Most Importers in Wait-and-See Mode on Mexico and Canada Tariffs

Amy Magnus, director of compliance and customs affairs for A.N. Deringer, said she's been calling clients, trying to get them to prepare for tariffs on Canadian goods. A.N. Deringer is headquartered in St. Albans, Vermont, and has a strong presence along the U.S.-Canada border, with offices in New York, Maine, Michigan, Chicago, and even small towns in Montana and Washington state.

"Some people are simply in denial, they don’t believe it," she said, adding that she tells them: "You may not believe it, but when it happens, you better be ready."

While it's only taking CBP three days to set up ACH for importers now, Magnus worries about her non-resident importers in Canada who haven't gotten it arranged, because they've never had to pay duties before. "We’ve been begging our clients to set up an ACH account, and they say: 'Why should I bother?'" She said they think Trump is full of bluster. But she thinks CBP is going to be deluged with requests to set up ACH transfers if the tariffs go on, and the wait may grow. "I am seeing that this is seeming more and more likely, and we’re trying to put the pressure on our accounts," she said, to convince them to prepare.

Dan Ujczo, a North American trade expert at Thompson Hine in Columbus, Ohio, said truck traffic is getting congested on the Mexican border at Laredo, and prices are going up. "Intermodal services seems [like] the most efficient route to go right now," he said, though he allowed it's likely too late to get space for goods to come in ahead of a possible tariff announcement in five days, on Feb. 1. But Ujczo said importers also should be thinking about other imports, given that Trump is considering a global tariff as early as April, and is thinking about punishing China further. "Consistent with what we saw during COVID, we’re seeing containers getting bumped from the Asia Pacific" when other customers are willing to pay more for a rush delivery. "If companies aren’t front loading now, they really need to consider it," the trade attorney said.

Magnus said she's seen the opposite trend on the northern border -- Canadian exporters holding back, unsure if they should send goods, because they thought tariffs might go up Jan. 21.

If tariffs go up, Magnus said, many Canadian firms may not be profitable, because the prices in their contracts didn't have enough profit margin to cover a 25% cost increase. The reverse is also true: U.S. exporters to Canada "are going to have to eat the punitive duties the Canadians are going to put on."

All importers pay for at least a $50,000 annual customs bond, but thousands of those companies are going to need to sharply increase the size of those bonds.

Avalon Risk Management CEO Michael Brown, whose company issues those sorts of bonds, explained that as of Sept. 30, 2024, there were 280,916 continuous customs bonds on file; 86% of those were at the minimum, $50,000.

Now, not all of those are from importers who mostly import from Canada and Mexico; some could specialize in products from other free-trade partners, like Colombia, Chile, Israel or CAFTA countries; some could import goods that are subject to duties, but import less than a half a million dollars' worth of goods in a year.

Brown said his company's analysis is that even with 25% tariffs on all goods from Canada and Mexico, 75% of Canada- or Mexico-heavy importers wouldn't need to increase their bonds. Another 15% will need to increase to somewhere between $60,000 and $100,000.

Only 1.5% of current importers with minimum bonds would need a bond of more than $1 million, he said their analysis shows.

But even if only 10% need bonds that are more than twice as high as their current bonds, it could be time-consuming and, possibly, a financial strain. That's because, depending on the company's size and balance sheet, Avalon and other customs bond underwriters could require collateral in exchange for writing a large bond. A company would need either to provide a letter of credit from its bank large enough to cover the projected duties, or cash on hand, or a combination of those.

The premiums for larger bonds won't be much more, but the need to prove access to cash -- or cash on hand -- on top of the need to pay duties 10 days or up to a month after goods cross the border may be a strain for small companies.

Ujczo said for companies that do $15 million a year or less in sales, if they are very trade dependent on Mexico or Canada, they may not be able to qualify for a yearlong bond. "That’s when very difficult decisions have to happen," he said. They'll have to see if an underwriter is willing to offer bonds on a month-by-month basis, or the company will have to go into a joint venture or even be acquired by a larger firm.

Similarly, Brown said, if a company's profit margin is 10%, and they suddenly owe 25% tariffs, those imports are unprofitable. "The question becomes: What pricing power do they have?" Avalon won't know if they'll be able to increase prices to cover the duties -- and it wouldn't accept a contract that says a customer will pay all or part of that cost as proof, either.

