Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

All right. Hello. Welcome, everyone. Welcome to our second webinar for March. My name is Nick, and I am with Onyx. I'm a director with our Onyx Group. I'll be hosting and moderating questions, and I'll also be presenting some slides in the middle of the webinar today. And we have 2 other speakers that I'll introduce here shortly. So like I said, this is our second webinar this month. It's really meant to be a follow-up from a session we hosted a week ago. I imagine many of you joined that. So last week, we dove deeply into the concept of reciprocal tariffs and we began to model what we're projecting, some economic implications there, but also just sort of the philosophy behind reciprocal tariffs and this session is kind of a continuation of that conversation. We are going to bring up some of the material from last week as background, especially for anyone who didn't join last week. But we're going to shift and talk a little bit more of a commercial field today on the services that a couple of our groups, Onyx and our partner Tradewin, who I'll introduce, offers to help clients navigate things like reciprocal tariffs and all the other tariffs and trade measures we're seeing. So you'll see kind of a 3-part field today, and I'll introduce speakers, like I said here shortly. A couple of admin things here. So about 45 minutes of content. Q&A, as usual, use the Q&A window of the webinar, submit those. We'll watch questions. And if we see a chance, we'll field those during the presentation. Otherwise, we'll save time at the end. If you want to get a copy of the slides and also the recording for the event, look for a survey sometime today within a couple of hours of the event. And once you fill that out, it takes about a minute or 2, you'll get a link to a page where you can download the materials and watch the recording. You can share that with your colleagues as well. If you'd like to be notified webinars and just beyond our mailing list, for instance, we sent out our monthly e-mail today. If you want to get that, then use that QR code and you can sign up your e-mail to get materials from Onyx. So it's a great way to kind of keep up with our material that we publish. Also, some of you may or may not know that we are -- we, as Onyx and Tradewin are part of a broader professional services portfolio as part of Expeditors. So we're here both as divisions of Expeditors. So you probably know expeditors as a global logistics company that handles customs brokerage, order management and other things. But in addition, the company has developed groups that you're seeing here on screen over the last few decades. And so it's a combination of consultancy and advisory services as well as a couple of software products. So all of these services can be used independently of expeditors, which is why we set them up as distinct. So today, we'll be focusing just on Onyx and Tradewin, but I thought it would be useful to kind of understand this broader professional services structure. Okay. For speakers today, we have Adam Karson from Onyx, Chief Economist. He has more than 20 years of experience as an economic adviser to global leaders across a number of industries. He's got experience in the U.S., Europe, Middle East. And before coming to Onyx a few years ago, he worked at Chevron as a senior economist. We also have with us Matthew Springate from Tradewin, Principal -- U.S. Consulting Principal. He brings a lot of experience working with importers and exporters to perfect their compliance operations. He specializes in duty recovery programs, preferential trade agreement, qualification, tariff classification, prior disclosures and audit support. All right. So we're going to start off with Adam. He'll give some background to the reciprocal tariffs, what we're seeing there, and then I'll come in after that.

