just give us a basic rundown of where things stand and how we got here?
Michael Smith: Yeah, certainly. So on April 2, President Trump did two things. He placed a baseline minimum tariff rate of 10 percent on every country. And then, separately for countries that he determined had increased trade barriers or nonmonetary barriers of entry, he introduced a country-specific tariff rate that stacked with other tariff measures. For example, China was hit with a 34 percent increase on their tariff rate.
This all changed a bit on April 9, when the president announced a slight delay to his plan. He determined that the country-by-country specific tariff rates should be paused for the next 90 days for every country except for China. Meanwhile, the 10 percent baseline tariffs are going to continue to remain in effect. This is largely due to the fact that China is one of the only countries that directly retaliated against the United States, and the president has had some strong animosity regarding their position. So that brings us into the China trade war. I believe [Treasury]
Secretary Bessent declined to call it a trade war, but I’m not really sure what else to interpret a 100 percent increase in tariffs on a country as, so we’ll kind of work from there.
But to better understand the situation, I think we need to take a trip back to the first Trump administration and the growing narrative of reciprocal tariffs that started there, and how the White House is continuing to bring that to the forefront. The Trump 1.0 tariffs started with solar panels, washing machines, steel, and aluminum tariffs for most countries around the world. That caused varying levels of dispute with the EU, India, and China that were all eventually resolved. However, China remained a little pesky in those negotiations. And then we got to the China Phase 1 agreement, which reduced the tariffs on certain goods and required China to increase the amount of goods purchased from the United States.
That remained in effect in the Biden administration, except for a few changes. Biden ended up increasing tariffs on electric cars, solar cells, and EV batteries. This is part of what the government is seeing as an issue with the way that China’s able to do business. Their companies are able to receive direct subsidies from their government. And that allows for some types of price manipulation, where they’re able to theoretically flood markets with various low-value goods or goods that are produced at a significantly cheaper quality. This reached its head with the EV market, where the U.S. ended up putting, I believe, over 100 percent tariff rate on Chinese EVs to stop them from flooding the local market. And during that time, there was a lot of concern that China wasn’t fulfilling all of their agreements with the Phase 1 negotiations. They weren’t purchasing enough of the specified goods, and just generally following through.
That sat on the back burner until a Trump campaign trail, where he started to push for policies like increased tariffs on China, Canada, and various trading partners to bring back onshoring of jobs. After Trump was elected, he put out his America First trade policy, which really set the tone for what the administration wanted to do in the coming months.
Tariffs kind of hit a head in February, when Trump initiated increased tariff duties under IEEPA, the International Economic Emergency Powers Act. This has traditionally been used for things like sanctions on Iran or increasing trade barriers with other countries that we aren’t necessarily on the most friendly terms. So it was a bit surprising to see it used against three of our largest trading partners, two of them being Canada and Mexico. These were also accompanied by tariffs on cars, steel, and aluminum coming from every country around the world, generally.
The big takeaways of this is that the U.S. is currently embroiled in a trade war with China. In February the U.S. imposed a 10 percent tariff on all imports coming from China. China generally retaliated, targeting specific U.S. agricultural products with various increase in duties. The Trump administration doubled that to 20 [percent], and now we are getting into the astronomically high numbers that came late on April 9. Since then, the U.S. has decided that 125 percent is the appropriate rate to put tariffs on Chinese imports. And that leaves a tariff rate on U.S. exports of China sitting at around 84 percent.
This is kind of reminiscent of some of the issues that happened during the first Trump administration, where we saw increased tariff and duties on agricultural products being shipped to China. So I think that’s kind of a good wrap-up of where tariffs land us today. We have country-by-country specific measures that nobody knows when they’ll actually go into effect. We have the 10 percent baseline minimum. We have auto tariffs, and we’re embroiled in a trade war with China.
David D. Stewart: OK. Well, it sounds like there’s certainly a lot going on. Now, I understand you recently talked to somebody about all this. Who did you talk to?
Michael Smith: Yeah. I talked with Mathew Mermigousis. He’s the national practice leader of customs and international trade services over at BDO.
