On Wednesday, April 2, the Trump administration announced its “Liberation Day” tariff policy. The policy imposes tariffs that are effective immediately and that are expected to last indefinitely. Leaving aside the politics and merits of the tariffs, the fact is that companies must contend with them. They may roil global supply chains, cause input scarcity, and result in higher prices, but companies will have to determine how to deal with these challenges.
Even though any business strategy to mitigate the effects of these tariffs likely will be multifaceted, to even begin to understand their options, businesses must first look closely at their commercial contracts. For companies situated in the middle of a supply chain, this includes looking closely at procurement contracts as well as sales contracts.
Tariff increases may alter a party’s duty to perform under their commercial contracts. If tariffs are specifically covered by a force majeure clause or are unforeseen and have a net economic effect extreme enough, courts may find that companies are excused from performance. Commercial contracts may also have other provisions that could impact which party will bear the costs of tariffs. It is therefore advisable for companies to:
- Look now at their supply chains to determine if tariffs will affect them; and;
- Look now at their commercial contracts to determine whether their pricing terms, force majeure clauses, or other provisions provide any sort of relief
There are other strategic options to try to mitigate the effects of the tariffs, which might include:
- Redesigning products to avoid using high tariff inputs;
- Finding other sources of supply; or
- Using creative supply chain financing to try to unlock dynamic discounting or other concessions to counter the cost increases associated with the tariffs
These are just a few other strategies companies may employ. However, the first step is to look now at your supply chains to determine whether and how tariffs will affect you. Then, look at your commercial contracts to determine whether your pricing terms, force majeure provisions, or other provisions might provide a basis for relief.