All right. Thanks, Nick. So I'll just kind of set the stage here. As Nick mentioned, if you joined our webinars last week, this might be a little repetitive, but it's also a very fast-changing environment just in the past -- really the past 2, 3 days, we've seen a number of changes in Trump administration policies in terms of 25% tariff on autos, yesterday in addition to some potential changes in the way reciprocal tariffs could be applied. Yesterday, the implication was that these will now be applied to all countries versus earlier in the week where tariffs -- reciprocal tariffs might be only applied to a certain percentage of U.S. trade partners. But -- so it goes without saying here that we're in an era of rising protectionism and policy uncertainty. And ultimately, what we think -- we think the Trump administration is really trying to redraw the global trade map through the use of tariffs to sort of "level the playing field" with major trading partners. And then -- but ultimately try to force trading partners to knock down their trade barriers. So tariffs are kind of be using little bit of a carrot and stick here to force other countries to lower trade barriers unilaterally and reduce regulations and other types of fees and things that the administration views as obstacles to U.S. market access. There are, of course, a number of risks associated with this approach, including how other countries respond and many are in a wait-and-see mode. Some will negotiate, others will retaliate. We'll talk a little bit more about that. And then there will be some -- there's going to be some economic pain associated with tariffs, both in the U.S. and abroad, and that's going to test policymakers' commitment to this strategy. But a good place to start here is to talk about reciprocal tariffs. As I mentioned, ultimately, the U.S. is looking for other countries to reduce tariffs, taxes, fees, non-tariff barriers, any kind of currency manipulation that they may be engaged in? And then the other barriers that are put up to that block U.S. market access. So this includes things like that, subsidies, wage support, a number of other kind of measures that the Trump administration thinks are adverse to trade. If we take a crack at quantifying these different factors, of course, there's a lot of variability across different countries and sectors of products, but they average out to about 22%, say, 20% to 25%. And that would be sort of an across-the-board average across all U.S. trading partners. If that were sort of the place we land as a -- for reciprocal tariffs, that would be pretty significant. We've got a lot of modeling and really anything above 20%, you start to see more significant economic fallout. Then -- so while some countries will negotiate on wherever the U.S. administration starts, others will not be able to do so. And fundamentally, we don't think the Trump administration is bluffing here. We think tariffs will be implemented. And so there's going to be a higher level of tariffs and protections overall and there will be some negative economic impacts as a result. On the next slide, we can turn to the timeline of how these things will be implemented. Of course, we're all watching the April 2 sort of announcement next week of what reciprocal tariffs could be. But there are other kind of factors and possibilities in this timeline. So first and foremost is the immediate implementation of tariffs starting next week, perhaps. April 3 is when the auto sector tariffs will go into effect. But the reciprocal tariffs could be implemented also pretty immediately by using IEEPA to place broad tariffs across countries. This could be anything from a very complex product-specific tariff structure. But it seems like the administration has moved away from that. The more likely scenario is a single number for each country, possibly the same number for all countries as a starting point. But beyond that, there are other possibilities a little further out. There's going to be -- there are short investigations on particular issues that the U.S. believes are sort of apparent violations of free trade. And then there are signals that the administration is even trying to eliminate comment periods on some of those investigations to try to kind of fast track their response. We also believe that there will be ongoing investigations, bilateral, trilateral investigations are going to take time. And that creates a risk for kind of a tit-for-tat escalation going into -- going through 2025 and even into 2026. So consider like a staged kind of approach where you have some immediate and then kind of ongoing points of escalation or de-escalation throughout this year. In terms of policy tools, if you go to the next slide, IEEPA is at the top of the list here for a fairly immediate implementation. This gives the President broad powers because it's essentially based on National Security Foundation, and it's less likely that, that would be challenged certainly by Congress. And the legal foundation is a little bit untested but that national security umbrella gives the President a lot of powers. We can also see a 15% across the board tariff on countries with which the U.S. has a trade deficit. So through like Section 122, that could last for 150 days before Congress needs to ratify those tariffs. That could be used as a negotiating tool to put pressure on countries to kind of drop their trade barriers. And as I mentioned before, we could see a number of investigations through Section 302, Section 232 that could be ongoing. That's a little bit more medium to long term. On the next slide. So when we think about U.S. and China, up until now, there's been kind of caution on both sides. Now you may push back on that and say, wow, the Trump administration has already ramped up tariffs 20% on China on top of the existing 25% from 301. So we're at 45% right now. How is that cautious? Well, compared to the alternative, it is kind of an incremental approach. And it seems as though the Trump administration has recognized that there is a -- the scale of the impact of rapid escalation with China could be quite severe and caused a lot of disruption to supply chains, among other consequences economically, politically. So we've seen this 20% ramp up in the past few months. But this is short of a sort of maximum pressure approach. Meanwhile, China is also looking to prevent a full rupture with the U.S. China's export engine is really its major source of growth right now. So they have to be careful in how they respond to the U.S. And so the Chinese government is really applying very acute pressure but focused pressure through export limitations, targeting specific firms or products, all with the goal of applying kind of very specific focused economic or political pressure in the U.S. There is a risk of escalating here. Most notably, the addition of potentially another 25% tariff on countries that buy Venezuelan oil, that would include China, India, among other countries. So that would take China tariffs from 45% to 70%. Our understanding is these would all be additive. On the other hand, yesterday, during a press conference, President Trump suggested that maybe China could get some relief on tariffs if they're a sort of a proactive constructive partner in the U.S. trying to acquire TikTok. So there's a bit of give and take here and a lot of uncertainty on how this is going to play out. So while all that's happening, it's also really important to focus on the EU. The U.S. is really targeting the EU and policy is going to remain front and center with some pretty serious disagreements dominating the headlines on things like the Digital Markets Act and CBAM, the carbon border adjustment mechanism. The EU is quite concerned about this and the scale of the changes that the U.S. is trying to push for and the sort of like take it or leave it approach of either you agree to our U.S. demand or you're going to face a ramp-up of tariffs and trade obstacles. This one is kind of difficult to call how this is going to play out. We think there are a couple of options how it could go. In the immediate term, it does look like there will be escalation over the next several months in ramping up the rhetoric, potentially ramping up tariffs, not unlike what the U.S. has done with Canada and Mexico. And then throughout the year, we're likely to see some negotiation, delays, pauses, retaliation. There's also a de-escalation pathway here where the EU would agree to some or all of the changes that the U.S. is pursuing. But if not, I think the U.S. may also not be willing to necessarily pursue a maximum pressure, in particular, if the U.S. economy looks like it's in trouble. And on the macro side, the U.S. economy is looking a little bit shaky at the moment. So that will be something that really watches a signpost for maybe U.S. negotiating power going forward. I'll wrap up with one more slide here, just kind of quickly taking a look at the rest of the world. So we talked about China and Europe, but really, the rest of the world is kind of mostly in a wait-and-see mode. But some countries, I think, are standing out as having a more or less assertive response to U.S. policy and the results have been kind of mixed in general. But one interesting kind of case study is to look at Canada and Mexico, where they've been faced with the same circumstances but have responded very differently. Canada has been quite assertive. Mexico has been more intentional in delaying its retaliation. Yet both countries have ended in the same place with the same tariff treatment. So that has set a mixed message to other countries on how to approach negotiating or dealing with the U.S. Because you also have India, which provides another signal that perhaps a bilateral negotiation is actually possible with the U.S. And India has been able to kind of succeed in that vein by more unilaterally removing some of its barriers or dealing with some of the issues that the U.S. has identified on their own before coming to the negotiating table. And then you have a host of countries that just aren't responding yet. They're -- for example, they haven't responded to steel tariffs, they're kind of waiting and seeing what happens next week with reciprocal tariffs and this is because a lot of these countries have very different exposure to trade, generally very different exposure to the U.S. specifically. And then they all have their own set of leverage and tools that they could use. Some have a lot of leverage, some have very little. So really, our -- one of our big roles going forward is to help clients stay on top of these changing dynamics, monitor what's happening in real time and then have an eye to the future of where kind of each individual country might land in terms of their, let's call it, the tariff relationship with the U.S. With that context in mind, let me hand it back to Nick and dive into the TRM.