David D. Stewart: Now, before we get to the interview, I should note that this was recorded early on April 9. And this is a fast-moving story, so some things have changed since it was recorded. All right. Let’s go to that interview.
Michael Smith: All right. Hey, Mat, welcome to the podcast.
Mat Mermigousis: Hi, Michael. Great to be here.
Michael Smith: Let’s get onto the tariffs. So I think before we jump into everything, it may be good to tell people the general authority provisions used for tariffs. And tell people what those general investigations look like, and what kind of processes those take.
Mat Mermigousis: Sure. So at a high level, Congress has delegated a broad range of, we’ll say, tariff powers to the president. And there are a number of provisions the president can use to increase tariffs. But I’ll focus on the key ones, the ones that are currently being used.
Back in 2020, 2018, when the president — Trump at the time — imposed the initial China tariffs, the provision he had used was section 301. And that provision requires an administrative review. And at the end of that review, there are recommendations around what the tariff levels would be. And that’s what was used back in Trump’s first administration.
The provisions that are being used currently are one called the IEEPA, the International Emergency Economic Powers Act. That particular provision allows a president to effectively declare a national emergency. And based on that, the president can impose tariffs. And that does not require an administrative review. And it’s this IEEPA provision that was used for the more recent tariffs on Mexico, Canada, China, and the reciprocal tariffs that were announced.
And another provision the president uses is called section 232, also focused around national security interest. But that one also requires an administrative review. And that’s what was used for the automotive tariffs that were imposed, the steel and aluminum tariffs, and current investigations around copper, lumber, and some other products. But effectively for the audience to know is that depending on the provision, some have an administrative review and some the president can impose unilaterally. I will say with respect to IEEPA, this was the first time that provision was used to impose tariffs. And I believe last week there was the first court case filed to challenge that particular authority.
Michael Smith: That’s a good point to get into what the trade policy has been looking like. I know that starting back in January, Trump issued his America Trade First policy and started touting the phrase reciprocal tariffs to talk about the trade deficit that the U.S. has with the rest of the world. This brought reciprocal tariffs to the forefront. And as somebody actively engaged in this space in dealing with tariffs on a day-to-day basis, what do you make of this phrase “reciprocal” and how it’s being used in tariff policy?
Mat Mermigousis: Sure. So when you look at how the administration defined reciprocal tariffs, when they started their review or their investigation prior to the imposition of the tariffs, their focus was on what were the actual tariff rates our trading partners were imposing on U.S. goods. But also the administration focused on, we’ll call them nontariff barriers. So what type of taxes might’ve been imposed on U.S. imports, looking at any type of restrictions to the market or access the U.S. goods have to that particular market? And they analyze all of these factors to arrive at a tariff level that they deemed was what was being tariffed on U.S. products. And that’s what they used. And that’s when they announced those reciprocal tariffs. And that’s why you’ll see that, for specific trading partners, where they deemed there was a significant trade deficit, those particular partners have specific rates. And all others, they’re roughly at 10 percent.
And I think for many companies, they’re struggling with the increase. Some of those trading partners, it’s pretty significant. So they’re really looking at understanding what the impact is to their supply chain. What are they able to do to mitigate particular impact of these tariffs? And also, at the same time, they’re also monitoring the negotiations that are happening. And the fact that there could be some sort of reduction or concession that our trading partners may make, that may be over the next few months that might provide some relief. But for many of these companies, it’s what can they immediately do to strategize around these tariffs to make their products affordable and be able to mitigate that increasing cost.
Michael Smith: I think that’s a good point to start in a bit more on the April 2 tariff that you were talking about. The formula has gotten a lot of criticism from economists across the aisle. Essentially, it was meant to calculate the tariffs that countries place on U.S. exports, and include the nonmonetary barriers of entry into the market, and then have that to give a tariff rate that the U.S. is going to impose. But many economists are saying that that’s a self-fulfilling prophecy, because the way that the formula is written means that it basically only calculates what is the trade deficit between the two countries.
