On February 1, 2025, President Trump issued 3 executive orders imposing additional tariffs on products from Canada, Mexico, and China, effective February 4, 2025. The tariffs on Canadian and Chinese products will go into effect on February 4, 2025. Pursuant to an agreement reached between Mexico and the U.S. on February 3, 2025, the tariffs on Mexican products will be delayed for a month. This client alert identifies key takeaways from the executive orders and provides important considerations for government contractors to best protect their interests. Register here for PilieroMazza’s webinar addressing these executive orders in-depth and providing cost recovery strategies for affected contractors.
Legal Basis for the Tariffs
President Trump authorized the tariffs under the International Emergency Economic Powers Act, in response to the national emergency declared at the southern border regarding drug trafficking and illegal immigration. In a fact sheet issued alongside the executive orders, the White House explained that the tariffs are intended “to hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country.”
Tariff Rates
The tariffs are ad valorem taxes, meaning the tariff amount is based on a percentage of the value of the imported products. Canadian and Mexican products are subject to 25% tariffs, except that “energy or energy resources” from Canada are subject to a lower 10% tariff. Chinese products are subject to 10% tariffs.
All the tariffs are in addition to any other duties, fees, exactions, and charges currently in place. Moreover, the executive orders suspend the “duty-free de minimis treatment,” which results in products valued under $800 being subject to the tariffs.
Timing of the Tariffs
The tariffs apply to products of Canada, Mexico, and China “entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern time on February 4, 2025.” However, products “loaded onto a vessel at the port of loading or in transit on the final mode of transport prior to entry into the United States” before 12:01 a.m. on February 1, 2025, are not subject to the tariffs, with certification to U.S. Customs. As noted above, the tariffs on Mexican goods will be delayed for a month based on an agreement between the U.S. and Mexico on border security efforts reached on February 3, 2025.
Anticipate Future Increases
These tariffs will remain in place for the foreseeable future until the President determines that “sufficient action to alleviate the crisis” has been taken. In fact, contractors should anticipate that tariffs will increase further. The executive orders explicitly provide that if Canada, Mexico, or China retaliate against the United States by imposing their own import duties on U.S. exports, the President may increase or expand the tariffs.
Canada has already announced 25% retaliatory tariffs on certain U.S. products, including cosmetics, beverages, and paper products, effective on February 4, 2025, with further tariffs anticipated in the coming days and weeks. Mexico initially signaled that it would issue retaliatory tariffs, so it may take action if the tariffs on Mexican products go into effect after the agreed-upon delay. China has indicated it will challenge the tariffs at the World Trade Organization and take unspecified countermeasures in response.
How Can Government Contractors Protect Themselves?
As PilieroMazza wrote in late 2024, in anticipation of these tariffs, government contractors offering products to the government should:
- Recognize that the tariffs may increase their cost of performance or lead to supply shortages, resulting in delays.
- Review the terms of their contracts to determine if any provisions provide a mechanism for cost recovery or excuse for schedule delays, such as:
- FAR 52.229-3: Federal, State, and Local Taxes, which provides for the contract price to be increased by the amount of any new tax imposed after the date of bid opening or the effective date of the contract for negotiated contracts.
- FAR 52.216-4: Economic Price Adjustment-Labor and Material, which calls for the Contracting Officer to negotiate a price adjustment after receiving notice of a price change.
- FAR 52.249-8(c) and FAR 52.249-10(b), which provide that the contractor is entitled to an excusable delay if the delay arises from unforeseen causes such as “acts of the Government in either its sovereign or contractual capacity.”
- Factor increased cost and performance risks into their bids and proposals.
- Ensure appropriate communications with subcontractors to lock in quotes and scheduling to the extent necessary.
- Ensure that you understand any notice requirements tied to changes or cost adjustments in your contract and provide proper notice to the Contracting Officer of such impacts.
If you have questions about President Trump’s executive orders and how they may impact your business, please contact Jackie Unger, Lauren Brier, or another member of PilieroMazza’s REAs, Claims, and Appeals or Government Contracts practice groups. Remember to register here for the webinar “Government Contracts and New Mandates: Executive Orders and Cost Recovery Strategies Explained” for an in-depth discussion of the executive orders and their implications for government contractors.
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