Thanks, Adam, there's one quick question about where Mexico falls here and dependence on exports to the U.S. because I know we're not showing it. I imagine it's close to Canada. It's in that range. Do you happen to know offhand like kind of where you position this on this graph?

Mexico is quite dependent on the U.S. Mexico is now the U.S.'s largest trading partner. So especially when you strip out energy. So the relationship between Mexico and the U.S. is one of mutual dependence and Mexico really depends on the U.S. as its #1 export market.

Okay. Awesome. All right. Let's move forward here. So -- now I'd like to really talk about what we do in Onyx in more detail. Given the reciprocal tariffs or other tariffs and just really broader trade measures in general, these could be anti-dumping, anti-subsidy, quotas, licenses, just things that pop up that really can be difficult to track, especially if you have a company that's sourcing for many origins, importing to many countries. Often these -- kind of the responsibility for these geographies fall on a singular person or a singular team located in one place. And so you have global responsibility, and you're trying to keep track of all the news, you're subscribed to many newsletters, you're Googling things. You're talking to your peers. You're talking to your providers and it becomes really a messy process to try to keep up with all the trade regulations that get introduced. So because of that, last year, Onyx, we introduced a new trade regulatory monitoring service because we saw the need out there that people were spending an inordinate amount of time trying to keep up, but still feeling that they didn't quite get there. And so it's just a struggle. So I'd like to just walk you through how this service looks like. Really quickly, I think you -- probably, if you've attended our webinars, you know about Onyx, we're an advisory firm. We help clients navigate risks, pursue opportunities around your supply chain. We focus on a lot of geopolitical, trade, economic and other disruptors. So that's who we are. And then we offer different service lines. And so the one I'm going to talk about here is this trade policy forecasting and regulatory monitoring service. As you can see, it's positioned towards the trade and compliance function. It, again, tends to be the people who are responsible for keeping tabs on regulations as they are introduced or even higher level trade policy. Some of those kind of slower moving legislation elections, things that precede regulations, we really try to get at that to be very forward-looking. We offer other service lines. I won't get into today, but you can kind of get a sense of those there on screen. So to get into the regulatory monitoring, it's essentially this 3-step approach. So what we do is when we work with the client, we need to understand more about you. What are the products you're shipping and where are you shipping from and to, so origin and destination. With the products, we use naturally HS codes for that and we do it at a 6-digit level so that it can be generally globally applicable, whichever country or geography. And so we take your list of HS codes and then we understand your geographies, and we build a -- or we plug that into our model that we've built, which is our continuous monitoring. That's that step 2 there. So we built this service where we're checking online as new regulations are announced. So I think federal register notices in the U.S. or Gazette publications in Mexico, things like that in the EU. So as these things are published online across a number of websites, we are tracking that. So we're pulling that down into our database. And then we tag it to a product, by HS code and geography. With that in mind, and when we have your information, we can correlate the 2 things together. And so we can kind of pull out what are the things that matter to you so that it's not this title wave of information you're trying to sift through and figure out what -- does it affect my goods? Does it affect my lanes? So we do that work for you. And so we identify that and then we serve it up to you in an alert. So these alerts are delivered via e-mail. I'll show you an example here in a couple of slides. Essentially, it's a table that lays out the impact of countries, products, timing. We get these out within 24 hours of a regulation that's issued. So those can go on throughout the week, throughout the month. Also at the end of the month, we offer a trade policy, a digest essentially looking at sort of the major things going on for that month and what we see looking forward over the next month, month plus. So that's more of a narrative form. I'll also show you an example of that. So that complements the alerts. Also in the monthly cadence, we can pile all the alerts that we have produced for the month. So if it's helpful to have that all in one place, once per month, you get a repeat of all the alerts, but more packaged up for you. So that's the essence of the service. We have an optional add-on where if you want a monthly briefing, you want to talk to our Onyx team, our analysts, ask them questions. That's something we found people are interested in, but not always. So it's really an optional component of this. Okay. So just to give you a sense, kind of paint the picture of what we cover. We divide this between our baseline service and a broader coverage. We found that the baseline service is mostly what people in a trade compliance role are the kinds of things that they need to cover. But we've also found that there are some things in the broad service that we can pick and choose and add those into the service as well. So as you can see on screen, things in the baseline include tariffs, quota, antidumping, countervailing, anti-subsidy measures and taxes, licenses, et cetera. Broader service components include things that are kind of larger corporate concerns typically like foreign direct investment measures, capital controls, other types of financial instruments that maybe aren't classically trade compliance, but could affect your overall supply chain. So some options there for you. And we would talk through that with you if you're looking at that. And then this is an example of an alert. So when we say we correlate your products and your geographies to the regulations and then serve that up. This is how that looks. So you'll get a table of information. You get the name of the regulation that was issued, which as you can see, is a link to a web page, so it explains everything about it. You want to read more details there. And then what country has issued the regulation, so a couple here from Brazil, one from Mexico. And then what other countries does it affect? So like Adam was talking about the measures on China. So if that was here, you'd see U.S. as the country, affected countries would be China in that case for those IEEPA tariffs. And then the policy type just categorizes it really simply like on that previous slide, you saw those bullet points. This will be the category that you'll see that applies. The products would be only your products. So these measures could affect many HS codes, but we'll only show you your HS codes so that you can do what you need to if you have a parts database or other systems, trade management systems that you're using, you can correlate what that looks like on your internal data. And then timing. So usually, this is announced within 24 hours or so of the alert. The implementation date can be right away, can be future dated, sometimes 30, 60 days out. So you get a sense of timing when this takes effect. So that's the essence of it. Just an example of the alert. And then I mentioned also the monthly digest. So this is a bit more of a narrative form. We really want to be forward-looking on this. We're looking more to trade policy here than trade regulations. We make that distinction, policies proceed regulations. So it's kind of an early warning to see what's coming, what's brewing in the background. We take great care to make these brief. These are not meant to be long written digest. The point here is to save you time, so you're not reading a ton of material, but we do provide links so that if you want to know more, you know where to go, and you can read more in depth on that. So that's the essence of the service. If you're interested, reach out to us, we really just kind of wanted you to know, given all the tariff activity going on right now, how we and Onyx approach it and what we can offer, and then a bit of a hand off to Matt next is in talking to clients, we often get questions about, okay, you've alerted me. Well, now what? Like how do I get through this? What are my options? Are there ways to mitigate these tariffs, for example, and Matt's really here to help talk you through that. So with that, I will hand it over to Matthew.

