IEEPA Struck Down — Why the Tariff Pressure Remains

[Transcript]

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Please download those files. I'll put a link right at the top of the show notes so it's easy for you to find. And if you have any questions, feel free to reach out to me on LinkedIn or email me directly, and let's get through this together.

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We've talked a lot about this in the past, and we're looking forward to having a, a lively discussion today. Please submit your questions through LinkedIn. We will answer them as they come in. Harrison, if you can go to the next slide. So, a lot has changed, but a lot has stayed the same. Here on February 20th, the Supreme Court struck down the IEEPA tariffs.

The Trump administration, as we had speculated, they would responded by pushing other tariffs into place. The easiest method that they could use was a Section 122 tariffs, which was a blanket tariff. So what went away? Deliberation day tariffs, that 10% was ruled illegal. IEEPA doesn't have the authority.

The fentanyl tariffs were ruled illegal. The additional tariffs on Brazil, Russia, India were ruled illegal. And then we've still got questions, at least for me, on the de minimis tariff, but I don't think that impacts most people here From a business perspective, if you order goods from China, if your kids shop online, you may have things coming in where you'll get stuck with a bill as something shows up at your house.

But that I think is less impactful. We do still need to keep in mind that there are many, 232 investigations going on. There are 301 investigations going on, and a lot is going to continue to be studied here. The administration is looking for new mechanisms to shift the trade imbalance.

They see this as a critical need for the United States, and they wanna fix this trade and barrel and figure out how do we move forward. So this move on February 20th was really something that we expected to happen. We're not surprised that it happened, and it also hasn't had much impact in the overall tariff rates.

So what does that, what did it mean? What did it do?

So the court decision effectively brought down the tariff rate a bit, and as we saw the rate get raised back up to 15% through the section 121 it, it's moved things up. Now that is currently being talked about as not being stackable. There are lots of loopholes that have, have emerged right now for different things.

So Harrison will talk about some of the specific areas, but what we're seeing right now is we're seeing a leveling. We've gotten to a lower level, and I believe the administration is looking for other mechanisms, other levels, other tools that they can use to help get the tariffs up to the pre-roll rate.

The focus has not changed from what we can tell from our conversations with people in dc the focus remains. We want to fix the trade imbalance. Tariffs are the lever that we're using, whether that's working or not. We can talk about the numbers don't show that it's working, but it is something where we're seeing more and more discussions about reshoring, re-regionalizing and I'm having very detailed discussions with many people on this call, and we're doing some projects for people on this call about how do you get out of China. We know General Motors has a big program right now to move away from China, to free the non-China supply chain from China.

I know other supply tier one suppliers and OEMs are doing it, and we know other industrial companies are starting to do it, but it's very hard to disconnect from that. So the tariff lever is beyond just tariffs. We get into geopolitical discussions. There's a lot going on, but the key point is really that things changed.

We saw an immediate drop in the tariff level and then an immediate boost back up through section 121, and I think that's very interesting. So we haven't gotten away from this. We were talking, Harrison and Jan and I were talking before this webinar started about how this section 121 Tariffs are valid for a certain number of days, 150 days, but there's nothing in the legislation that says it can't be immediately renewed.

So while it is time limited, we can theoretically, and this is untested, see this tariff put in place on a continual basis. So I expect we're going to see some games being played. There'll be some additional litigation. There'll be a lot of pressure here, but my bet is that tariffs are going to stay in place and we have to function as if the tariffs were here.

We got some relief. There was some initial celebration on February 20th. It was my birthday. It was a great day, but all of a sudden there's a wave coming back right afterwards where the administration had already planned for ways that they could keep the tariffs in place.

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So on the left here, we have a look at the top 20 import partners of the US and how their effective tariff rate changes. You can see some of the big winners include countries like China and Brazil that had previously been targeted pretty heavily by the administration. And then some of the losers in this transaction are a few of the countries in the EU that had previously gotten lower sub 15% tariff rates.

Now they're kind of, they're stuck with the blanket, 15% tariffs. That's countries like Germany, Italy, France, and so on. On the right, we look at the top 15 import categories, and across the board you can see there's been some relief with this change in tariff structure. The one thing to call out is particularly interesting, especially for an automotive audience, is the HS code 98, the special classification.

