Aviation Groups Urge Exemption from Tariffs

Aviation Groups Urge Exemption from TariffsBy Kerry Lynch • Editor, AIN monthly magazineMarch 12, 2025As 25% steel and aluminum levies take effect this week, a broad swath of aviation organizations are appealing to the Trump Administration to consider an exemption for aerospace from tariffs to ensure there are no unintended consequences. In a letter sent on Wednesday to Transportation Secretary Sean Duffy, Commerce Secretary Howard Lutnick, and U.S. Trade Representative Jamieson Greer, 15 U.S.-based aviation organizations urged a meeting to discuss the state of the industry and the complexities of the supply chain.Pointing to a report on the risks of the supply chain, which involves tens of thousands of suppliers from all over the globe that cannot be easily replaced or substituted, the organizations wrote, “It is essential that both the government and industry work together to minimize cost and availability disruptions in the aviation supply chain.” The letter also points to the importance of bilateral safety agreements.This letter came a day after the White House implemented the 25% metals tariffs but also vowed (and then rescinded plans) to double those tariffs on Canada in particular. Business aviation leaders have been trying to dig into the details of the implementation of the tariffs, but the situation is constantly shifting.“The tariff landscape is incredibly fluid, dynamics are changing by the day and even by the hour...it’s incredibly unpredictable, and there’s lots of questions unanswered as we wait for further guidance from the government agencies responsible for these policies and from the White House,” said Kristie Greco Johnson, senior v-p of government affairs for NBAA, during a webinar that NBAA hosted on tariffs on Tuesday. But she added that the association was hoping to provide a little more clarity on them through the webinar.Earlier this month, the White House implemented 25% tariffs on Canada and Mexico and doubled tariffs to 20% on goods from China. However, last week, it also paused for a month tariffs on goods that fell under a previous U.S., Mexico, and Canada (USMCA) trade agreement negotiated by the first Trump Administration.Aircraft and gas-turbine engines should be covered by the exemption, said Jonathan Epstein, a partner with the law firm Holland & Knight, during the webinar. This includes both new and used. But Epstein noted that the situation is a little more complex for parts, and details still need to be ironed out; other questions remain, such as application to upgrades and MRO services.Making this more complicated, he said, are U.S. Customs aerospace policies that were largely designed for an industry that operated without tariffs. This leaves gaps in application. However, companies must certify that their products qualify under the USMCA exemption, and Greco Johnson added that manufacturers are anxious to facilitate that process.AINsight: How Tariffs Hit Aircraft Sales and FinancingBy David G. Mayer • AIN ContributorMarch 14, 2025The new or threatened tariffs announced by the Trump Administration and other countries may cost more than you realize when buying and financing private aircraft. The on-again, off-again U.S. tariff activity has roiled the U.S. financial markets, triggered retaliatory tariffs, alarmed aircraft stakeholders, and created wide uncertainty in global trade.The Trump Administration has imposed, modified, and/or delayed the imposition of tariffs on specific countries to achieve certain foreign policy and economic goals. To stop massive shipments of fentanyl into the U.S., the Administration has imposed tariffs on Mexico and Canada and a 20 percent tariff on Chinese-origin goods to make U.S.-origin products more price competitive with cheaper non-U.S. origin metal sellers. This tariff may affect the metals used by aircraft manufacturers (OEMs), repair facilities, and their suppliers.Transacting Steps and ProcessPurchasing an aircraft without addressing tariffs is not an option. It is imperative to rely on customs brokers, lawyers and other import/export experts in deal teams to conduct a real-time analysis of potential tariffs, including direct and retaliatory tariffs from the U.S., Canada, or Mexico.Their objectives should include determining the application, percentage, and effective dates of the tariffs on the aircraft being purchased. Second, they should calculate the tariff based on the purchase price if tariffs apply. The analysis should consider such tariff-based factors as the country of origin or transformation of an aircraft or specific product codes under the U.S. Harmonized Tariff Schedule (HTSUS). HTSUS is the primary resource for identifying tariff rates on aircraft imported into the United States. Third, they should try to structure the importation timing and terms to minimize the tariff cost.As a byproduct of tariffs, the parties should brace for higher transaction costs and processing delays from the pre-tariff duty-free norm. The deal team will also negotiate purchase or financing documentation and interact with U.S. Customs and Border Protection officials.Complex Tests To Determine TariffsThe complexity of tariffs cannot be overstated. Adding to the legal and customs quagmire, the United States-Mexico-Canada Agreement (USMCA) provides a very complicated certification process as to the country of origin of products. Based on current policy, the USMCA seems to allow duty-free imports of aircraft. However, that exemption may end on April 2, 2025. The certification