Potential Impact of New Tariffs on Business Aviation

The goals of protecting U.S. borders, increasing the U.S. industrial base and leveling the playing field with respect to tariffs in order to help U.S. businesses and enhance the U.S. trade balance are laudable. However, the potential ramifications of broad tariffs on imports in the U.S. aerospace industry are uncertain. The U.S. aerospace sector is a trade success story, as the sector has historically run a large positive trade balance, with export sales vastly outpacing imports. In particular, under the 1979 Agreement on Trade in Civil Aircraft (Civil Aircraft Agreement), of which the U.S., Canada and China are signatories, the U.S. civil aviation industry has benefited from essentially zero tariffs on imports of civil aircraft and most civil aviation-related items imported into the U.S. and a number of countries. However, notices from U.S. Customs and Border Protection (CBP) are clear that the new tariffs apply regardless of certain preferential tariff treatments, including the Civil Aircraft Agreement.

What Tariffs Are in Effect and Proposed?

• On March 4, 2025, the U.S. imposed 25 percent tariffs on Canadian- and Mexican-origin products (except for Canadian-origin energy products, which are subject to a 10 percent tariff).
• On March 4, 2025, the U.S. increased tariffs on Chinese-origin products from 10 percent to 20 percent.
• On March 7, 2025, the U.S. exempted Canadian- and Mexican-origin products that are eligible for duty-free treatment under the U.S.-Mexico-Canada Agreement (USMCA) from the 25 percent tariffs, with the Trump Administration indicating such relief would be available until April 2, 2025.
• Effective on March 12, 2025, the U.S. will impose a worldwide 25 percent tariff on steel and aluminum imports, as well as on certain products made from steel and aluminum.
• On Feb. 13, 2025, the U.S. announced it will implement "reciprocal" tariffs on foreign countries that impose tariffs on U.S. products and, through the Office of the U.S. Trade Representative (USTR), solicited comments from industry participants on such foreign tariffs.
• Canada and China have imposed counter-tariffs on certain U.S. exports to those countries. Mexico was expected to announce counter-tariffs prior to the U.S. agreeing to pause tariffs for goods entering under USMCA.

How Do New U.S. Tariffs Affect Routine U.S. Aircraft Operations Among the U.S., Mexico and Canada?

The tariffs should not impact routine flight operations among the U.S., Mexico and Canada, regardless of aircraft manufacturer, country of registration, etc., as the aircraft would be moving as instruments of international trade and not as merchandise being imported into the U.S. for consumption.

What Aircraft Purchase and Sale Transactions Would Trigger U.S. Tariffs?

Except for Canadian and Mexican products that qualify for duty-free treatment under USMCA, any aircraft of Canadian, Mexican or Chinese origin when permanently imported into the U.S. on or after March 4, 2025, as part of a sales transaction would be subject to the relevant countrywide tariff when it makes customs formal entry upon arrival at the first port of entry into the U.S. 

Examples include:

• new and used aircraft of Canadian origin, regardless of the country of current registry and regardless of from what country the aircraft was being exported
• a Canadian-origin aircraft imported for pre-buy inspections with the intent to be sold in the U.S.
• An aircraft that was last "substantially transformed" in Canada or Mexico prior to entry into the U.S. would be considered of Canadian or Mexican origin for purposes of these tariffs. For example, if a white-tail aircraft went through interior, paint and other completion services in Canada, then it likely underwent a "substantial transformation" in Canada. A similar substantial transformation analysis would apply to engines and other components. (Please note that the substantial transformation test applies only after USMCA exception expires on April 2, 2025. The applicable country-of-origin test under USMCA is a product-specific tariff shift test.)

Conversely, the following transactions would not be subject to the additional tariffs because the country of origin of the aircraft would be the U.S.:

• a Canadian-registered, U.S.-manufactured aircraft being sold from a Canadian seller to a U.S. buyer (assuming the aircraft has not been modified or otherwise advanced in value in Canada or Mexico)
• a U.S.-manufactured aircraft being imported from Mexico to the U.S. for sale in the U.S. (assuming the aircraft has not been modified or otherwise advanced in value in Canada or Mexico)
• a Canadian-manufactured aircraft that was "substantially transformed" in the U.S.