Do you have any thoughts on how that’s operating and what that means for negotiations going forward, on whether or not eliminating things like the VAT or other nonmonetary barriers will actually change any of the calculation?
Mat Mermigousis: I’m not an economist, so I can’t comment on the formula itself. But to your point, we did hear some economists questioning the formula itself or the math in the formula. And there were a few economists that also supported the formula.
But I think for companies specifically, what they need to understand is that there are negotiations. And even prior to the reciprocal tariffs being imposed, the administration did issue term sheets to some of the trading partners, asking them what type of concessions that they’re willing to make. And I think to really answer your question on the formula, really depends on the specific trading partner. There could be some trading partners where just a reduction of the duty rate might be sufficient for the U.S. to provide some relief for those particular countries.
And then for others, a reduction in tariff rates may not be enough because they have specific barriers to U.S. products. For example, some countries have restrictions on U.S. agricultural products or food products because of GMOs, and hormones, and those sorts of things. So even a reduction in rate might not be enough, provided those markets are opened.
And then, also, the administration has been pretty open about the digital services tax, being against that. If countries remove that or impose that, that might also play into the negotiations. But I think, ultimately, it will be country by country. And that was part of the testimony that Jamieson Greer, the USTR [U.S. trade representative] gave yesterday. So I think, provided they provide some concessions and that U.S. goods have access to those markets, though you’ll likely see some reduction in those rates.
Michael Smith: This is a good moment to take a small step back in time and look at the February IEEPA tariffs that Trump placed, because interestingly enough, two of the countries are not mentioned in the country-by-country tariffs, Canada and Mexico. Do you have any helpful insight into that?
Mat Mermigousis: Because of the IEEPA tariffs in the 25 percent that’s currently imposed on Canada and Mexican origin products, part of the notice that was announced last week stated, “If those IEEPA tariffs do go away, then there will be a 12 percent reciprocal tariff on Canada and Mexico.” But I think, for many companies, what they need to focus on is their actual manufacturing process and their supply chain.
So when you look at the IEEPA tariffs that are imposed on Canada and Mexico back in March, there was a provision in there that said, “If products qualify for the free trade agreement for USMCA [United States-Mexico-Canada Agreement], then those products are exempt from the IEEPA tariffs.” Which now requires companies to focus on their other manufacturing process, focus on the bills of material, focus on their content and their process to make sure that their products qualify.
And this might be a struggle for some companies, because there are those who traditionally were manufacturing, let’s say Mexico, but the products, their normal duty rate, was zero. So they never really had to use the free trade agreement. Now because of the IEEPA tariffs, they’re taking a closer look at it to see whether their products qualify. And they may not be as experienced in terms of understanding the rules, which then might trigger more audits from U.S. Customs [and Border Protection] to make sure companies are compliant with the USMCA.
The other piece that ties into the reciprocal tariffs is when you look at the executive order and the notices that were issued, it does mention that if there are products where the U.S. content within a product is at least 20 percent, then the reciprocal tariffs would not apply on any of the U.S. content within that product. So this goes back to the companies, once again, looking at the bill of materials, looking at their sourcing. Can they identify the U.S. content of those products so that they get some relief from the reciprocal tariffs? And this is where of late we’re getting a lot of questions on how do we do this, how do we manage it, providing companies advice as to how to identify that information within their bill of materials, how to solicit their suppliers and be able to mitigate that particular impact.
This is a little bit different than your question, but also ties back to the automotive tariffs that were imposed, were brought for vehicles, for example, that are manufactured in Canada and Mexico under the 25 percent automotive tariffs. They’re still subject to 25 percent. But once again, what they’re saying is if your product qualifies for USMCA, even though you’re not exempt from the tariffs, they’ll focus on the U.S. content within that vehicle. And the U.S. content will not be subject to the tariffs. So companies looking at the cost of what these tariffs are, but then the process around mitigating and looking at the bills of material, tracing their supply chain.