The bond issue wouldn't be an immediate disrupter, because CBP doesn't generally stop imports the moment an importer owes more in duties for goods that have entered than their annual bond. Rather, early in the month, CBP sends out letters notifying companies that, based on their imports over the last 12 months, they do not have a sufficient bond. If those letters were to go out Feb. 8, and the tariffs were either not yet being collected or only began collections a few days prior, there probably won't be many notices. Those notices would be more likely to begin in March, and then importers have 30 days to secure a larger bond. In 2022, there were more than 10,000 of those letters; in 2019, there were more than 13,000; in 2023, there were fewer than 5,000.

But, Brown warned, importers shouldn't increase the bond only by the amount CBP names in the letter, because those letters will only include one or two months of duty. He said that if an importer had a $50,000 bond, and CBP said it needed a $100,000 bond, then, two months later, CBP would be sending a letter that you need a $200,000 bond; another month, you need a $300,000 bond, and so forth.

Each old bond is an exposure for the underwriter, because it can't be erased until the goods that entered under it are liquidated. Brown said importers will pay more in premiums, and be a worse risk, if they stack liabilities like that. It's better to project out a year, or as far as the importer can, and get a big enough bond to cover that projected volume of goods.

"It may seem counterintuitive to get a big bond early," he said, but it costs less, and while CBP will not judge importers for one insufficiency letter, a string of letters does not please the agency, which expects importers to be proactive.

Brown said that, while Avalon is getting calls to talk about what might have to change in their bonds, there haven't been many customers who have arranged for a higher bond now.

A big bond early makes sense, unless, of course, the tariffs are removed quickly.

Brown said while it's true that Trump might roll back the tariff on Mexico or Canada after a few weeks, and declare victory, "it’s also true that you could see a situation where the administration put a 25% tariff on a country, and [with] that tariff they didn’t achieve the results they were looking for," and so Trump imposes a 50% tariff.

"That’s the difficult part -- it does seem to be a moving target," he said.

"It’s very difficult right now, much of the industry is in a wait-and-see posture," he said. Nobody knows when the president will make an announcement, despite his talk of Feb. 1. No one knows if all goods will be covered, or just some. No one knows if CBP can make the change immediately, or if they would need 15 days or longer to get their systems ready to change what has been duty-free trade.

How companies calculate what they really will owe depends on whether one thinks Trump will be imposing tariffs as a way to pay down the deficit or pay for income tax cuts, or that he's more likely to use the threat of tariffs as a way to get the policies he wants.

If "you believe Trump looks at tariffs as a negotiating tool, and clearly in the case of Colombia, that’s what was happening," Brown said, referring to a 25% tariff on Colombian goods that was threatened, but not imposed, over the weekend, that would suggest there's no need to get a big bond set up now. But if you think tariffs will be used to replace the revenue now collected from workers' tips, for instance, "that would imply a more enduring tariff."

Magnus said the majority of her clients don't have adequate bonds, and some are importing such high-value goods that she thinks they'll saturate their bonds in a day or a week. Canada sells billions of dollars' worth annually of high-priced manufactured products such as planes, aerospace engines, heavy-duty trucks and gas turbines to U.S. buyers. But even lower-cost goods like paper and lumber add up when you're bringing it in by the container-load, she noted.

Ujczo and Magnus both believe finished goods like a truck or car just won't cross in the first weeks of such an action, as importers wait to see if the tariffs go back off. But Magnus wondered if U.S. assembly lines will get backed up with a part from Canada that's not being shipped, while Ujczo said car manufacturers learned their lessons during the COVID-19 pandemic, and no longer operate just-in-time.

Because of that, it could take weeks, or even months, before the effects on the car industry become obvious, he said. "In some ways it's counterproductive," he said.

Similarly, Ujczo said Canada is debating about how strongly they should retaliate. If they cut off crude oil or electricity exported to the U.S., that would be felt immediately, but there's a downside to such a dramatic response, he said.

Magnus said: "What if the Canadians really decide to play rough with us? The whole Northeast is powered by [Canadian] hydropower."