By Chao Deng

President Trump on Thursday suspended for one month the 25% tariffs he placed on Mexican and Canadian products earlier this week. But there's a catch: The deal only applies to goods that had been traded duty-free under a 2020 North American trade agreement.

That's less straightforward than it might seem, as the U.S.-Mexico-Canada Trade Agreement sets forth an intricate and complex set of rules governing trade among the three countries. Thursday's turnabout has trade experts and lawyers rushing to determine exactly what goods will be subject to higher tariffs, let alone businesses that have skin in the game.

Generally speaking, under the USMCA, which took effect during Trump's first term, products enter the U.S. duty-free if businesses can show they comply with certain rules regarding the origins of those products' components.

For example, a passenger vehicle only complies with USMCA if the majority of the components -- including steel and aluminum -- originate in North America. In addition, 40%-45% of the vehicle's value must come from factories where workers earn at least $16 an hour.

Because USMCA rules are so complicated, businesses have sometimes chosen to pay a tariff on a given product instead of expending time and money to figure out whether it is USMCA-compliant, according to trade experts.

The analytics firm Trade Partnership Worldwide estimated that in 2024, 50% of Mexican exports and 45% of Canadian exports entered the U.S. duty-free and in compliance with the USMCA. These products include cars, trucks and auto parts from either country. Also falling under this category are Canadian rapeseed oils, chocolates, beef and engines; and Mexican television sets, air conditioners, avocadoes and tomatoes.

About 40% of U.S. imports from Canada and Mexico fell outside USMCA but still passed through duty-free: The U.S. imposes no tariffs on a host of products, regardless of the supplier country.

From Mexico, such products included computers, medical equipment, phones and beer. From Canada, such products included petroleum gases, aluminum, airplanes and turbojet engines.

Only about 10% of total Mexican exports to the U.S. in 2024 faced any tariffs at all. This included about $11 billion in auto parts and $7 billion in passenger vehicles that likely couldn't meet USMCA rules of origin. It also included about $9 billion in low-tariff oil products in which suppliers opted to pay the duty rather than deal with the paperwork and compliance costs required to make a claim under USMCA.

In 2024, only about 15% of Canadian exports to the U.S. faced any tariffs. This was nearly all oil with low tariff rates, rather than products that couldn't comply with USMCA rules.

The 25% tariff that Trump implemented on Tuesday is likely high enough to prompt many businesses to do the legwork to figure out whether their products fit under USMCA, said Ed Gresser, a former trade negotiator and vice president of the Progressive Policy Institute.

TPW estimates that each day the U.S. imports $1 billion worth of goods from Canada and Mexico that faced no tariffs even without USMCA. That means companies could now be on the hook for $250 million a day in new tariffs.

Gresser said that even U.S. Customs and Border Protection officials will be struggling with implementation, which will involve understanding the changes and reconfiguring electronic databases appropriately.

"A mountain of legal challenges and headaches are ahead," he said.

Gary Hufbauer, an economist at the Peterson Institute for International Economics, said that given the complexities of rules and constant changes by Trump, businesses will continue to put orders on hold and delay investment decisions.

"This is tremendously disruptive," he said. "There's no rhyme or reason to it."

-- Gavin Bade contributed to this article.

Write to Chao Deng at chao.deng@wsj.com

(END) Dow Jones Newswires

Roughly 38% of Canadian exports entered the U.S. duty-free under the U.S.-Mexico-Canada Trade Agreement in 2024, according to analytics firm Trade Partnership Worldwide, and only about 22% of Canadian exports to the U.S. faced any tariffs last year. "Big Chunk of North American Trade Remains Exposed to Tariffs," at 6:03 p.m. ET, incorrectly gave those respective percentages as 45% and 15%.

(END) Dow Jones Newswires

March 06, 2025 22:09 ET (03:09 GMT)

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