And I think that’s where many companies are focusing on, as one of the key strategies to help mitigate the impact, because it’s something that could apply across the board and leverage some of those processes, whether you’re subject to the section 232 tariffs on auto, reciprocal tariffs, or the IEEPA tariffs on Canada and Mexico.
Michael Smith: The third country that was part of the February IEEPA tariffs. There is a lot of volatility happening right now between the U.S. and China, in terms of trade and tariffs. Do you care to explain any of that or what’s happening between the countries?
Mat Mermigousis: Sure. So just a little bit of background in history. So back in Trump’s first administration, there were tariffs imposed on China under section 301. And depending on your product, those rates can be 7.5 percent, 15 percent, 25 percent, 50 percent, or 100 percent, depending on the product. Those tariffs, those section 301 tariffs were still extended under the Biden administration. And for some of those — some products — the Biden administration even increased the original tariffs.
Now, in February, the administration imposed an additional 10 percent tariff on all Chinese products under IEEPA. And then in March, added on another 10 percent under IEEPA on Chinese products. So you’ll see that these are all stacked, they’re all tacked on. So there’s an additional 20 percent above the section 301 tariffs on products. Then, under the reciprocal tariffs that were announced last week, the administration provided a specific rate on Chinese products, which is also another add-on of 34 percent.
But what ended up happening was China retaliated then against U.S. products, issued a tariff of 34 percent on U.S. goods coming into China, also implemented certain export controls. So for U.S. companies, certain U.S. companies exporting out of China are prohibited from exporting certain products. And then, also, they have this entity list, where if you’re on this list, there’s certain restrictions on the level of investment and import and export in and out of China. And they listed a number of U.S. companies.
Last night, the Trump administration retaliated even more against China and added another 15 percent to those reciprocal tariffs. So the reciprocal tariff rate went from 34 percent to 84 percent. So now you have on average over 100 percent tariff on all Chinese products. And then China, also, this morning or late last night, increased their retaliatory tariffs on U.S. goods also to 84 percent, and then also added more companies in the entity list and also more export control restrictions.
So we’re effectively seeing a back and forth between the U.S. and China, so many companies also struggling with how to manage the impact now of some of these tariffs. What is that going to do from market competitiveness perspective? And then the other piece is where maybe it’s getting a little less press or news is that — so when you import into the U.S., you have a bond. You have a surety bond that covers your import process. And if you’ll have to pay duties, there’s a bond that supports that. And that’s based on how much duty you pay. So now, for many companies, especially smaller companies, the cost of increasing their bond to cover the additional tariffs and potentially adding on collateral to support the surety, there’s another sort of cost there for many companies. And we’re also working with them on how to manage that as well.
So I think these back and forths is just changing the strategy that some companies are using, and really looking at how they’re going to change their import process, maybe change sourcing and try to manage, we’ll say, the changes that can happen day to day in the current tariff landscape.
Michael Smith: As Mat just noted, these things are moving incredibly quickly. Shortly after we recorded the interview, President Trump decided that he was going to delay the country-by-country specific tariffs on everybody except for China. This means that he’s also going to increase the tariff rates on China, which are now looking to be at around 125 percent. And China is increasing their tariff rates against United States, which are resting at about 84 percent as of April 10.
It seems like everything’s moving really fast in this area. So as somebody dealing with and advising companies on how to interact in this landscape, what are the biggest things that you’re telling people, the biggest things that companies are doing to counteract these levels of uncertainty?
Mat Mermigousis: Sure. The first thing that they’re doing is they’re looking at, first, their processes and controls around the import and export process. So as a quick primer, when companies import, they file an import declaration on every shipment that comes into the country. So look at it as a tax return that’s being filed on every single shipment. There are a slew of reporting requirements, but the three key elements that are part of that declaration are, one, the tariff classification of the product. And that tariff classification is a 10-digit number that lets the U.S. government know what’s being imported into the U.S. And then that particular tariff classification has its own associated duty rate. And for many of these additional tariffs are being imposed, you’ll have to see whether your tariff number is included within the scope of some of these tariffs.
