Background

On 1 February 2025, President Trump signed Executive Order (“EO”) 14193, entitled Imposing Duties To Address the Flow of Illicit Drugs Across Our Northern Border, declaring a national emergency under the International Emergency Economic Powers Act (“IEEPA”). The tariffs were initially scheduled to take effect at midnight on 4 February. Canada promptly responded and on 2 February 2025, published Customs Notice 25-03: United States Surtax Order (2025), imposing tariffs on US goods “in response to the U.S.’ imposition of tariffs on goods imported into the U.S. from Canada.” The Surtax Order was also scheduled to be implemented on 4 February 2025. After reported negotiations, a 30-day suspension—until 6 March 2025—was agreed upon between the countries.

 

As a result, EO 14197, entitled Progress on the Situation at Our Northern Border, was issued on 3 February 2025, with the President stating in EO 14197 that “I have determined that the Government of Canada has taken immediate steps designed to alleviate the illegal migration and illicit drug crisis through cooperative actions. Further time is needed, however, to assess whether these steps constitute sufficient action to alleviate the crisis and resolve the unusual and extraordinary threat beyond our northern border.” With much less fanfare, Canada published Customs Notice 25-04: Repeal of the United States Surtax Order (2025), to repeal the Surtax Order.  

 

The near implementation of tariffs on Canadian products by the US and Canada’s planned countermeasures are now “paused,” providing companies with an opportunity to plan based on valuable insights taken from the EOs and the United States Surtax Order. Significantly, before EO 14197 was issued, an advance copy of the text to be published in the US Federal Register was posted on the Federal Register’s website, but was then removed because the notice was not published, as scheduled. The United States Surtax Order remains available on the Canada Border Services Agency (“CBSA”) website. Importantly, interested companies and their advisors now understand how the US might impose these tariffs early next month or later and how Canada will respond of the tariffs are imposed in an otherwise uncertain business environment.

 

US Tariff Action that Might be Implemented
Scope and Coverage of the Tariffs

Under EO 14193, a 25% ad valorem duty will be assessed on all Canadian products, with a reduced duty rate of 10% specifically for Canadian energy products, including oil, gas, and electricity. The primary question that arose was the definition of “products of Canada.” The US government clarified this in a Federal Register notice, which was later retracted, stating that the duties apply to all products of Canada, including:

• Products last substantially transformed in Canada (“substantial transformation” test, the general country of origin rule); and
• Products undergoing a tariff shift in Canada (tariff shift test, the CUSMA-USMCA rule of origin)

 

This means that US Customs and Border Protection (“CBP”) can collect duties on Canadian-origin goods if either of the above rules of origin are met, including when CBP makes that determination post-importation. 

 

Chapter 98 Exemptions

While the tariffs on Canadian products could cover all items, if implemented as initially set forth in EO 14193, the withdrawn Federal Register notice indicated that the US intends to maintain several duty exemptions under Chapter 98 of the Harmonized Tariff Schedule of the United States (“HTSUS”). Examples of some of these provisions are set forth below.

 

Canada’s Potential Responsive Countermeasures

Canada’s reaction to the now paused US tariffs was swift and allows companies to understand how the countermeasure duties will be implemented if the pause ends and the US moves forward with its action. Canada answered with a targeted list of goods subject to a retaliatory tariff of 25%.

 

According to Customs Notice 25-03, the duties will apply to “goods that originate in the United States” meaning goods that are eligible to be marked as goods of the United States in accordance with the “Determination of Country of Origin for the Purpose of Marking Goods (CUSMA Countries) Regulations.” US items such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper. The complete list of the HTS Codes (“tariff items,” as described in Customs Notice 25-03) is below for your review.

 

Recommended Mitigation Actions

While the duties and countermeasure duties have not gone into effect, the publicly-available details are critical in helping American and Canadian businesses anticipate how future tariffs could unfold.

Businesses can take a number of proactive steps to mitigate the impact of Canada-US tariffs, if they become effective. Some of these measures include:

1. Review Product Classification and Country of Origin: For imports into the US, ensure products are accurately classified under the tariff schedule of each country and review the country of origin under the tariff shift and substantial transformation rules.

Because the “substantial transformation” test is applied on a case-by-case basis, US importers of record (including Canadian Non-Resident Importers) and Canadian exporters should carefully review whether their manufactured goods might not undergo a substantial transformation in Canada and instead only undergo simple assembly or mere finishing operations—particularly if significant parts, components, or subassemblies originate from other countries outside of Canada, including from the US. If it can be shown that items are not a product of Canada, the tariffs might not apply.

Similarly, companies should carefully review the Bill of Materials (“BOM”) of the imported products and confirm accurate HTS Code classifications under the respective tariff schedule of Canada and the US, as well as the applicable CUSMA-USMCA rules of origin to determine whether, in fact, a tariff shift in Canada occurs since failure to meet the tariff shift can be advantageous if the US duties on products of Canada are implemented.

 

2. Explore Potential Duty Exemptions: Under the US tariff schedule several full and partial duty exemptions apply under Chapter 98 of the HTSUS. Understanding these provisions can be crucial to mitigating the impact of the tariffs imposed on products of Canada imported into the US. Some examples of exemptions and partial duty exemptions include:
   
   

• • Subheading 9808.00.40 (Articles for the General Services Administration: Materials certified by it to the Commissioner of Customs to be strategic and critical materials procured under the Strategic and Critical Materials Stock Piling Act)
    
    
  • Subheading 9810.00.6000 (Articles entered for the use of any nonprofit institution, whether public or private, established for educational or scientific purposes: Instruments and apparatus, if no instrument or apparatus of equivalent scientific value for the purposes for which the instrument or apparatus is intended to be used is being manufactured in the United States)
    
    
  • Subheading 9817.00.96 (Articles specially designed or adapted for the use of blind or other physically or mentally handicapped persons; parts and accessories)
    
    
  • Subheading 9802.00.80 (Articles assembled abroad in whole or in part of fabricated components that are the product of the US; a duty upon the full value of the imported article, less the cost or value of such products of the United States)
    
    
  • Subheading 9802.00.40 (Repairs or alterations made pursuant to a warranty; a duty upon the value of the repairs or alterations only)

 

3. Contract/Terms & Conditions: Companies should prepare for the potential that US tariffs and Canadian countermeasures will be implemented by reviewing (and potentially seek to amend) agreements with suppliers, distributors, dealers, resellers, customers, and other parties with which they transact business, for terms that permit price adjustments, cancellation or modification of orders, whether either party can declare force majeure, or if agreements can (or should) be terminated if conditions for doing so exist.

 

If you have any questions or require assistance regarding upcoming potential tariffs or other international business or trade matters, please do not hesitate to contact our attorneys:

Jon P. Yormick, Managing Member ([email protected]; M: +1.216.216.5138)

Pavit Arora, Associate ([email protected]; M: +1.774.571.9028)

Alexandre Heuzé, Associate, ([email protected]; M: +1.216.410.9388)