Thanks, Nick, and it's good to speak to everybody. A brief introduction to me and Tradewin as we move to the next slide. So Tradewin is part of the global professional services umbrella with Onyx and Cargo Signal and Tradeflow, and some other partners of ours. But what we do is we specialize in customs and trade compliance, consulting solutions here in the United States and then around the world, focusing on really kind of 3 different discrete functional areas. One would be advisory consultant where we're doing regulatory reviews, we're looking at program set up. We're helping companies build the compliance programs through risk assessment or manuals or things like that. We provide certain functions around filings to customs around reconciliation and duty drawback and then assisting with duty recovery opportunities through protest as an example. And then we do a lot of work around managed service for companies where we're competitively doing classification or auditing or USMCA solicitation and qualification, supporting on export control programs, things like that. So the last few weeks have been busy for us as it has been for everybody on this call as we really work with companies to adapt to some of the changes in these tariffs and look at from a tactical execution perspective, what do we need to be focusing on as we work through the tariff action that has happened and then what we think will happen over the next several weeks and months. And we pulled out a few different highlighted in yellow, but we'll talk about them a little bit more through the presentation, kind of functional focus areas that we really think that everybody in the trade should be looking at thinking about and talking about as you work to adapt to these changes to maintain your compliance program and then focus on mitigation strategies. So as we move to the next slide and we think about what are kind of 2 different facets of how we should be approaching these things. We can take some lessons from the first Trump administration and some of the activity that we saw around 232 duties on steel and aluminum and then 301 duties on product coming from China and apply them to the situation, understanding that the environment today is very different from what it was in 2018 and 2019. When we worked through mitigation programs and strategies with customers during the first Trump administration, there were more levers of things that companies could do to save duty as part of those programs. But then there was also a lot of learned experience that companies had where they really looked at some of those kind of route fundamentals of their trade components program, classification, value, country of origin. And if those data elements weren't correct at the time that the tariffs were implemented, there was a lot of work that needed to be done on the front end to correct and confirm those things in order to take proper advantage of those mitigation strategies. So we want to really focus on and we really think companies should focus on a two-pronged approach to working through this environment. One is looking at and focusing on trade compliance fundamentals and then the other one is looking towards mitigation strategies that may be available to you as part of the structure of the tariffs as they sit today. So moving to the next slide, we think a little bit about classification. And for those of you that are involved in classification in your company, you know that it can be very tedious and detail oriented. For those that aren't -- trust the people that are when they say it can be very class, very tedious and detail oriented. It is really more of a technical expertise level than a lot of people that don't do it every day, get a credit for. But effectively, the classifications, the 10-digit code that you use to apply to your goods to import them into the United States. And that is going to be a significant driver along with the country of origin and the value for how much normal duty you're going to pay on the product? And then if there are any additional duties that are owed on the products as well. Taking Section 232 as an example, in the steel and aluminum tariffs that we're seeing on foreign products for steel and aluminum and then derivative products, those duties are all driven by how the product is classified. And what's interesting in the way that the executive order and subsequent federal register is structured around imposition of these 232 duties in March is the executive is really pushing customs to say look at companies and make sure that they are classifying their products correctly in order to ensure they're paying the right amount of duty and you are allowed to enforce maximum penalties permitted by law if you see scenarios where companies are not classifying their products correctly, right? So I put to the right and won't go through them the kind of levels of duty and penalty that can happen if you are subject to an investigation from CBP for misclassification as part of that process. But in general, everybody who imports product that is currently paying Section 232 duties or may not be paying Section 232 duties needs to look at the classification structure of what they're bringing in for anything that contains metal and aluminum and make sure that it's classified appropriately to ensure that a follow-on penalty might not happen due to a customs inspection through a CF 28 or a broader focused assessment. These tariffs are heavily weighted towards goods that are classified in Chapter 73 and 76, which deal with steel and aluminum products, but there are also other classifications for derivative items that contain a portion of steel and aluminum within them that are subject to them. Our recommendation would really be for companies to look at classifications in those named tariff categories, but also classifications that aren't in those named classification categories that may be an argument can be made should be put in those named classification categories. So a great example of these are companies that are heavily involved in automotive or in the aerospace industry and the tariff structure gives you some options to classify things as parts of aircraft or parts of automobiles or parts of a certain finished good that might go into another finished good. Those parameters and those provisions are very specific to items that can have no other commercial operative function and to go into that finished item. So we see a lot of misclassification through trade of people putting classifications into other classification categories versus the raw form categories that may be subject to the tariffs. So again, something to look forward to as part of that process. An interesting thing as we move to the next slide is thinking about that section of mitigation, not allowed by law. There's a little bit of push and pull between the executive order, the way it's written and in the way that the statutes are written for customs that would allow mitigating factors in the event that you self-discover a compliance issue through classification or what have you, and you want to disclose it to CBP. We want to make sure that everybody knows is that if you are doing this kind of review, and you've got options to self-correct and mitigate some of these potential classifications or misclassifications, you should take advantage of those opportunities. You have normal tariff change or entry change process like post-summary corrections for when entries are not yet liquidated or protests if you want to change entries within 180 days after they're liquidated. But really, what I want to focus on here for everybody is this concept of a prior disclosure. And a prior disclosure is a program that CBP allows through the regulations where if you have found a compliance issue through misclassification of an article or other scenarios, value issues, country of origin issues. You've got the right to go back to CBP through that player disclosure across your statutory