“Liberation Day” Tariffs & Trade Impacts: What We Know and Where We Go From Here

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Ryan Petersen

Hello, everybody and welcome. We have a lot going on in the world of customs and global logistics and at those intersections. So thank you all for joining us on really, very short notice. We decided to do this webinar around midnight last night as I was writing up a blog post and kind of keeping track of everything. Realized, man. There's enough content here. We've got to get the word, you know, start talking to our customers more directly. So thank you. We had over 2,700 people register for this webinar that we just announced about five hours ago. So obviously there's a lot of enthusiasm is probably the wrong word, but people are definitely curious and need to learn more. So hunger for knowledge before I go in. I do want to, you know, legal team always asked me to do this but I feel like it's probably more appropriate on this webinar than more important than ever is like there's this is for informational purposes only. And you really shouldn't rely on everything you hear here in this seminar for legal and business advice, your sit, your personal, your business situation may be unique and different. So make sure you talk to us in person or sorry, live one on one about any specific issues that you hear here. It's possible we'll make some mistakes. There's a lot of brand new kind of information that we've just heard about. And then I want to introduce and come up on stage here, Bernie hart, who's our flexports, head of customs, vice president of our customs and trade advisory business, where we help. He's a, I don't want to date Bernie, but he's got many let's just say decades of experience in this industry and is a real pro at helping companies to stay compliant and helping them find operations, find opportunities in their customs operations, to save money and run a tighter ship. So great to have Bernie with me today to help me and all of you explore what we've learned, what is new, what's happening? And that is our agenda ultimately is to explore what has happened, what we know so far from liberation day as they call it the new tariffs that just dropped and some other programs that have really changed very dramatically yesterday. As well as we're going to explore some areas of nuance, and some open questions that we still have that we're going to try to find out the answers to in the coming days. I'm going to take you there a little bit about the macroeconomic story, what this meant in the broader economy. And then of course, what you all know is what do we do now? And then we will try to leave time at the end for Q a on the right side of your webinar, you can see the Q a tab. So go ahead and post your questions there. We're gonna, we're gonna try to take as many of them as we can as we get as we have time for. So, yeah, first off, what has happened and we know first off is that what they're calling the administration is calling reciprocal tariffs dropped? I'm not going to talk you through every single detail here. I'm sure you guys are pretty in tune with it. We will highlight some important exemptions and carve outs and then talk through the end of de minimis that's a really big deal and was pretty buried in the executive order. We kind of found it on section H of one of the executive orders that de minimis is going to go away not just for China which we've long known about, but also for rest of world and timeline on that. We'll talk it through a little bit. So, yeah, first off the reciprocal tariff announcement, you, the baseline here is a 10 percent duty on every country in the world. This is done under the 1977 international emergency economic powers act which was a Carter administration act. 1977 is really about the oil crisis, and giving the president powers to declare certain goods, to impose duties on things that are national security issues, and those goods are ineligible for duty drawback. So all the new tariffs here will not be eligible for duty drawback. And, and then there is also some nuance here that goods in transit may be eligible for, to enter under the old rates. But like we're going to talk through the timeline on that, you basically have to get those loaded on a ship in the next day or two. So maybe too late, if you haven't already got in gated in at the car at the port of origin, we also saw country specific tariffs. I'll take you through the highlights on that in a moment. But those were ranging from 11 percent up to 50 percent based on what country they were from. And then usmca that's the replacement for nafta that has been exempted for now, there, there is an act of that remains exempted. There isn't an act that has passed the senate that would declare that Canada, there is not a national emergency, a fentanyl emergency on the Canadian border. And so if that, my instinct says the president will probably veto, that act and it won't go, it will remain exempted but there's some chance that will end. Okay. So this is, the official table here. The fact it's much longer the number of countries. But these are the highlights especially the one on the left of the countries that are most impacted by this. It is very important to note in all of this that these are cumulative duty rates they are adding on to existing duty rates. So in the case of China, this 34 percent rate adds to the 20 percent that they've already imposed, which adds to the section three one tariffs which were between seven and a half and 25 percent, which all of that adds to whatever was pre existing before trump's first administration really. And so and then we, what has not been covered yet was this tariff proposed on any country that imports Venezuelan oil of another 25 percent, so that that's potentially still lingering in our future. So China still is definitely clearly the biggest target of this. But there was definitely there were some surprising things