Since the 2024 American federal election, the global trade landscape has been in state of unpredictable flux. Tariffs are threatened, implemented and rescinded, nearly on a weekly basis. Changing tariffs and trade policies, and the unpredictability of international relations have created a period of significant uncertainty. For businesses engaged in international trade, this unpredictability can have a profound effect on profit margins, operational costs, and the overall financial health of a company. With tariffs changing on short notice, businesses need to take proactive steps to mitigate their risks. One of the best ways to do this is by addressing tariff-related risks directly in your contracts.
This blog provides businesses with a framework of key strategies and contractual clauses that can help them mitigate their risks and losses from tariffs.
1. Understanding the Risks Posed by Tariffs
Before diving into how to contractually prepare your business for tariffs, it's essential to understand what they are and the risks posed by them. Tariffs are taxes imposed on imported goods and are typically used by governments to protect domestic industries or as part of broader trade negotiations. While their affect can be nuanced, tariffs generally have the following economic impact:
Product Costs: Increased tariffs can significantly raise the price of raw materials or goods that businesses import.
Supply Chain Disruption: Higher tariffs may alter supply chain dynamics, making previously cost-effective suppliers less competitive or forcing businesses to find alternative sources.
Customer Pricing Pressure: If your costs rise due to tariffs, you may need to raise your prices, potentially reducing your competitiveness in the market.
Uncertainty in Planning and Forecasting: The volatility created by tariffs make it more difficult for businesses to plan their budgets and long-term strategies.
Reducing exposure to the above begins at the beginning of the business relationship with careful consideration given to the terms of the contract governing that relationship.
2. Contractual Clauses to Prepare Your Business for Tariffs
A Force Majeure clause is one of the most critical provisions a business can use to address tariffs. Force Majeure clauses generally cover external, uncontrollable events that impact a business' ability to perform under a contract. A well-drafted Force Majeure clause can include tariff implementation or changes as a triggering event for contract renegotiation or termination.
For example, you may want to include language that specifically addresses "changes in government regulations or trade policies," which would encompass sudden tariff increases. The clause should clearly define the circumstances under which a tariff-related disruption would excuse performance or allow the business to renegotiate terms.
It is also important to include contractual clauses regarding import taxes, duties and fees, including any references to whether the delivery price is inclusive of all taxes, duties, tariffs or fees (e.g. Delivered Duty Paid terms). Businesses should also review change of law clauses to determine whether they apply to changes in tariffs.
3. Negotiating Price Adjustment Clauses (Escalation Clauses)
When tariff increases come with short notice, businesses don't have the opportunity to prepare and absorb the increased costs without negatively affecting their profitability. To mitigate this risk, businesses can include price adjustment or escalation clauses in contracts. These clauses allow for the adjustment of pricing in response to specific cost increases, such as tariffs.
Such clauses help businesses maintain their profit margins despite changes in tariffs by allowing them to pass on some of the increased costs to their customers. The key is to negotiate these clauses upfront so that both parties are aware of the potential for future cost adjustments.
4. Reviewing and Updating Terms with International Suppliers and Partners
If your business relies on international suppliers or partners, it’s crucial to regularly review and update the terms of your contracts to address the shifting risks of tariffs. As trade policies and tariffs change, contracts should include provisions that allow for flexibility in terms of pricing and delivery timelines.
Some contractual provisions to consider include:
Tariff-sharing agreements: This provision allows businesses to share the burden of tariff increases with their suppliers or customers. For example, a contract might stipulate that both parties will absorb the impact of tariffs equally or proportionally.
Supply chain flexibility: Contracts can include clauses that allow for the use of alternative suppliers or shipping routes if tariffs significantly affect the cost or viability of continuing with existing partners.
Re-exportation clauses: In some cases, businesses may need to renegotiate contracts based on shifting markets. For example, if new tariffs impact goods imported into one country, businesses might seek to re-export goods to a different jurisdiction where it thinks it can offset the increased cost of tariffs from the initial jurisdiction.
5. Legal Advisors
The evolving nature of tariffs and trade policies requires businesses to stay informed about business law, commercial law and contract law matters that may affect them. One of the most effective ways to anticipate and adapt to tariff changes is by retaining an experienced legal advisor.
Consulting with legal professionals who are familiar with international trade law can ensure that your contracts are up to date and offer adequate protection against tariff-related risks. Legal advisors can also help businesses navigate disputes related to tariffs and trade regulations.
Contact Samuel Osei Law Corporation for experienced, professional services in the negotiation, review and drafting of your contracts affected by tariffs and other international trade matters.
7. Conclusion
While it may be impossible to completely eliminate the risks associated with tariffs, businesses can take proactive steps to contractually insulate themselves from the worst effects of tariff increases. Well-drafted contractual terms and proactive engagement of other parties can help achieve this. Samuel Osei Law Corporation can help business expertly navigate this uncertain ground. Contact us below to let us know how we may be of service.
Contact Samuel Osei Law Corporation at 778-680-6087 or info@soseilaw.com.
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