This is looking at goods or really components that are sent from the US to either Mexico or Canada. Assembled into a finished good and then sent back under the IEEPA legislation those components, were not really components. The finished goods were subject to tariffs based on the value added outside of the us and now as it's written in section 122, those components should be exempt as long as they are U-S-M-C-A compliant.

Now again, that's all. As of today, things could change and U-S-M-C-A could also change in the summer.

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So we, we've broken these down on the right here. There is a chance that Congress could step up and Congress could act. Congress could put tariffs in place. Congress could vote to extend things. Congress could vote to put different tariffs in place to support the administration's desire. Now I think we all know that that's very unlikely 'cause Congress struggles to get a budget in place and we're, we're functioning in a continuing resolution world where different parts of the government lose funding on a regular basis.

So we've got a fairly divided government. So getting Congress to act in a uniform way doesn't seem likely because this isn't something where we have a high agreement. We've got section 338 tariffs. Now this is a very interesting one. It's a potential vehicle that that could be used. It's not been tested, but that means that it can be used and, and it will get tested.

And the Trump administration has proven that they are willing to push limits, uh, where there is a law that was put in place by Congress that they can use and see what happens in the court. So section 338 enables the administration to implement tariffs on countries that are discriminating against the United States.

How we define discriminating isn't very clear, but I would contend right now that the administration would very likely argue that those that have a trade imbalance are discriminating against us. That those that are countries like China would definitely fall into this world within the current administration's view, and we could see section 338 used to increase tariffs.

Now that's something that I would believe the administration is looking at right now. I, I know from, from conversations with people in DC there is a scramble going on. There are lots of things that are being looked at and there's lots of opportunities to, to try different things, and there's a willingness to try things that hasn't been there before.

There could be new section 122 tariffs put in place. Now I think this is very likely this could be rolled. Maybe it's 150 days and then it goes away for a day. And on day 151, we have tariffs back. There are ways that this could work. The clock can reset, things can be moved forward again, very likely that would be challenged the most.

Robust mechanisms that the administration has are the section 232 and 301 tariffs. Now for those in the automotive industry, I know MEMA been doing a great job lobbying and keeping everybody informed on what's going on there. There's a lot of information that's out there that's a lot of reviews that are currently going through the process, but we've got section 232 and 301 tariffs already in place. I expect those will build and I expect additional studies will be kicked off so that further tariffs can be put in place there. That is the cleanest mechanism that the administration has the, the least challengable mechanism to get tariffs in place.

So we knew that IB tariffs were announced back in 25. We've had a long road here. The Supreme Court just came through and, and struck things down. We have a long road ahead. I think as we get to the point where in July, the section 122 tariffs expire, and the administration appears to be preparing for that and looking for ways to keep these tariffs in place.

Tariffs are a core tenant. It as President Trump would say, is the most beautiful word in the English language. So if he continues to believe that tariffs is the most beautiful word in the English language, I can guarantee you we're going to see tariffs on an ongoing basis during this administration.

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And there's this thing called a liquidation date. And that liquidation date is usually about 300 days after the entry of the product. And during that period, the duties are basically. Estimates. So within that window, that's the opportunity to file what is commonly known as A PSC or a post summary correction.

So the date of entry is critical, the liquidation date is critical. And then once they say the liquidation date is passed, basically they're saying, okay, that's it. Those the duties are paid. That's it. Then you're into what they call the filing the protest, and you've got 180 days to file a protest. Now this is information that we know to date.

It can change. The process can change. I would highly recommend that you've got a trade expert and a legal expert, because the idea is that the litigation route would start after. You file a protest, but you know, who knows? So I, I'm certainly not a lawyer, but I would say this, make sure that you have your trade expert and a legal expert, not one or the other, both because they both have different sets of expertise to help guide you through this and stay really close to the information that's coming outta the administration because we know that it could change at any second.

So there's a few other interesting points on this slide that we've mentioned, and I think, Harrison, talk to us about the historical precedent.