here. Now, I've been warning customers for months that places like Vietnam and other parts of Asia are not the safe havens you may think they are. That I know the administration's been pretty clear that they're focused on trade imbalances, and our trade imbalances with some of these other countries are similar to that with China. And so, to see the 46 percent tariff, I think that caught a lot of people off guard. But we've been warning people for quite some time, that you may have problems. One, one interesting thing in note here, well, how this was calculated first off the administration that has this term reciprocal tariff. I was on Jim Cramer mad money yesterday and I joked that it's kind of like, the administration's version of community adjusted EBITDA that we work used to use. It's the community adjusted tariffs and so you have, but there, it is true that tariffs applied by other countries are higher than those applied by the us. This graph here comes from Jp Morgan's, chief economist and shows that the, it shows you the tariffs that the us applies relative to the same tariffs, the same, the tariffs supplied by those same countries reciprocating. And you can see that US tariffs are lower in every case than the other countries. However if you listen to and there's a great interview that John that lighthizer did. The former US trade representative. He did an interview two weeks ago that you can find on spotify where he says that, yes tariffs are a problem that other tariffs charge other countries charge higher tariffs. But his main point was that it's really not about the tariffs that's not the major issue. The major issue is industrial policy, things like suppression of organized labor, environmental regulations, subsidized credit, export subsidies. The list goes on of things that they allege that other countries do. And he says these are far more important than tariffs as a trade barrier and as a factor creating imbalance trade. And so, his point of view is that the tariffs are the easiest and most effective way for the administration to respond to those non tariff barriers. And so that's what they tried to get to in this table. Actually, if I go back, you see on the left, it's a little bit small to read here. But the left side there's an asterisk there. So these are not the actual tariff rates that other countries are charging the United States. These are the sort of yeah, community adjusted tariff rates it's trying to account for. They claim this is the administration claim trying to account for all these industrial policies and other non tariff barriers to get you to that number. And then the president claims is being kind by cutting that number in half. Well, the interesting one interesting nuance here was we, our team did a little bit of math, some basic math. We figured out with some help from our friends on the internet that, the tariffs were actually calculated in a much more simple way. It was simple. They just took the simply the trade deficit that the United States have has with each country that's the level of exports they have minus the imports, that we, our imports minus their exports rather. And they divided that by our, the imports from that country. And that gets you the effective tariff rate of these other countries. This graph showed you what we would if you did that math, what the formula would predict? And you can see it's 100 percent exactly what happened here. So it's a very simple formula a little bit lazy, I might say possibly generated by chat gpt. I don't know this is a little bit too simple. But also so when I first saw the rates get published, one thing you'll note is that latin American countries had much lower duty rates than asian countries. So at first glance, it looked like they must be trying to send some signal that, you know, latin America is our friend, we want to do manufacturing in latin America as kind of America's backyard and the strategic interests that we have there. But then when you see this, it seems like it just sort of naturally fell out from the trade flows that happen to exist with latin America rather than some grand strategy. It does come back the same Jp Morgan economist who created the other graph I showed you had, his big framing of all of this, is they are these serious people and are they serious? And I think this one starts to call into some question about how serious they might be. They're deadly serious though that said, they've done some silly things like they put a tariff on this island. I've never heard of it before the herd in mcdonald islands. Well, the reason I've never heard of it that no people live there and there's only penguins but they did call them out and there's now a 10 percent duty. So, you know, some of these things they're done en masse and, you know, sort of a silly thing, not that any of this is funny but anyway, but there were some, you try to do something this big this fast. You're going to make some mistakes. So an important call out. I want to call Bernie up here to talk a little bit about what the reciprocal tariff does not apply to. And the big, you know, the big categories were are semiconductors, chemicals, pharmaceuticals, some critical minerals, copper. And then there's an annex ii. We'll post it on our website today. But that link there that HTS link takes you to annex ii, which has this long list of exemptions of HTS codes. So if you're a flexport customer, your team, please know we are actively going through every HS code that's been exempted. And we will be finding your codes that's happened already for the last few hours. And the team will be calling you and emailing you and walking you through hopefully finding some relief in there, Bernie. Do you want to talk through like what is annex ii? And where does I don't know? I mean, I'm not expecting you to know where it came from, but what is the concept behind that? And anything that jumped out at you is like that. I'm missing in these top level things here.