The second piece is around customs value. What is the right value to report? And the third piece is, what is the country of origin? Where is the product produced? So they’re taking a step back and looking at their controls around all three elements, because that can impact whether you pay more in duty or maybe you pay less in duty. So we’re working on companies on strengthening those particular controls.
The second piece is a modeling exercise. So here in the U.S., companies can access their own import-export information out of a government portal, so they can see all their transactional data going back roughly at least five years, both import and export. We’re working with them on taking this data, and based on these tariffs that are being imposed, what is the financial impact? Also modeling potential future increases, so they have a sense in being more prepared. But then also, because you can see from this data, the outbound exports out of the U.S. and the countries of destination, when retaliatory tariffs are imposed, you can also take those rates and start modeling out based on U.S. exports and the country destination, to see not only what the U.S. exposure might be, but just the global impact.
Once we’ve done that, we’ll work with companies on mitigation strategies. So one of the mitigation strategies, one we talked about earlier. So focusing on USMCA and U.S. content within products to see if companies can — you have to qualify for USMCA, but see if there’s ways to increase their U.S. content to mitigate the impact. The other strategy that we’re helping companies with is a concept called duty drawback. So here in the U.S., if you import a product and reexport the same or a like product, you can get back 99 percent of the duties taxes and fees paid at the time of import, going back five years.
Now, the caveat there is, is that some of these tariffs are not eligible for duty drawback. So the section 232 tariffs are not eligible, as well as the IEEPA tariffs that were imposed on Canada, Mexico, and China. However, the reciprocal tariffs that were issued last week, even though they were issued under IEEPA, the administration has said that those are eligible for duty drawback. So that provides another avenue of relief for companies.
The other strategy we’re working with companies on is foreign trade zones. So, effectively, many companies who have warehouses or manufacturing facilities here in the U.S., they could designate their own facility as a foreign trade zone, which means they can import product, not pay any duty until that product enters U.S. commerce. So it provides a time-value-of-money cash flow benefit. If those products are reexported, then you avoid duty altogether. So that provides a relief mechanism, depending on your supply chain.
And then lastly, companies are focused on what is the right customs value. So for many of our clients, they import from related parties, so they’re importing based on a transfer price. So we’re working with companies to understand what’s embedded within that transfer price, because sometimes there’re costs embedded within it that may not be dutyable. So we’re working with our clients to understand the transfer price: What are the cost elements within it? If some of those are not dutyable, then you can unbundle the price or effectively extract those costs and create a separate service payment back to the seller. And what that does is it reduces the customs value and the basis for how much duty is paid. And there are certain costs, like advertising and promotion. If the U.S. is a distributor, and embedded in that price is effectively a distribution fee, you can extract all of those to reduce the customs value. And that provides a significant benefit.
And then lastly, the U.S. allows your first sale. So for example, if you have a contract manufacturer who’s manufacturing in China and selling a product for $100 to a middleman, which can be a regional principle for $100, and then that principle entity may be based in Singapore, is then selling to the U.S. importer at $150. If you meet certain requirements, you can use that $100 value for customs purposes, rather than the $150. And what that does is you’ve effectively lowered your duty expense because you’re not paying duty on a markup on that price.
So these are some key strategies that we’re helping clients. These are key strategies that companies are focused on to help mitigate the impact, in addition to some of the lobbying efforts that some industries are doing. I know the automotive industry is talking to the representatives and having meetings with the administration, but those are some of the key strategies that companies are focused on.
Michael Smith: Thanks again for coming on the podcast and talking with me, Mat. It’s been great to chat. Take care.
Mat Mermigousis: My pleasure. And I will say, too, Michael, these strategies aren’t, we’ll say, new. It’s just in this environment, they’ve become more crucial. I did want to end on good news, in that there is ways to mitigate the impact and things that companies should focus on. And I really do appreciate your time today.
David D. Stewart: That’s it for this week. You can find me online @TaxStew, that’s S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we’re doing here, please leave a rating or review wherever you download this podcast. We’ll be back next week with another episode of Tax Notes Talk.
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