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The issue there is where it's not a great comparison is the scale. It was only about a billion dollars in refunds compared to 165 billion for IEEPA tariffs. And it even took them about three years to set up a actual procedure refund mechanism. So if that's any guide, it could be five plus years for companies to eventually see these tariffs be refunded.

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[00:14:33] Ambrose Conroy: So what do we think the OEMs are gonna do? I mean, for me, this, this raises that question if, if you have been given tariff relief by your customers, what is that going to mean? This is, we're entering into this crazy new world here.

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That would be the most aggressive route, but I'm curious, is there anybody on the call, have we received any signals at all from the OEMs as to how they're gonna approach this? Any responses coming through Harrison?

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[00:15:12] Jan Griffiths: Okay, but it's, that's going to apply all the way through the supply chain because the tier ones now are gonna have to look at their suppliers, the tier twos and all the way through the supply chain.

And the same problem Ambrose, that we've had for a long time in this industry. And having been in that supply chain role, there's a leadership team meeting and somebody says, okay, great, so this happened. So what's the impact? Yeah, what's the impact? Which is a logical question to ask. And then the port supply chain leader or logistics leader is, okay, well that depends, and it really depends on how well you have your arms around the data, how much visibility you have to that data all the way through the supply chain to be able to run those what if scenarios.

And I see that Ambrose, that continues to be a challenge in this industry.

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I think right now we need to make sure that we're all communicating with our customers, communicating with our suppliers, talking about these issues and in talking about the tariffs and how it could impact financially. Also, talking about the other globalization issues and resiliency issues that we need to address on a daily basis that supply chain leaders aren't just focused on this, and this is not only a supply chain topic anymore. This is a board topic. CEOs boards, CFOs are very engaged on this in a way that I don't think five years ago, if you told me that supply chain was going to be the thing that drove organizations, I'm not sure I would've believed anyone.

Pre COVID supply chain was, was a function that was seen as supportive. Now it's so core and it's so critical and it's so impactful so many times because. Everything is so fragile since we've sought lowest cost and lowest price and not necessarily taken into account true resiliency.

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[00:18:08] Ambrose Conroy: I don't think the tariff rates have really changed, Jan. I think what we're seeing is we're seeing.

We're seeing companies continuing on the path that they're on, and there are reasons to leave China other than the tariffs. Mm-hmm. There is, no one likes it when I say this, but geopolitics is a huge thing that we all need to be very aware of, and I think there is a very clear risk that that China will move on Taiwan at some point.

US government is planning for: 2030

International sanctions go into place. Companies are just not allowed. So if we haven't moved our supply chains out of China before then there's going to be a mad dash. It took us years to move things to Mexico, move things to China, move things to other low-cost countries, and follow the low-cost country strategy.

It's hard to unwind. Yes. And as we try to do it, we're finding skills are not, are in different places. I'm, I'm in Adelaide, Australia with a client, uh, this week and, and it's very interesting, the automotive industry mostly left here. But this is an area where you've still got automotive skills, you've still got capabilities, and it's very interesting.

We needed to get CNC operators and we're able to get multiple CNC operators who are highly qualified in a couple of days just putting an ad out there. So there are parts of the world. That may not be the lowest labor cost, but where you can get the skills and where you can get the, the capabilities to do different things.

We're just gonna need to think differently. We're gonna get back to having to find that human capital and find those skills and find places where we can work that are friendly.

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Any thoughts around what could happen after that? I'm asking you to look in a crystal ball, which might be a bit tough to do, but,

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[00:20:24] Jan Griffiths: Yeah. Right.

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They're continuing to build militarily of note. They just are. It's reported that they've just sold hypersonic missiles to Iran. Which are the United States. Navy doesn't have a defense for those. So if Iran used a Chinese hypersonic to take out an aircraft carrier, which is not out of the question, we would see something happen very, very quickly.

That wouldn't then just be Iran attacking the United States. That would be China attacking the United States. And Iran has published some footage of their drones flying above carriers that aren't. Our Navy didn't detect. So we know that there is a lot of stalking, there's a lot of games being played, and we're at a point where geopolitical tensions are incredibly high.

