For more than 20 years, the North American Free Trade Agreement (Nafta) and later the US‑Mexico-Canada Agreement (USMCA), have facilitated cross-border trade and investment among the US, Mexico and Canada through the elimination of virtually all financial barriers to trade. Nafta and the USMCA have been a boon to the energy industry in particular by creating a highly integrated and competitive North American energy market. On Feb. 1, however, US President Donald Trump announced a series of executive orders through which he invoked authority granted under the International Emergency Economic Powers Act (IEEPA) to impose broad-sweeping tariffs on goods imported from Canada, Mexico and China.
With respect to Canadian goods, specifically, these executive orders cited the “extraordinary threat” presented by fentanyl and illegal immigration to impose an additional 25% ad valorem rate of duty on all imported products, except for Canadian “energy” or “energy resources,” which are subject to a 10% ad valorem rate of duty. The Feb. 1 executive orders represent both a novel interpretation of IEEPA — which has never been used to impose tariffs on the import of foreign goods — and a marked shift in the country’s energy policy. To the extent the Feb. 1 executive orders (or the ways in which they are implemented) are challenged, litigation is most likely to occur in the US Court of International Trade, which is a federal court with nationwide jurisdiction over trade-related disputes.
On Feb. 3, Trump paused the implementation of the Feb. 1, 2025, tariffs on Canadian and Mexican goods until Mar. 4. Negotiations are presumably ongoing, and there is a possibility that the tariffs may never go into effect; however, there remains a possibility that the tariffs will go into effect on Mar. 4, as currently ordered.
A Brief Tariff History
Prior to the Feb.1 executive orders, tariffs on North American imports of oil and natural gas were increasingly rare, as an unencumbered energy trade has, in modern times, been viewed as a strategic and beneficial component of North American economic integration. Yet, while average tariff duty rates have fallen — and many duties on imported oil and natural gas have been eliminated altogether — the American energy trade has not always been unfettered. For example, in the 1970s, Presidents Nixon, Ford and Carter utilized authority granted under Section 232 of the Trade Expansion Act of 1962 to impose import restrictions on oil on the grounds of national security concerns. The import fees, which ranged from $0.21 to $4.62 per barrel (depending on the type and source of oil), were designed to encourage domestic production and refining capabilities and to reduce the country’s dependence on foreign oil supplies.
The oil import fees of the 1970s, however, were gradually reduced and were ultimately eliminated in the 1980s and 1990s as energy markets stabilized and the US introduced a more cooperative and market-oriented approach toward energy policy. With respect to North American trade, specifically, the execution and implementation of Nafta in 1994 signaled the beginning of a modern trend toward regional economic cooperation in which tariffs (and other cross-border fees and taxes) on North American energy products were virtually nonexistent. This trend continued when the USMCA replaced Nafta during Trump’s first term. The broad tariffs proposed by the Feb. 1 executive orders, therefore, represent an unprecedented shift in modern US energy policy, the impacts of which remain to be seen.
Impact on Canadian Trade — What You Need to Know
- What products do the tariffs apply to? While the tariffs apply broadly to “products of Canada,” the precise scope of the tariffs is currently unclear. We expect clarification regarding the covered US Harmonized Tariff Schedule (HTS) codes, and the new HTS Chapter 99 special tariff number will likely be included in a subsequent Federal Register. Importers can look to a recent publication in the Federal Register concerning supplemental tariffs imposed on importation of Chinese merchandise as an example of how the HTS might be updated if the North American tariffs are implemented. The terms “energy” and “energy resources” are defined by reference to related Executive Order 14156, issued by Trump on Jan. 20, and include “crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water and critical minerals.” The executive orders do not address whether the tariffs will apply to cross‑border flows of electricity; however, precedent from the International Trade Commission suggests that electricity would not be impacted.
- What are the tariff rates? With the exception of Canadian energy resources, all products imported from Canada are subject to an additional 25% ad valorem rate of duty. Canadian energy resources will be assessed a 10% ad valorem rate of duty. The rates of duty established by the Feb. 1 executive order are in addition to any other duties, fees, exactions or charges applicable to such imported goods.
- Are there any exceptions/exclusions? The Feb. 1 executive orders originally provided exceptions for goods that were loaded onto a vessel at the port of loading, or in transit on the final mode of transport, prior to entry into the US before 12:01 a.m. EST on Feb. 1. To utilize this exception, the importer would have needed to follow the US Customs and Border Protection (CBP) certification process, which was to have been published in the Federal Register. This exception was withdrawn as part of the Feb. 3 executive orders that otherwise delayed the implementation of the tariffs. Additionally, the Feb.1 executive orders exclude from tariffs any merchandise covered by 50 U.S.C. 1702(b), including: (1) personal communications that do not involve a transfer of value; (2) donated articles; (3) informational materials; and (4) transactions ordinarily incident to travel.
- When do the tariffs take effect? The CBP was initially authorized to begin implementing the tariffs against Canada beginning at 12:01 a.m. EST on Feb. 4, 2025; however, subsequent negotiations between the US and Canadian governments resulted in a temporary delay of the assessment of any tariffs until Mar. 4, 2025.
- How will the government administer the tariffs? Under current law, CBP — which is an agency under the US Department of Homeland Security — has jurisdiction to assess and collect tariffs. To the extent these tariffs are administered like other current tariffs, importers will file entry paperwork and pay estimated duties upon importation. CBP will then review that entry paperwork and fix the assessment of duties through its liquidation process.
Administration of tariffs, however, may eventually shift to the US Department of the Treasury. Trump has instructed the Secretary of the Treasury to “investigate the feasibility of establishing and recommend the best methods for designing, building and implementing an External Revenue Service (ERS) to collect tariffs, duties and other foreign trade-related revenues.” If an ERS is created, it would be somewhat of a return to form, as prior to the creation of the Department of Homeland Security and CBP, tariffs were administered through the US Customs Service, which was then housed under the Treasury Department.
Near- and Long-Term Considerations
Although the effective date of this first round of tariffs has been delayed, companies should begin planning for these or other tariffs to go into effect in the near future. Companies with significant import and/or export operations in North America, and especially those moving energy resources across the borders, should be proactive in determining how such tariffs may impact their businesses and should explore potential mitigation strategies, including by:
- Analyzing the effect on short/long-term operations and profitability, including impacts resulting from delays or disruptions in the supply chain;
- Reviewing existing contracts for the purchase and sale of impacted energy resources to understand contractual liability and risk from the impending tariffs;
- Renegotiating existing contracts with suppliers or customers to clarify or alter the parties’ respective cost-sharing responsibilities; and
- Assessing domestic or alternative sources of goods to avoid impacts from the payment of additional duties.
We anticipate that the CBP will issue further guidance regarding the scope and application of the tariffs following its receipt of directives from the White House. Trump has indicated a clear willingness to utilize tariffs as a tool in influencing international trade policy, and it is possible that tariffs against other countries will be a recurring topic that we will focus on throughout this administration.
Jason Fleischer and Jeffrey Jakubiak are partners and Stephen Josey and Elizabeth Krabill McIntyre are counsel at law firm Vinson & Elkins. The views expressed in this article are those of the authors.