Note that it is the physical importation of the aircraft into the U.S. for consumption (e.g., sale) or repair that would potentially trigger the customs entry and duties. Neither the country of registry nor the citizenship of the owner is legally relevant. For example, the sale of a "N"-registered aircraft or a Canadian-manufactured aircraft from a United Kingdom seller to a French buyer where the inspection and transfer of title occurs in Biggen Hill, England, would not trigger tariffs.          

What Are Other Impacts of U.S. Tariffs on Owners, Operators and Repair Facilities?

Except for imports for which the party can claim duty-free treatment under USMCA, the following would apply:

• Importing Parts from Canada, Mexico or China. Canadian-, Mexican- and Chinese-origin aircraft parts imported into the U.S. will generally be subject to the new tariffs.
• Repairs/Overhauls in Canada, Mexico or China. This is an area where additional guidance is needed from CBP. Under prior CBP regulations and guidance, if a U.S. commercial operator flew its U.S.-registered aircraft to a foreign jurisdiction temporarily to have work done abroad, there is no requirement for the aircraft to make a new formal entry or pay duties on repair work performed abroad. However, the rules differ between commercial and private aircraft operations. Given the basis for such duty-free treatment was the Civil Aircraft Agreement, it is unclear whether this would continue to apply now that the repairs may otherwise be dutiable. On the other hand, if defective components are sent to Canada, Mexico or China for repair, the value of such repairs would generally be subject to the 25 percent tariff upon reimportation into the U.S.
• Importing for Repairs/Overhaul in the U.S. When an aircraft is brought into the U.S. for repair, overhaul or improvements, it is typically imported under a Temporary Import Bond (TIB), then reexported without the need to pay duties. The cost of the bonds may increase significantly, and underwriting the bonds will take more time than usual in a duty-free environment. This TIB process would also need to be used for parts coming into the U.S. for repair.

What Aviation Items Will Qualify as Duty-Free Under USMCA?

USMCA provides for duty-free entry of goods originating in the U.S., Mexico or Canada. For complex items, such as aircraft and engines, the rule for determining whether a product is "originating" in a USMCA country is the tariff shift test. The tariff shift test is for a good produced entirely in the territory of a USMCA country using non-originating materials, whether those non-originating goods satisfy the applicable rules-of-origin criterion for items under that particular Harmonized Tariff Schedule of the U.S. (HTS) classification.

• Civil aircraft are classified under Heading 8802. The applicable rule-of-origin criteria is that any material (i.e., part) used in production undergoes a tariff shift from another HTS heading or subheading. Since Heading 8802 covers only aircraft and not aircraft parts, engines, seats, tires, etc., which are classified under separate HTS headings, any part would go through a tariff shift once incorporated into the aircraft as part of being manufactured in Canada. Therefore, aircraft manufactured/assembled in Canada using engines or parts regardless of origin should qualify for preferential treatment under USMCA. Conversely, an aircraft manufactured outside of the U.S., Canada or Mexico that was completed in Canada would not meet USMCA requirements.
• A similar analysis would apply with respect to an aircraft gas turbine engine manufactured in Canada, as any part for a gas turbine engine (other than a complete gas generator) would fall under a different HTS subheading than the engine itself.
• This analysis becomes more granular when discussing parts because one would need to look at the specific rules of origin for that product. For example, HTS Heading 8807 covers many aircraft parts, but it might be the case that the part may be made up of other parts that fall under the same HTS heading/subheading and, therefore, do not undergo the required tariff shift.
• A similar analysis would apply in the case of gas turbine engine parts, except that in the alternative, if there is no tariff shift, USMCA rule of origin allows for the product, such as a component made in Canada or Mexico of multiple parts, to be qualified based on whether the value of the qualifying regional content is 60 percent based on a "transaction value" method (e.g., assessing the costs of purchasing each component versus final product value) or 50 percent if based on the "net cost" method (e.g., looking at cost of production).
• USMCA generally exempts repairs performed in another USMCA country, regardless of country of origin of the item being repaired. Hence, it appears such repairs in Mexico or Canada may be exempt from the 25 percent tariffs. However, there is some ambiguity on this point given the way the exemption was implemented that may require further clarification from CBP.

