The recent shift in U.S. trade policy has fundamentally changed how businesses must approach cross-border commerce. Our recent seminar with customs and trade expert Robert G. Kreklewetz provided crucial insights into this complex new environment. Here are the key takeaways every business leader needs to understand.

The Fundamentals: How Customs Duties Work

At its core, customs duty calculation revolves around three critical elements — what Rob calls "the big three of customs":

Tariff Classification: Every product crossing borders must be classified using a standardized numerical system. For example, a ballpoint pen falls under heading 9608, with specific subheadings determining the exact classification. This classification is consistent across WTO member nations.

Origin: Determining where a product is actually "from" for customs purposes. This goes beyond simple manufacturing location and involves complex rules about substantial transformation and value-added content.

Valuation: Establishing the dutiable value of goods, which follows internationally agreed rules and isn't simply the invoice price in related-party transactions.

The End of the Free Trade Era

For decades, Canadian businesses benefited from essentially duty-free trade with the United States. This began with the Auto Pact in the 1960s, evolved through the Free Trade Agreement of the late 1980s, NAFTA in the 1990s, and most recently the USMCA (CUSMA).

However, a telling statistic emerged: only 38% of Canadian goods entering the United States were actually claiming USMCA preferential treatment. Many businesses didn't bother with the complex origin analysis because goods were entering duty-free anyway under other provisions.

That comfort zone has ended.

The New Reality: Understanding Current Rates

The current tariff structure presents multiple layers of complexity:

• USMCA-qualifying goods: Generally subject to a 10% minimum tariff
• Non-qualifying goods: Face the base 25% rate plus potential additional duties
• Third-country goods: May be subject to much higher rates — for example, Chinese goods faced rates as high as 145% (recently reduced to 30% for 90 days)

These rates aren't arbitrary. They often combine multiple types of duties: reciprocal tariffs, Section 232 national security tariffs, and Section 301 unfair trade practice tariffs.

The USMCA Qualification Challenge

Qualifying for USMCA treatment requires meeting specific rules of origin. Using Cracklewitz's pen example, even a simple product requires complex analysis:

• Each component must be classified separately
• Non-originating components must meet "tariff shift" rules (typically requiring components from different tariff chapters)
• Alternatively, products can qualify through regional value content tests (typically 60% North American content)

For complex manufactured goods like automotive parts or machinery, this analysis becomes exponentially more difficult.

Cross-Border Complications

When goods cross borders multiple times, a common occurrence in integrated North American supply chains, each crossing triggers its own duty calculation. A Canadian component shipped to the U.S. for assembly faces U.S. duties, while any U.S. components coming to Canada face Canada's retaliatory 25% tariff.

Importantly, businesses can't simply claim both USMCA benefits and duty drawback relief, it's one or the other.

Business Structure Considerations

Some businesses are exploring structural changes to minimize tariff impact:

Transfer Pricing Strategies: Attempting to reduce dutiable values through related-party pricing faces significant obstacles. Customs valuation rules specifically address influenced pricing, and royalty payments may still be dutiable as "additions" to transaction value.

Assembly Operations: Moving final assembly to the destination country can reduce dutiable values, but the benefits may be limited if components already qualify for preferential treatment. The complexity and cost of restructuring operations often outweigh modest duty savings.

Contractual Implications

International sales contracts have become critically important. Incoterms 2020 define who bears responsibility for duties and taxes:

• Ex Works (EXW): Buyer handles all duties and taxes
• Delivered Duty Paid (DDP): Seller handles all duties and taxes

Many businesses discovered their contracts didn't clearly address these responsibilities, creating unexpected cost exposures.

The Cost of Compliance

Professional analysis costs vary dramatically based on complexity:

• Simple tariff classification: Less than one hour of professional time
• Complex origin analysis for manufactured goods: $15,000-$25,000
• Comprehensive business restructuring: Potentially much more, often requiring teams of trade, tax, and legal professionals

Looking Forward

Three key realities have emerged:

1. Tariffs are sticky: Some level of tariff protection appears likely to persist long-term, making this more than a temporary policy shift.
2. Complexity requires expertise: The technical nature of customs law means most businesses need professional guidance. The era of informal cross-border trade is over.
3. Audit activity is increasing: U.S. Customs and Border Protection audits increased 137% in early 2025, while Canadian authorities are also stepping up enforcement.

Strategic Recommendations

Immediate Actions:

• Audit existing supply chains for USMCA qualification status
• Review international sales contracts for duty allocation clauses
• Assess whether goods qualify for any available duty relief programs

Medium-term Planning:

• Consider supply chain restructuring only after thorough cost-benefit analysis
• Develop internal customs compliance capabilities for larger operations
• Build relationships with qualified customs and trade professionals

Long-term Strategy:

• Accept that some level of tariff environment is likely permanent
• Factor tariff costs into pricing and sourcing decisions
• Invest in systems and expertise to manage ongoing compliance requirements

The shift from an essentially free-trade environment to one where tariffs matter represents a fundamental change in how North American businesses must operate. Success in this new environment requires understanding not just the rates themselves, but the complex technical rules that determine how they apply.