I know we're talking about tariffs today, but I think there are hard resiliency issues that people need to be thinking about, and as we look forward to that meeting with President Xi and President Trump, if things haven't started to get better before then. It's not going to magically get better, then I don't think anyone has a Harry Potter wand that works and it's gonna change overnight.

We're moving in the opposite direction right now. The tensions are increasing. Military tensions are increasing between the United States and China. The automotive industry has always been where things get turned on. If we go to a military conflict, that's the industry that will has the production capacity.

Challenge right now is we don't necessarily have enough. Production capacity in the regions, Europe and, and the North American region. Both depend very heavily on China for a lot of components, things as simple as fasteners. And then we look at all the critical minerals, the critical materials that come outta China, PCB, boards, chips, you know, transistors, resistors.

There's so much that we get from China right now and, and they've used. State supported capital and other things to do this so that meeting with President Trump and President Xi could be a landmark, but I don't think it's gonna move the way people want it to move. I don't think we're gonna see anything good come out of it.

It's not going to be one where we start fighting the next day. But if, if we haven't seen positive indications of. Improvements in relations before then I think we're going to be worse off. I'm sorry. I'm just realizing that

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[00:23:17] Ambrose Conroy: shining up on

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[00:23:18] Ambrose Conroy: Yeah, I'm in, I'm in Australia and it's early in the morning and the sun is just coming up, so, my apologies to everyone.

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[00:23:32] Harrison Catlin: Yeah, of course.

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Any thoughts on that? Ambrose? I.

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Canada and Mexico, which is gonna mean that Canada and Mexico need to negotiate their own deals. I think they'll have an easier time negotiating deals. It for me, the real question is going to be what happens then if a Canadian part goes to Mexico and then needs to come into the United States or Mexican part coast of Canada and it needs to come into the United States.

Our supply chains right now are built around. What was NAFTA now is U-S-M-C-A where we as a region function together. And I think there is a high probability, and Harrison, I don't think we've looked at the prediction markets for this, but I think there's a high probability out there that we'll see those kind of things change and we have a lot of internal discussions that, that sometimes maybe we should be running a hedge fund and not a, a consulting company.

We look at these and there's some specific bets you can place to try to figure out what's going on. I think we're going to see another massive disruption. I think U-S-M-C-A as we know it today, will not stand past that date. I think we'll see a big shift as the negotiations happen, as Trump likely tries to put a specific deal in place with Mexico and a specific deal in place with China, which breaks a lot of those supply chains where we were able to use Mexican parts.

Assembled in Canada, shipped into the United States, and we'll have to wait and really understand what the implications will be. But we should be expecting changes and we need to think about and model and scenario plan accordingly.

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[00:26:05] Ambrose Conroy: We are and, and we haven't even seen the 338 tariffs. My expectation is that by the middle of March. We'll start to see some 338 tariffs get tested and they'll be mostly tested against China and possibly Mexico.

It'll be very much, I would, my speculation is it will be much like the fentanyl tariffs, these will get pushed, so there's a lot more to come. The only thing that it, that is clear to me, if you, if you want to sell a product in the United States. Make it in the United States Source. In the United States.

That's what the message from the administration has consistently been. But we all know how hard that is. We don't have the supply base. We're missing a lot of components. We're trying to develop it. And if we have the U-S-M-C-A region, if we have, if we have Mexico and Canada to supplement, there's a lot more that we can do.

But we've all gotten so used to low cost sourcing and we haven't. We've added a lot of complexity. This is gonna get very, very interesting and I, I am pushing clients to really look at resilience, to take geopolitics into account and to listen to this administration and what they're saying they have been very clear. If you want to sell here, you should make it here. Trump was very clear on that, and I think we need to, we need to take that seriously. Yeah. And I don't know what you're hearing, Jan. You're talking to a lot of people as well, and you, you may be hearing something different.

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And then the other thing I heard after a session today is get your arms around the data, get visibility all the way through the supply chain. And make sure that you know those dates, the entry date and the liquidation date, and that you've got the right team of people around you with the right set of expertise.

And I also heard you say stay true and stay the course with your re-shoring initiative. Stay with it. Don't take your eye pole for a second.