Bernie Hart

Yeah. I mean, the annex to, I mean everything really comes back to the HTS number. The HTS number is the cornerstone of trade. Once you have that HTS number, of course, it gives you the duty rate, but it also talks to you about admissibility that's out of a country and then into the next country. So you want to look at everything at the HTS level. This is what every customs agency around the world tracks for importers and exporters. And the way the government is doing this is they're basically looking at when they go out and they assign an additional tariff or reciprocal tariff, whatever it happens to be. They assign it to an entire category of HTS number. But there are, as you already alluded to, there's nuances, and there's edge cases for each of those individual products that might fall underneath that HTS that's where you get into a lot of these. Does it apply? Does it not apply? Is it stacking? Is it not stacking? So we've got a few examples here. So goods paying steel and aluminum, that's your section two 32 duties. These do not apply if you're paying automotive on the two 32, it does not apply. Now, column two, this is specifically called out in the HTS. This is for countries like Belarus, North Korea, Cuba, and then Russian Federation, that's primarily due to the fact that we're not doing much trade with them at all because there's restrictions in place today for us to do trade with those countries. So it doesn't make sense to include them in this overall process. But there is also the kind of.

Ryan Petersen

to prevent the administration from taking a lot of heat for leaving Russia off. Correct? So, a lot of people are saying that it's because trump is buddies with putin, but I don't think that's the case, there's nothing to.

Bernie Hart

Do with it. You already can't do business with them today. So it kind of is what it is. But then the last bullet here, any future goods impacted by the future, two 32 changes. What this does is leave the door open. You know, as we've all learned, going through this process, we get updates in the morning. Those updates can change by the afternoon. What we're all waiting for is these executive orders to turn into federal register updates. Then we as the community can sit down and actually code for this if you will. And then allow for it within our business processes. And as we submit to the government. So we make sure we're following the rules and regulations as defined. Okay? And again, this is going to continue to change.

Ryan Petersen

Yeah. Okay. And we'll talk through what those section two 32 and some of these other terms mean a little more detail in a future slide here. But one thing to call into out here is that the duties go into effect on April fifth and April ninth. April fifth is for the 10 percent countries and April ninth is for the rest if I'm not mistaken. And so this is just an example of goods that are, this is in U. S time zone by the way. So Vietnam, it's already April fourth or it will be shortly over there. But this is about based on us time zone. So you have about 24 hours. If the container gets loaded, it will still be under the prior duty regime. If it's loaded between the fifth and the eighth of April. That'll be a 10 percent duty. And then after April ninth, you're gonna go to 46 percent duty again, like given that the cargo has to gate in, it's about when the cargo is loaded onto. The final mode of transport is how the law is written or how, the order executive order is written. That's quite interesting that final mode of transport because that implies that, you know, there's some debate internally here. Does that, what about a trans shipment? You know? But its final mode is the way it's written. So presumably, it doesn't matter if it changes ships. It's still in the same mode. However if it was to go to Canadian rail and then come across the rail is the final mode. So it would have to be loaded on the railroad today or tomorrow. Well, by April ninth. Let's say in this month, so, you know, these things sound like technicalities, but it might be a lot of money on the table that you guys are going to want to go dig into. And flexport's team will be helping customers manage that. We are fighting really hard. Next 24 hours is going to be kind of intense for us to try to get as many containers loaded as we can on your behalf. And, and that last piece there that if you're the automated manifest system is what CBP is going to be using for this. That's every container has to be filed through the ams system with CBP. And so there are some cases where the data on the ams doesn't line up with the actual vessel onboard date from an ocean carrier. And that may be very valuable date for you to manage to, and dispute, if and CBP might come after you and you may want to go back and challenge them if they get things wrong there. So staying on top of that might be worth, yeah, I mean tens of thousands of dollars all of a sudden. So, and then this is, this slide's a bit dense. So bear with us here. But this is our sort of high level cheat sheet you'll see on the left side. Normal relations is just like prior to any of these other changes that have taken place, iepo, we talked about that's that 1977 emergency powers act for and that's what trump has invoked here on the fentanyl duties on Mexico and Canada, and others. Then section three one is what he invoked. And biden also invoked during the kind of first administration in biden's term to increase duties, section two 32. You want to talk about section two 32 for us that's the steel and aluminum, but there's some nuance to this. I want to make sure Bernie helps us get it right?