period, which is 5 years, to self-disclose some of those issues to them. And through that statute, they can't levy you penalties as written by the law, right? So you would be subject to any loss of revenue for duties that weren't paid, but you would not be subject to penalties as part of that self-disclosure. Important point to note on prior disclosures is you can't get refunds through prior disclosures, but you can net overpayments with underpayments through the prior disclosure program if you're working to correct an entry structure, right? But as we move on to the next slide and we start thinking about mitigation strategies, I want to kind of pause and talk about what's different in 2024 -- excuse me, 2025 as compared to 2018 and 2019 when we were dealing with 301 and 232. I think the more important things to look at is there are a few more outs in the First Trump administration where you might pay additional duties and you have opportunities to reclaim those. The first thing would be on exclusions. So in 2018 and 2019, as a lot of us know, there were procedures where you could ask the U.S. trade representative for temporary stays of not paying 301 duties because you couldn't source product from a country other than China in a sufficient quantity in the time period necessary to change your supply chain. Those exclusions don't exist under the existing EPA [indiscernible] tool that's being used for China, Canada and Mexico imports. And in addition to that, those exclusions have all expired and are not being renewed under the existing 232 and 301 protocol. So that's a loop that's been closed, so to speak, for trade when they look at duty recovery opportunities. The other big adjustment with the EPA duties is duty drawback. So duty drawback for those unfamiliar, is a duty recovery program if you're importing product into the U.S. and then you're turning around and exporting it either in the same form or after a manufacturing process here in the United States. Drawback programs exploded during the First Trump administration because the 301 duties on products from China were eligible for drawback purposes. These EPA duties, however, are not. So you cannot reclaim these EPA duties through the drawback provision and that's explicitly noted in the executive orders and Federal registers that announced them. So what are you left with, right? Well, I have a few things that we've been having a lot of conversations with customers about over the last couple of weeks, and we'll look a little bit more at USMCA and value deduction programs. But really specifically, it may be worthwhile to look at in particular Section 232 scenarios, a concept called tariff engineering, where you actually sit down and you do product design based on what that finished good classification is going to be. And then you design your product in order to fit the classification that you want that may fall out of a high -- normal duty rate or Section 232 duty rate. So that's something that you can look at for tariff savings. The other 3 parameters, I would say, that the company should be looking at are our use of USMCA with a big caveat on that, that I'll talk about in a second, and then value deduction programs like Chapter 98 provisions and for sale per export. As it stands today, companies that are importing into the U.S. from Canada and Mexico, do not pay the EPA duties when -- of 25% when the product qualifies for USMCA meaning -- and I'll talk about that in a second, meaning it's been made and substantially transformed in those countries. That is subject to a review on April 2 with the broader reciprocal tariff announcement. We hope that obviously is going to stay in place. But this is something that I think the whole industry needs to be looking at to make sure that's still a viable pathway and next up for duty savings. As we move on to the next slide, we talk a little bit about USMCA more specifically, if you make product in the U.S., Canada or Mexico, that product may qualify for reduced duty on -- reduced or free duty on normal duties and the reduced or free duty on EPA duties as it stands today. Again, we will see again what that changes, what happens on April 2. In order to validate whether or not a product qualifies for USMCA, and a lot of companies are looking at this new with fresh eyes now because they may have had products that even though they're manufactured in Canada or Mexico, were duty-free anyway based on the HTS code they were using, and so they never fooled with the program. And now they're looking at it with the lens of EPA as a duty savings program. So at a very basic level, the way you look and see if a product can qualify for USMCA is you have to look at what are called the rules of origin or the USMCA rules of origin for the product. And those rules of origin are going to be dictated specifically by the finished good classification of the item. And once you have the finished good classification of the item, you can look in the tariff schedule and the USMCA provisions to see specifically what rules apply to that product to determine if it can come into the U.S. duty free. There are typically 3 different ways that you can qualify a product for USMCA. All of them require a review of a bill of material for the product, which incorporates all of the different components used to manufacture the product, where they're sourced, what the value of those components are and real specifics around the country of origin of those source components. But the 3 different methods are tariff shift. So you're looking at a comparative difference between the tariff of the finished good and the tariff for the raw materials to see if they are different, and the rules for that are specific to the finished good classification. You're looking at regional value content, so comparing the value of originating material components that were made in Canada, Mexico or the United States as compared to nonoriginating material, and those thresholds are set based on the finished good classification or you're looking at de minimis where you're looking at -- is does less than 10% of the value of the product contain components that are not originating, right? All those things need to be reviewed at a bill of material level and on a product level for you in order to certify and confirm that you have product that can be imported under the USMCA provision. How do you get certificates and how do you prove it? You have to have a document. It's called a USMCA certification that you provide to your broker in order to complete that. Real quickly, these can be provided by the importer, the producer of the goods or the exporter. It's got to be done at a product level that you can group multiple products onto one certificate, and they can cover a blanket period of no more than 1 year, right? One of the things that's important to note through the EPA duties for everybody to understand is that in years past, if you had duties that you were paying under the USMCA program and you got a certificate after you imported the product, you could go back and you could recover those duty through what's called the 520D or an FDA reconciliation filing. We don't know yet from customs whether or not those EPA duties would be available for recovery under the law as it's stated, and we're still pending that guidance. So it's still an open question to us. Moving on quickly to value deduction programs, and I'll talk really quickly about Chapter 98, and then we'll get into First sale a little bit more. But when we move to the next slide, Chapter 98 as a provision is really defined around U.S. goods return, either not advanced in value outside of the country or advanced in value outside of the country. The whole Chapter 98 in the tariff is really driving around special trade programs that have reduced our free duty, right? And the 2 kind of key categories are 9801, which are U.S. articles that are exported and reimported within a certain period of time or maybe reexported