By Lewis Retik and Wendy Wagner, Guest Contributors
President Donald Trump and his administration intend to use tariffs as a policy tool to negotiate with trading partners and ultimately encourage manufacturing within the United States. With the development of counter tariffs across the globe, it is unclear whether it will have the intended effect.
Regardless, this is already having a dramatic impact on cross-border sales between Canada and the U.S. covering a broad range of products, including those commonly sold in the direct selling channel. All industry players need to assess this impact, understand who will bear the liability and assess all available mitigation options.
Since February of this year, the U.S. has threatened and imposed multiple rounds of tariffs on Canadian products, and, in response, Canada has retaliated with its own tariff and non-tariff measures.
On March 4, the U.S. announced it was terminating a month-long reprieve and imposed a 25% tariff on all goods from Canada except for energy exports, which are subject to a 10% tariff. Canada retaliated by announcing a 25% tariff on an initial list of $30 billion in goods originating in the U.S. and a proposed additional list with a further $125 billion in goods.
Three days later, the U.S. granted a reprieve, but only for those products from Canada that “originate” under complex rules in the U.S.-Canada-Mexico Free Trade Agreement (USMCA). Available statistics indicate that 62% of goods exported from Canada to the United States do not claim originating status.
On March 12, the U.S. imposed a 25% tariff against steel and aluminium imports from Canada and other countries, including certain derivative products containing steel and aluminium. Canada retaliated against a further $28 billion in U.S. origin products imported into its country.
The on-again, off-again tariffs have been characterized as a trade war. At the time of this writing, it is not known whether further tariffs against Canada and other countries will have been imposed on April 2, either on the basis that such tariffs are reciprocal to those imposed by other countries, or to address other economic practices that the U.S. administration considers to be unfair or undesirable for U.S.-based companies, such as Canada’s Digital Services Tax. In response, stock markets have tanked, businesses are scrambling, and historically friendly trade partners have been left in a state of disbelief.
We now know that the scope, breadth and potential consequences of the Canadian-imposed tariffs is extensive for U.S. companies selling into Canada. Canada’s tariffs are targeted, but still wide-ranging. The lists of goods subject to the 25% tariffs has been curated by Canada to be felt by a variety of industries, including in the direct selling channel.
Under that first list alone, cosmetics such as lipstick and nail polish; consumer goods such as handbags, apparel, and kitchenware; and food products such as whey protein, were made immediately subject to a 25% surtax. The proposed list of $125 billion additional goods includes certain products that especially impact the direct selling channel, including vitamins and essential oils.
Regardless of what action the U.S. administration will have pursued on April 2, the tariff genie is out of the bottle.
The economic consequences of the tariffs to the direct selling channel—both to U.S. businesses and their Canadian subsidiaries—are likely to be substantial. At a macro level, tariffs are expected to increase the cost of supplies throughout North America, including inputs for production.
The tariffs also have the potential to alter the competitive landscape by impacting the prices at which finished products are sold to consumers. The cost of doing business is likely to become less profitable for some, but this depends on the product, its origin, and other supply chain dynamics.
The threat of tariffs is real and persistent. We don’t know when or even if broader tariff action against Canada and retaliation in kind is coming, but direct selling businesses can take steps to prepare themselves. There may be ways to mitigate the economic harm that is likely to come.
We cannot control the tariffs, but there are things we can control.
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Audit Your Tariff Codes
The Harmonized System (HS) classifies goods using harmonized descriptions and a coding system. Each unique code corresponds to a tariff rate. The 25% tariff, therefore, is applied to specific goods, as identified by their HS codes. Prudent businesses will audit the codes they have been using to ensure that they accurately capture the products imported into Canada. If your product is captured by the list of goods subject to the Canadian-imposed tariffs, consider whether an alternative code can be used.
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Determine the Origin of Goods
Determine whether your goods that appear to be subject to the Canadian tariff are of U.S. origin. Only goods originating from the U.S., according to a specific legal definition, are subject to the 25% tariff. If your goods do not legally meet this definition, the tariff may not apply.
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Review Cross-Border Valuation Methodologies
Every product that is entered into the Canada market does so at an assigned “value for duty,” which is generally the invoiced sale price in the cross-border sale. If the sale is made at a different level of distribution (e.g., intercompany to a Canadian subsidiary versus distribution channels that occur at a subsequent level of sale), the value for duty on which duties are applied may be lowered.
However, this is subject to complex and stringent rules that disentitle companies from using values other than the last sale. It must be carefully reviewed by legal and tax professionals for compliance to avoid costly audits with four-year “look backs.” Tax considerations must also be looked at.
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Shift Your Supply Chains
Direct sellers who manufacture in multiple jurisdictions can leverage their supply chains to avoid tariffs. If you import or sell into Canada, determine if you can source products from outside the U.S. If you manufacture in Canada, determine whether you can sell those products directly to Canadians, or into foreign markets. Strategically structuring supply chains will reduce the need to rely on imports that will attract tariffs.
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Preempt Tariffs by Stockpiling
Businesses that have the ability should consider amassing larger inventories in Canada before any tariffs are imposed (i.e., during reprieves). Shipping your products to Canada at a time when no tariffs are being applied will avoid a surtax on those products when tariffs apply in the future.
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Reevaluate Contracts
Businesses should take a close look at their supplier and customer contracts, as well as any purchase orders to determine who bears the liability to pay the tariff. If possible, contracts should be renegotiated to reallocate risk between the parties and to pass some of the costs to the end customers. Existing contracts may also have clauses that allow for liability to be negotiated, such as price escalation clauses, change of law clauses, and force majeure.
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Prepare Relief Applications
There is a formal process for remission requests on U.S. imports into Canada that are subject to tariff. These requests are only available to Canadian-registered companies that can demonstrate either that there is a lack of domestic supply or that there are exceptional circumstances that resulted in the tariffs causing disproportionate economic harm.
These applications require detailed documentation and supporting evidence. This application should be prepared in advance of any tariff imposition so that they can be submitted at the earliest possible moment.
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Step Up Advocacy
Work with trade groups and industry associations in all markets to advocate for risk mitigation on behalf of the interests of the direct selling channel.
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Get Canadian Legal Counsel
Canada’s trade laws are complex, and the retaliatory tariffs are dynamic. Further, the imposition of tariffs may lead to further scrutiny and enforcement at the border on all goods. Canadian counsel can help you prepare for a potential trade war and can help you navigate the regulatory and customs regimes.
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Hope for the Best, Expect the Worst
Don’t assume that the tariffs will not be imposed or will not last. Many businesses took that attitude in the weeks leading up to the initial tariff announcements and were left scrambling when the tariffs became imminent. Be prudent and be prepared.