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Yes, you wanna make sure you understand that because if, if it holds true and, and you need to file by the liquidation date and you don't file for a refund by the liquidation date, you may lose your right to a refund. And with $165 billion in play, that's a lot. There's also the risk if you instigate litigation against this administration, you may magically have other problems, so you want to make sure that you're understanding all of the risks as you work to reclaim tariffs that were ruled illegal, but were taken by the government.

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[00:28:57] Harrison Catlin: Yeah, we had a couple, but I believe they were covered by, other people answering within the LinkedIn comment section. There was a question briefly, and I can just clarify this slide to make it more clear.

On the left hand side, what we're showing there is the net tariff rate that any country was kind of exposed to pre ruling and post ruling. It's not necessarily the headline, right, that you see for that country specifically because there's both exemptions and then additions for specific industries. So the question was around Germany.

And pre ruling, they were a little over 10%, but again, there was no headline, 10% rate. For Germany, it was 15%. And then there was some exemptions for specific goods that they happened to ship quite a bit of. And then there was additional stuff for automotive and that's what it netted out to. The one thing we haven't covered yet, which I know Justin wanted me to cover and Ambrose alluded to it, the kind of ability now with predictions markets and occasionally the use of ai. But I would kind of caution that slightly here to predict stuff that previously we wouldn't have as much visibility into the likelihood of things occurring. So in this case, we had mentioned that we were not surprised by the Supreme Court decision, and that was for a couple of reasons.

First, there was a pretty liquid market on call sheet, which is one of the major predictions markets for this specific case. That pointed to about 80 20, odds for this decision. And we also did a, a quick exercise just to back this up. We downloaded a PDF of the oral arguments back on November 5th when this case was originally heard.

And we gave that to Claude, which is the service we use here at Seraph. And we asked it to output a list of odds by justice that they would uphold the decision. We used that output and ran a quick simulation on that. And what we derived was that there was about an 82% chance, just purely based off of the way the oral arguments went for the decision to be uphold.

And the most likely outcome that our model predicted was six to three. And that is actually exactly what the outcome was. So kind of a cool use case there. And in the past you really, you would need a legal expert to speculate on how a case might turn out based on the oral arguments. But in this case, none of us are lawyers.

But the combination of predictions markets plus the ability of AI to parse text pretty well, gives you a little bit more insight than you may have had in the past. And again, the caution here is that's a sample size of one. You can't take that as proof of concept, but it's something

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So there's, there's a lot here. It's very interesting. If I truly believe this was the way to go. I'd be running a hedge fund, not a consulting firm. You do need people to think AI hallucinates, but it can supplement. So I'd continue to encourage people to supplement with AI. Use AI to get ideas, but then do the work.

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What?

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[00:32:23] Jan Griffiths: What did they say? Yeah, don't keep, don't keep it hanging in. Harrison, tell us.

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I didn't see it originally. It was okay. They had received description about the process from Stellantis related to MSRP licenses and had been asked to extend the period for the PSCs, which is Jan, you're talking about that liquidation date. We did it through their customs broker, and so far it was rejected by Customs and Border Patrol. Nevertheless, the MSRP license is working for current imports.

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[00:32:53] Harrison Catlin: So business as usual, I guess they're nothing crazy. But a again, I guess just follow the lead of whatever OEM you are attached to.

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I think most of the people on this call from looking at it are, are automotive. But if you're in medical device, if you're in other sectors, you'll be playing with different challenges and different rules. But this tariffs will hit the same way and the tariffs. Right now, what I didn't look at is whether there's a pharmaceutical exemption in in 122, but that would, that's something we'll take a look at and we'll come back with.

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[00:33:29] Ambrose Conroy: if this is helpful, we've got a a site. If you want to get a copy of this deck, please scan this, subscribe to Seraph. If everyone that subscribes, we'll get a copy of the deck. Follow Harrison, Jan, myself on LinkedIn. Follow Seraph on LinkedIn. We'd love to have further conversations. Feel free to reach out to any of us if you wanna have a conversation.

We love to talk about this topic, geopolitics, and just how to make your business work better. Thanks very much everyone. Have a great day. Take care.