and reimported for repair. And then there are other provisions around 9802 where articles can be exported and return when they've been advanced in value. So there's been further processing or rework done outside of the United States. In those scenarios, you can deduct the value of the goods exported versus the value that was added to the goods outside of the U.S. to reduce some of the duty exposure. There are some restrictions in the 232 provisions for 98020060, which covers metals exported for processing and reimported for further processing. So it's really important to make sure that you're looking at value traceability through that and the way that that's structured, so that you can read those benefits. Important to look too at the structure of the export on those because there typically are provisions where if you export something and you claim drawback on it, you can then bring it back in under a Chapter 98 provision. So again, some significant constraints to that program that you need to look at. As we move to the next slide, we have a lot of customers that are looking at and speaking with us about a program called First sale for export. And the First sale for export program has been around since the '90s. It was established by a court ruling about subway cars coming from Japan actually. And it's been something that's been used very heavily in the wearing apparel industry for years based on the high duty rates and the structure of transactions in that industry. But more and more companies are looking towards their supply chain to see if this is something that they can leverage to reduce their duty exposure by reducing their value based on these higher duty rates. And at a really high level conceptually, the idea is if you are an importer in the United States and you have a multi-tiered transaction prior to that import, meaning you buy product from a vendor, and that product then turns around and buys product from a manufacturer and then that manufacturer ships product directly to you in the United States. You may have the opportunity to declare to customs, not the price you paid your vendor for the merchandise, but the price the vendor paid their factory for the merchandise. So you're effectively not paying duty on the value that was added by the vendor, the markup by the vendor. And by reducing your value, you're reducing your duty exposure. Now there's some significant constraints to that program. And you have to make sure that certain parameters of the transaction are accounted for in order to use that type of valuation analysis. The first thing you want to look at is something called Bonafide sale. That's the idea that you've got 2 discrete separate transactions where you've got a purchase order, a commercial invoice, a proof of payment, there's consideration in place for the goods. And that vendor isn't acting as an arbitrary buying agent or selling agent on commission. They are truly acting as a buyer and seller where they have title and risk of loss for the merchandise at some point in that transaction structure. You're looking at arm's length relationships, so making sure that if any of those 3 companies that are in the chain are related to one another that, that relationship does not have an impact on the price of the goods, you're looking at order information to show that when the importer places the order on the vendor, the intent is for that manufacturer to sell goods to the United States. So you can't have scenarios where manufacturers are bringing goods into a third country in their own inventory and then calling them off to the U.S. or other jurisdictions based on order status. And then the fourth thing that we look at is all cost incurred. So making sure that if there are scenarios where the importer or the vendor are providing design assists or material assists to that manufacturer that those values are included as part of that process. Once all those qualification requirements are met and you've proven that, that transaction structure is in place, you can work with your customs broker to start filing for First sale for export, presuming you can get a First sale invoice with the manufacturer value included. How do you do this in practice? You don't have to apply for approval from customs prior to completing it. You can start using the program once you've done that feasibility review and you've got written documentation to prove that those transactions beat that structure. And those are called case studies, and there's something that we do for customers all the time. In addition to that, it's important to look at from a management perspective, significant vendor training and understanding of how you're going to get that First sale invoice and the documents that you need to make the entry and provide that to your customs broker on a replicable basis. Some things in the program to keep in mind, it's not an all or nothing provision. So most companies look at their highest duty items or their highest volume vendor manufacturer pairs and focus on those first so they can reap the highest benefits and they can activate for sale based on bid when they manage the import process with their broker. And in addition, you can use some of those vehicles that we talked about earlier, PSC and protest, where if you can show a time of doing that case study that the goods are -- the goods have met those transaction structures for the past 1.5 years approximately. You can go back and request duty refunds from CBP via a PSC or a protest to fall on that. So I would say the 2 biggest things that are driving customer conversations with us at the moment are USMCA qualification to reduce duty exposure and First sale for export programs to reduce value. Moving to the next slide and just kind of wrapping up, thinking about what do we do now? A great question that we always get is how do we stay informed about the pace of this change at a real practitioner level. And there seems to be a chain of notification where you go from either media announcement or social media announcement and then you go to executive orders, so whitehouse.gov is a great resource for pulling those up and reading them and seeing what the structure of these tariff actions are going to be. But we have to keep in mind that, that executive order isn't live and in force until it gets published in the Federal Register, which is the next sort of document. And that will really be what contains the specifics in terms of how a trade action is going to be implemented by customs and the bureaucracy. And then following on from that, what's called CSMS or customer service messaging system, where they will publish more formal notices around implementation and next steps. So if anybody on this call is managing trade compliance on behalf of their company, I would really recommend that as we move through this period of tumult, spend a little bit of time every day, checking the Federal Register, checking the CSMS, get subscribed to them. They come into your e-mail and then managing change from there. We talked about fundamentals, but it's really important to -- if you're looking for mitigation strategies, don't fall down on fundamentals, make sure those classifications, those values and those country of origin that you use are right and then build on top of them to make sure that if you are pursuing savings through a program that's done so compliantly. Again, a lot of you may be importing from Canada or Mexico have not looked at USMCA in the past, I would look. There might be some opportunities for duty savings now and then in the future through those programs. And then again, look and see what kind of opportunities that you have for value deduction programs through First sale or Chapter 98 and then as always, reach out to help. We're here to help companies at Trade and navigate some of these changes and then provide advice and guidance around how we can pull some of these levers to help. So thank you. With that, I'll push it back to Nick.

