New England Biz Law Update
A stock market that has swung widely in recent days is one measure of the uncertainty Americans are feeling about tariffs. Businesses are also wading through the uncertainty, trying to both adapt to what has happened and predict what will happen.
Dave Townsend, a partner at Dorsey & Whitney, offers his thoughts on tariffs as he works to advise companies about their short-term and long-term strategies.
Since President Donald Trump assumed office, he has announced tariffs on imports from Canada, China, and Mexico. Townsend said that they were imposed under a legal theory that “has never been used to impose tariffs.
“The framework essentially allows the president to impose tariffs immediately, rather than through any sort of public process that would allow participation of businesses,” he explained.
“It is difficult to know what the administration is looking for from Canada and Mexico in response,” Townsend said. “That essentially creates all decision-making power with Trump himself, and it makes it difficult, if not impossible, to predict what is going to happen.”
The situation is volatile, to say the least. During the interview with Townsend, news broke that most tariffs on Canada and Mexico were delayed until April 2. Trump reported that he made this decision concerning Mexico out of respect for President Claudia Sheinbaum.
“If you would have asked me yesterday whether that was likely to happen within a week, I do not think I would have said I thought it would,” Townsend said. “It is difficult, if not impossible, to know where we are headed.”
Therein lies one of the challenges in advising businesses: Given how the tariffs were imposed, and lack of clarity about when or whether they will be imposed, businesses cannot truly understand the impact.
And the uncertainty is not just about the tariffs in effect, but what might be coming in the future. Townsend has fielded as many questions about upcoming tariffs as existing ones. The “America First” trade policy “sets the table for a variety of trade actions,” he said. Reciprocal tariffs are another area of concern; while there are not a lot of details, there are questions about what might be coming.
“The initial question they ask is whether this is going to be a long-term or short-term issue, in terms of increased tariffs,” Townsend said. “The business community is trying to figure out, not just what is going to happen within a month, but asking whether they are dealing with a fundamental change that, two, three, four years from now, will remain in effect.”
“It is hard to predict the future, but given the number of different tariff actions, and frameworks that President Trump has already created for new tariffs, it is hard to imagine that the issue is going to go away anytime soon,” Townsend affirmed.
In terms of operations, Townsend has first asked clients whether they can pause or delay shipments out or in and wait and see what happens.
“That’s not a viable longer-term solution,” Townsend noted. “Obviously, it depends on inventory, and the particular business, how long they could do that.”
Some businesses’ inventories can dry up in days, while others have mere weeks.
One strategy is to see if clients can shift the tariff burden contractually, passing on the cost of the tariff or reallocate the burden of them. Another change that can be made is who is the importer of record that pays the tariff to customs.
“Sometimes, you can change that,” Townsend said. “If you are a U.S. company shipping to Canada, you could take the position that, because of the uncertainty, you aren’t going to be the one importing anymore and require your customer to do it, or distributor.”
Longer-term strategies depend on the business. Some are looking for other import options.
“The optimal situation is where the market allows you to have multiple sources with multiple countries of origin, if you need to import something, including the U.S., because that is the safest bet right now if you are buying in the U.S. market,” Townsend said. “Having several sources, rather than just one country of origin, because of the way the tariffs are being implemented, that diversifies the risk.”
Townsend has also been assisting clients with compliance-related checks, including determining whether a company is declaring merchandise correctly to U.S. Customs.
“With the new tariffs on Canda, for instance, there are lots of industries that haven’t had to think about tariffs on goods from Canda since the ’90s with NAFTA,” he said. “There are some companies that, because there has not been much at stake, have not looked at those compliance issues.”
Townsend says legal guidance can ensure companies are not overpaying or underpaying, which creates liability to the U.S. government.
“Companies are looking at this, in the first instance, as an increase in cost. And that’s true. Put a 25% tariff on your supply chain, and it will increase your cost,” he said. “From a legal standpoint, one thing I think in-house counsel need to be thinking about is that the stakes of compliance with import laws is increasing drastically.”
“If you make an error that effects the duties you are paying, you make a country of origin error, you make a valuation error, all of a sudden, you may be depriving the U.S. government of a significant amount of money, whereas, three months ago, that wasn’t the case,” Townsend explained. “In terms of in-house counsel trying to manage risk, this needs to be something looked at, not only from, ‘Is this going to hurt our company because of cost,’ but also ‘Do we have internal procedures to avoid taking unnecessary risks that could create large liabilities to the U.S. government?