Bernie Hart

Yeah, from the two 32 side, there continues to be more and more updates coming out on the under the two 32 guidance steel and aluminum things. And we have some, a couple of examples coming up and some subsequent slides here about how that overall applies and what we really want to think about with this is that stacking tariffs concept. Are these in addition to, are these replacing? So when we walk you through two or three examples, we're going to show you one that it actually is replacing one where it's on top of. But again, all of this really comes back to the HTS number. And then within the HTS number, you need to see where your products fall and then understand what those rules of interpretation are, ie specifically, are they going to be subject to this additional duties and tariffs associated with it? So there's some derivatives that came out with the two 32 steel and aluminum, whether you know, where it was poured, where it was melted. This took supply chains a little bit by surprise in terms of they had to have that level of specificity that they probably never have had to have before. So we're seeing that Ryan pretty much across the board where businesses are now being asked for a lot more detail about their supply chain. You know, there's this old adage you should be able to track everything from dirt to shirt type of an approach. But we're seeing that more and more it was originally coming out for uflpa for forced labor. But now we're seeing it more from a manufacturing more from a business perspective. So it makes a difference now if you are a furniture importer by way of example, and you've got steel and aluminum that's involved with that? Where did that steel and aluminum originate from? Do you have the specifics about what portions of that were Russian based, non Russian based. And so you can don't have to declare your total value of the steel or aluminum product, if you have these derivatives and have the availability of that. Of course, you need to have proof associated with it that's part of the additional nuances that businesses and supply chains are being asked to produce now. But it's giving getting to that level of granularity. What we can anticipate here is that we're going to probably see more and more of that level of granularity. So businesses need to be thinking about their product library as an example, which is a great way to store product catalog, great way to store their information at the part and SKU level. But within that, we're also asking them or having them consider really taking it. To the next level. And when I say taking it to the next level, if it happens to be a kit, an assembly, a sub assembly, if it's part of a manufactured product, keep your costed bill of material there because that costed bill of material might be able to help you to lower your overall entered value on those specific parts that are attracting these higher duty rates. So it gets more and more complex. But it really is up to the importer of record to store all of this data and information. And one of the great ways to do that is capture that in your product library so that you then have that specificity if customs ever comes back and challenges you on that.

Ryan Petersen

And great. And we'll talk through a couple examples as you said. And then reciprocal terrorists tell us a little bit about this too. I mean, obviously we just walked through the high level of what's just happened. But it comes back to this act from, that allows the government that allows the administration to respond in kind. I think one of the open questions that we've had here we'll get to in a moment, but maybe preview that is they've been very clear about the carve out for usmca, for the new naft, but we have much visibility here on what it means for other free trade agreements and how it would interact with those.

Bernie Hart

Yeah, that's perfect. None of that was addressed yet. Korea, Australia, any of those additional free trade agreements that are exist with the United States. So are we going to take a more aggressive approach with that? Is it going to be more passive like we've seen with usmca granting that further extensions if you will. That remains to be seen. But that's why we're just encouraging everybody. Again. If I go back, excuse me to this product library type concept you want to be tracking in the product library just by way of example that this product originates in Mexico. Does it qualify for a usmca? If it does, you want to set those overall flags so that when these changes happen, it's easier for you as a business to go through and do those what if scenarios to see what your potential impact could be with this. And then it also depends if it's what level of content. So every free trade agreement that's out there really has two main major components. It's either regional value content or, tariff shift being if the products being brought in get assembled and they get a new tariff number associated with it or they've shifted to a new HTS number, and then there's the regional value content. So all of these trade agreements, at least most of them that are out there and there's over 400 around the world. Those regional value contents. This is where businesses need to be able to prove that. Hey, for this car coming in, it's 30,000 dollars but 10,000 dollars. I know what this is us content that satisfies the rules for us. Therefore I can take advantage or not take advantage. It's that level of scrutiny. It's that level of detail that we're really getting into now and it's yet to be determined. Ryan for those other countries and those other free trade agreements, there was a lot of discussion early on about you about us, Canada, Mexico, usmca. This is basically allowing for businesses to continue to reap the benefits associated with that as more considerations are coming into play and you're probably right? They're probably looking at this at a much broader scope in terms of all of those other ftas that exist today. How do we keep this similar across the board? Do we make it unique for each of these trading partners and that's yet to be determined? Okay?