Recently, China announced tariffs on $50 billion in U.S. products in retaliation for U.S. tariffs on steel and aluminum products and 1,300 other product categories entering the country. This is likely the opening salvo in a back-and-forth between the United States, China and potentially other countries, such as the European Union, Mexico and Canada as the Trump Administration continues to take an aggressive posture on trade issues.
What this means for local businesses is that a significant number of products and raw materials are going to be impacted by tariffs in the coming months and it will be important to identify who is legally responsible for the cost of paying those tariffs. If you do not pay attention to this issue, you could easily find yourself absorbing a 25 percent price increase in the goods that you buy and sell.
Most products do not have a profit margin that can absorb these tariffs in today’s competitive environment. So how does a business protect itself?
The first step is to identify the problems you may already have. There is often a significant lead time associated with products bought and sold internationally, and you may have made or accepted orders in the last six months that did not anticipate the imposition of tariffs. What happens with those orders?
In the U.S., the legal responsibility for paying a tariff or customs duty is on the party who imports the product into the country. This is very similar in other countries as well. A tariff will become effective on all products entering the country on a particular date, and the tariff or duty must be paid for a product to clear customs following that date. The government does not care when the product was ordered or what the economic terms were, it is essentially a tax that must be paid.
Once that tax has been paid, the question becomes: Who is legally responsible in the purchase order or sales agreement for the cost of the tax? If you are a seller, can you pass that additional cost on to your customer? If you are a buyer, can you insist that the fixed price you agreed to includes all such taxes and duties?
From a strictly legal perspective, that depends on the standard terms and conditions attached to the purchase order or included in your sales agreement. A standard set of terms and conditions will generally put the responsibility for taxes, duties, fees or other governmental charges on the seller — unless the seller has included that cost as a separate line item or has used its own set of terms and conditions that shifts this liability to the buyer.
When dealing with other parties in the U.S., the risk allocation in the terms and conditions may settle the issue. When dealing with foreign suppliers or customers, it is more complicated.
If you purchased products from a seller in China, the legal responsibility may be irrelevant. You will have to pay the tariff when you import the product and, if you have already paid your supplier for the product, you will have very little recourse — even if the tariff is the supplier’s legal responsibility.
You might even find yourself in the position of having terms and conditions that make you responsible for tariffs on both sides of a transaction (for example, you buy components in China for a product and have to pay the tariff on entry to the U.S. and you then sell the product with that component to a buyer in Germany who you have given a fixed price).
As you can imagine, these situations can get messy and there may be no clear legal responsibility, so it is important to evaluate your risk in the short-term and make sure that going forward, this is an issue that you pay careful attention to.
* This article first appeared in The Press-Enterprise on April 28, 2018. Republished with permission.
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