Great. Yes. Thanks, Matt. So have a few minutes here for questions. Adam, I see you coming back. I think you might want to answer a couple of these. Do you want to go ahead and pick from the list?

Yes. There were a couple of questions on what kind of in the vein of like what countries are going to be hit with reciprocal tariffs. And we've done a lot of analysis on sort of what -- which countries are sort of on the radar or not. And based on a combination of different factors, like what -- how large is the trade deficit, the goods trade deficit with the United States. And if you add up the different factors included in the reciprocal tariff executive memo like what does that add up to? How big would the discrepancy or reciprocal tariff be? And then the Trump administration was initially kind of talking about -- I don't like this term, but the so-called Dirty 15, 15% of U.S. trading partners would be sort of targeted with reciprocal tariffs. The implication from yesterday's press conference with President Trump was that it would not just be this 15% of countries, but it would be all countries. So if we -- it kind of depends on the scenario. So there were specific questions around Costa Rica and EU. If we stick to the sort of 15% of "Worst offenders or Dirty 15," I don't see Costa Rica in that tranche or that group. EU would be. The question is whether the EU would be treated as a block or if individual countries within the EU would be singled out and treated differently in some way. But certainly, in some fashion, the major economies in the EU, either as a block or individually would be included in the reciprocal tariffs on the second. Countries like Costa Rica, I don't see those in the top 15, but if it's a broad sweeping tariff applied to all countries, then of course, yes, it would be.