for duty-free treatment applies to repairs and products like aircraft tires, seats, components, and parts.As a technical point, to determine whether a Canadian or Mexican origin good qualifies for duty-free treatment, import experts should analyze the product-specific rules of origin under the USMCA. This generally means the experts either apply a “tariff shift test” (change in product, like from steel to an aircraft hull, to use the right tariff) or a “regional value content” test (to calculate a product’s origin value in a producer’s region or country such as finding a 35 percent Canada origin of an engine).Tariffs DefinedA tariff is a tax or duty imposed by a government on imported or exported goods. U.S. tariffs aim to prop up local industries, including steel companies, by increasing the price of imports. Tariffs may also lower the U.S. trade deficit and generate revenue for the U.S.Among four types of tariffs, the one that most often applies to aircraft is an ad valorem tariff or duty. An ad valorum tariff or duty refers to a customs duty calculated as a percentage of the value of the product such as a new or used aircraft, or its engines, parts or components using the HTSUS.The U.S. tariff is based on the country of origin where the product is manufactured or substantially transformed. It is not relevant for tariffs where the aircraft is based or stored, the aircraft’s delivery location, the nationality of a seller or purchaser, or the country where the aircraft has been registered.For example, substantial transformation seems to occur when a product, like aircraft components from outside Canada, undergo a fundamental change in form, appearance, nature, or character to be fully integrated into an inseparable part of an aircraft built in Canada. At a high level without detailed facts, Canada should be the country of origin for tariff purposes.Tariff Impact on the Sale of New and Used AircraftIf anyone plans to physically import an aircraft or aircraft engines, parts or components into the U.S. for sale, repair, overhaul or upgrades, the deal team should conduct a product tariff analysis. Back-to-back aircraft transactions may be subject to a double down on tariffs—one on the transfer to the intermediary and another tariff on the sale to the ultimate buyer.There is no free lunch from tariffs. OEMs, purchasers, sellers, customs brokers, product suppliers, and others may incur directly or indirectly the tariff costs of U.S. and counter-tariffs. In other words, consumers, businesses, and exporters, among others, pay tariff costs. In aircraft deals, repair facilities, purchasers, and sellers (including OEMs) should assess tariff exposure and develop tariff cost minimization or tariff cost-sharing strategies.Until tariff guidance shows up in useful written form (and probably after that), the tariffs may slow the importing and exporting of affected aircraft into and out of the U.S., complicate the supply chain for maintenance, repair, and sales, and alter the trajectory of marketing new products and services.Tariff Impact on Aircraft PurchasesAbsent an exemption from the tariffs or structural solution transactionally, it is likely that the tariffs will materially increase used (and new) aircraft purchase prices, potentially to an intolerable level for a purchaser. That could kill the transaction at inception or cause a transaction to terminate due to a purchaser default under an APA. Correlatively, if a U.S.-manufactured aircraft is imported into Canada or Mexico, the retaliatory or reciprocal tariffs of those countries (if any) may also increase the price of the aircraft.Among the many questions for OEMs, OEMs may experience profit margin compression on closed sale contracts and potentially future new aircraft sales to the extent that they cannot raise prices to recover the higher tariffs. OEMs may also face price increases from suppliers and experience unanticipated delays in aircraft or parts deliveries due to tariff-related supply chain disruptions.Impact of Tariffs on Aircraft FinancingThe tariff changes may also affect the financing with loan proceeds or leasing of a new and used private aircraft. An owner/lessor that buys an aircraft and leases it to a lessee/user and aircraft lenders may derivatively encounter tariff issues of any lessee or borrower. Higher tariffs may raise their credit and aircraft valuation risks even if the customer still meets their respective credit qualifications. As a result of these risks, financiers may bump up rates depending on pricing competition in the era of new tariffs.APA and Financing Contract Issues from TariffsAt the documentation level, the parties should consider modifying the typical APA to include more specific tariff tax indemnities, termination provisions for importation delays (a type of force majeure) or unexpectedly high tariff costs, and increase allotted time to complete inspections and close.The parties may even need to consider a reallocation of the tariff burden. For new aircraft, OEMs may need to include or rely on contract provisions that allow them to increase prices to pay all or a portion of the tariffs (a change in tax law price escalator clause).If a purchaser uses financing, he or she should lock funds rates for a maximum period to cope with transaction timing. If a financier agrees to finance tariff costs, the lender may insist on tougher or new financial covenants, require additional representations and warranties regarding tariffs, and tighten loan-to-value ratios to ensure tariffs do not dilute asset value.