What Is the Process for Claiming Duty-Free Treatment Under USMCA?

In order to claim duty-free status under USMCA and avoid the 25 percent tariffs, the customs broker will need to annotate entries to claim the product qualifies for duty-free status and will require certification from either the producer, importer or exporter that the product so qualifies. Such certification can be based on information, including documentation, or an exporter who is not the producer may reasonably rely on the producer's written representation. Hence, generally, the Canadian or Mexican producer would be in the best position to provide either the actual certification or information that can be relied on by the exporter or importer. This will be particularly important with respect to components and subassemblies, given the complex rules of origin, where the producer may be the only person with information sufficient to make such determination.

One positive note is that items entering the U.S. under USMCA are not subject to merchandise processing fees, which for expensive items such as aircraft and engines can be up to $634.62.

How Will the U.S. Tariffs on Steel and Aluminum Affect Business Aviation?

The U.S. tariffs on steel and aluminum and "derivative products" are unlikely to have any direct effect on civil aircraft and related parts. Though derivative products such as refrigerators and vacuum cleaners made with aluminum and not smelted in the U.S. are subject to duties assessed on the value of the aluminum, the list of derivative products does not include any tariff codes associated with civil aviation aircraft or related parts. However, such tariffs may impact the costs of production for U.S.-based manufacturers that need to source steel and aluminum from abroad.

How Will Counter-Tariffs Imposed or Threatened by Canada, China and Mexico Affect the U.S. Aviation Industry?

To date, the counter-tariffs implemented by Canada and China have targeted specific products not including civil aircraft or aircraft parts. However, Canada's initial round of counter-tariffs includes unmanned aircraft and, on March 4, 2025, Canada announced future tariffs up to certain dollar thresholds that could include civil aircraft.

What Proactive Steps Can a Buyer/Seller of Aircraft Do to Reduce Risk?

• Consult with your customs broker and customs/trade counsel before bringing aircraft, engines or parts into the U.S. for sale or repair. Expect there may be issues arising upon entry as CBP officials struggle to implement these new tariffs.
• In new contracts, consider carefully how the cost of tariffs will be allocated as between the parties (review applicable international commercial terms, tax representations and other provisions). Consider whether increases of tariffs over a certain percentage threshold should constitute a "Force Majeure" event, as such unexpected cost certainly changes the bargain that the parties contemplated.
• If tariffs would apply, and given the rapid changes in tariffs, consider whether the physical entry of the aircraft into the U.S. can be delayed. It is the physical entry into the U.S. for consumption (i.e., to be permanently based in the U.S., not being placed on the "N" registry) that triggers the formal entry and duty requirements. If you have existing contractual obligations, consider amending agreements to delay taking delivery, take delivery outside the U.S. or other contractual options.

How Will These Tariffs Affect Carriage of Baggage and Air Cargo?

The new U.S. tariffs do not apply to items for personal use in accompanied baggage and currently would not apply to unaccompanied packages valued at $800 or less under the de minimis exemption (until such time as adequate systems can be put in place to collect duties on the latter).

Expect air cargo operations among the U.S., Canada, Mexico and China to be affected as the new tariffs and, in some cases, counter-tariffs are implemented.

This Holland & Knight alert provides an initial summary of potential impacts of new tariffs on business aviation generally based on information available to date. Parties with active issues are recommended to seek advice from customs lawyers or brokers regarding their specific issues. For more information or questions, please contact the authors or a member of Holland & Knight's Tariff Task Force.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.