Great. Matt, I want to make sure I answered this one question right about FTZ. I don't think you covered it, at least not in a lot of depth, but I'm pretty sure FTZ with IEEPA is not available, correct? Or to mitigate duties at least, right?

It's complicated. So activating an FTZ is not a short initiative. It can take a year or maybe a little bit less, maybe a little bit more through activation, through grantee authorization and then through implementation of the systems. And we do that work for customers through our affiliate company, FTZ World Services, all the time. What's important to look at is how the FTZ is going to be used. If you're just using distributed -- look, you're just distributing in the U.S., there may be more value to it because you're moving your point of sale and your payment of duty closer to when the goods are called off and exported. And so you've got both the cash flow advantage for domestic distribution and then you've got tariff advantage for doing that. When it looks at manufacturing that can be a little bit more complicated because those goods have to come in under what's called a privileged foreign status. And so the extra duties actually may carry through, through the manufacturing process to the finished product. So it's important to do a feasibility analysis to make sure that the FTZ makes sense for you, and that's something where we can help.

All right. Thank you for clarifying that. You covered the topic of tariff engineering, which I think is super interesting. Do you have any examples that come to mind, something you could share generally or...

Yes. I mean, really high level. We talked about parts of general use versus specially designed. If you are an aircraft manufacturer and you're manufacturing titanium nuts and bolts and washers and screws and things like that or actuators or fasteners, you can look at the way that you manufacture that. And you can make an argument if the way that manufactured product is set up that it could not be used in any other commercial application than as part of an aircraft that it could be classified as a part. You have to be really careful, though, to make sure that customer is going to agree with you on that. So that's -- what's really involved in doing that is getting your product teams, getting your engineers, looking at the tariff structure, and then it may be worthwhile to just submit a ruling, what's called a binding ruling to U.S. customers to make sure that they agree with your interpretation of what that tariff is going to be before you make that move into production. But again, it's all about looking at the structure of the product and designing it in such a way so that it will meet the tariff that you want.

Okay. I think we're just about out of time. Anything else from either of you before we call it for the day?

One quick answer I can talk faster than I can type. So the question on Southeast Asia reciprocal tariffs depends on the approach. It could be a flat tariff across all countries, somewhere like 15%. If each country is treated differently, our math suggests Southeast Asia would be somewhere -- each country would be somewhere in the range of 10% to 25%. Vietnam, maybe on the high end, a country like Thailand on the low end as a starting point, and then we'll see who's willing to negotiate down from there.

Okay. All right. Great. Well, thank you, Matt, for joining us. It was great to offer this content with you and Adam for the background. And just a reminder, everyone to get the content, you'll see a survey today. If you don't get the survey link, feel free to reach out to me. That way, you can get the material, and we can get some feedback. So thank you, everyone, for joining, and Adam and Matt, thanks for the time today.

Thank you. Good luck, everyone.

Thanks. Take care.