Navigating the Trump Administration’s latest tariffs on Canada, Mexico, and China

We have reported extensively on President Trump's "America First Trade Policy" (see here), the new tariffs imposed on Canada, Mexico and China (see here), and provided commentary on how President Trump's return to office might affect the UK and EU (see our Briefing Note here).

Key areas of note include:

1. A 25-percent tariff on all imports into the US of steel and aluminium.
2. US "reciprocal tariffs", being country-specific tariffs to address US trading partners’ trade and economic policies that the Trump Administration has deemed unfair. This raises the prospect of complex web of tariffs with different rules applying to different countries.
3. Retaliatory tariffs and countermeasures being imposed on the US by other countries, driving an upward trend in the cost of cross-border trade.

It is not yet clear how the trading relationship between the US and EU, and between the US and UK (or, indeed, other countries), is likely to evolve, but White House releases suggest that the sectors most likely to be targeted by new tariffs include automotive and industrials, electronics and technology, and life sciences.

Contracts as a tool for risk mitigation

We have commented on the mitigation strategies that businesses can deploy with a view to addressing the risk of increased tariffs (see here), with one of those strategies involving a review of contractual arrangements.

This note sets out some of the specific considerations from a contract law perspective.

Will force majeure clauses provide relief?

Lessons learned from Brexit, the COVID-19 pandemic, and other events have shown that it could be difficult to rely on a force majeure clause unless very specific circumstances occur which align neatly with the drafting of the contract.

Relying on a force majeure provision in the case of increased tariffs is difficult for the following reasons:

1. The definition of "force majeure" is often characterised as being something that's beyond a party's control. By contrast, the obligation to pay tariffs or customs duties is often addressed in the contract, for example by incorporating delivery terms (such as Incoterms) which clearly make payment the responsibility of either the seller or the buyer.
2. Even if the imposition of new tariffs was to fall within the definition of force majeure (for example, by virtue of specific drafting), force majeure provisions typically only provide relief if a party to the contract is "prevented or hindered" from performing it. In most instances, that won't be the case – if new tariffs are imposed, the contract can still be performed; it might just become more costly to do so.

Whilst this isn't definitive, and each case would need to be considered on its merits, these hurdles mean that a more bespoke approach, rather than relying on force majeure, could be favourable. This echoes our earlier takeaways in our commentary on MUR Shipping v RTI, a case which concerned the interpretation of a force majeure clause in the context of US sanctions.

What other measures should you consider?

Fortunately, there's an existing playbook for dealing with these issues, and that's Brexit. Between 23 June 2016 (the date of the Brexit referendum) and 31 December 2020 (when the UK left the EU), it was not clear whether tariffs or quotas would apply to trade between the UK and EU. This gave rise to the popularity of so-called Brexit clauses – contractual provisions designed to allocate cost and risk depending on the outcome of Brexit. Those clauses, or versions of them, remain relevant today.

Key contractual considerations include:

1. Term and termination. Long-term exposure to changing tariffs can be mitigated by agreeing shorter-term contracts, or by inserting termination rights – such as a right to terminate for convenience on short notice.
2. The strength (or not) of supply/purchase commitments. Depending on whether a business is buying or supplying goods, the contract can impose a stronger or weaker (as applicable) obligation on the supplying party to accept and supply orders. Tailoring these provisions can either provide greater flexibility or greater certainty, depending on the desired position.
3. Delivery terms and Incoterms. Incoterms are pre-defined delivery terms published by the International Chamber of Commerce (ICC) which allocate responsibility for freight costs, insuring goods in transit and paying import/export duties. By choosing a more favourable Incoterm (e.g. DDP if you are the buyer, or EXW if you are the seller), you can contractually allocate responsibility for the payment of customs duties to your contracting counterparty. You could additionally go a step further and spell out in the contract which party will be the Importer of Record.
4. Force majeure. Although force majeure clauses are not without their challenges, with careful drafting it is possible to increase the likelihood of a force majeure clause providing relief in certain circumstances. Consider: (a) whether these clauses should be mutual (or just operate to benefit the supplier); (b) the introduction of express drafting to make it clear that the imposition of new or increased tariffs constitutes a force majeure event (as defined); and (c) a lower contractual threshold for claiming relief (rather than requiring something which prevents or hinders are party from performing its obligations).
5. Greater flexibility to increase prices. If you are supplying, consider drafting in an ability to increase prices by giving notice, using price increases as a mechanism for offsetting the cost of higher tariffs.
6. Brexit-style clauses. Most Brexit clauses were structured as a form of Material Adverse Change (MAC) provision, comprising a defined trigger event (in that case, Brexit) which gave rise to associated consequences. Here, the trigger event would need to be defined by reference to the imposition of new, or increased, tariffs, customs duties, or customs-related charges. It will be important for the trigger to be sufficiently certain to be enforceable, but not too narrowly defined (concerns could arise, for instance, if the drafting only captured US tariffs but not those imposed by other countries). The potential consequences flowing from the trigger event might include:
   1. A right for one or both of the parties to terminate the contract. In such circumstances, consideration will need to be given to the consequences of termination including, for example, whether either party would have any outstanding obligations (including payment) arising on early termination.
   2. An automatic increase or decrease of the prices (this sort of clause might take the form of price review mechanism, similar to the indexation clauses which are used to address inflation).
   3. An obligation for one party to pay, or both parties to share, the increased cost of tariffs.
   4. A structured negotiation process to be followed by the parties, setting out what the default position / consequences will be if the parties are unable to reach an agreement within a defined period.

Concluding thoughts

Whilst the future remains uncertain, we are seeing an increased use of tariffs by the US and other governments. Companies can navigate the associated challenges through a range of strategies (some legal, and some operational), but a carefully considered approach to contract drafting could be an especially practical and low-cost solution.

Please contact the author or your DLA Piper relationship partner with any questions.