“Past Lessons Learned” Concerning Tariffs, Freight Fee Escalation, and Supply Chain Agreements

The Trump 2.0 Administration’s clear vision focuses on increasing tariffs and border enforcement. Parts of the tariff escalation rhetoric may be a negotiation tool, but past experience tells us that some of the announcements will stick. Recent statements concerning implementing 25% tariffs on imports from Mexico and Canada, between 10 and 60% tariffs on all China imports and increased tariff threats against all countries may be fast-tracked early in the new Administration. During the first Trump Administration, the trade sector faced significant challenges from rising freight and demurrage costs, as well as Section 301/232 tariffs of up to 25%. There is no one mitigation strategy and it will take a comprehensive review of all available tools to effectively mitigate tariffs, including the following: 

Supply Chain Strategies

Many unknowns remain, but we are able to predict with some confidence that additional tariff and other trade barriers will focus on trade with China. While restructuring supply chains to minimize contacts with China remains a high priority for duty minimization, many companies face barriers due to existing manufacturing connections in China, long-term supply commitments to China and lack of availability from other sources. The financial impact of tariffs remains front and center, but other significant pricing components deserve review and attention, including rising freight costs, potential contractual breaches and unwanted inventory fluctuations associated with supply chain interruptions. In addition, enforcement of U.S. trade laws and regulations is increasing, as are penalties and detentions. Against this background, it is absolutely critical that companies understand all aspects of its international supply chain, including the source and specifications of all parts, components and technology included at any stage of the supply chain.

DCG Recommends the Following Review and Strategies:

• Review global supply and manufacturing sourcing for potential manufacturing and substantial transformation of raw materials, parts, and products outside of China and other countries targeted for retaliatory tariffs.
• Understand the entirety of your company’s supply chain: research manufacturing inputs and unique manufacturing steps that may occur in various countries to complete finished goods to analyze potential for country-of-origin/classification corrections.
• Review HTS classifications, country-of-origin and valuation structure of all product inputs and finished products throughout your supply/manufacturing processes. This will enhance compliance, but also prioritize fast action to potentially minimize duties if specific tariff increases are announced for specific classifications with upcoming implementation dates.
• Customs Valuation Planning: some examples:
  • First Sale applicability for multi-tiered sales transactions may provide opportunities for a lower customs value, reducing the impact of tariffs.
  • Review commission payments, and other fee and service payments involved with the international transaction that may be legally excludable from the declared customs valuation.
• Review applicability for the use of Section 232 exclusions for steel and aluminum products subject to increased tariffs, as well as steel and aluminum quota country limitations.
• Monitor the introduction of product, origin and/or importer specific exclusion filing and comment opportunities available in prior tariff implementation orders administered by the US Trade Representative and the Department of Commerce Bureau of Industry and Security.
• Evaluate duty preferential programs and potential duty reduction opportunities through bonded warehouses, foreign trade zones, duty drawback, Free Trade Agreements and other opportunities that may reduce duties or delay of duty payments improving cashflow management.
• Plan financially for implementation of tariffs: forecast how increased tariffs may impact financial outcome in different sectors of your company’s business plan.
• Review contracts to evaluate restructuring opportunities and allocation of responsibilities, focusing on the following issues and clauses that may mitigate or negate exposure to liability from changes in the supply chain:
• Contractual Clauses: Review of all force majeure clauses and consider revising an existing force majeure clause to determine if there is express coverage for tariff changes and other supply chain interruptions. The review should focus on the use of incoterms, delivery dates and the impact of potential detentions, seizures, and other trade restrictions. Does the contract provide for suspension, termination or renegotiation of performance obligations when tariffs significantly alter costs. Similarly, frustration of purpose and/or impossibility or impracticability of performance clauses may be appropriate if the tariffs substantially undermine the contract’s intended economic benefits, though caution must be applied as these defenses are typically disfavored by the court.
• Limitation Liability Clauses: Liquidated damages and limitation on liability clauses can be used to set predetermined damage limitations and exclusions that apply even if a contract is breached due to frustration of purpose or unforeseen costs (like tariffs). Placing a cap on liability or restricting liability to specific damages (e.g., direct but not consequential) can significantly mitigate or eliminate any adverse effects of tariffs.
• Price Adjustment Clauses: Negotiating price escalation clauses allows for cost-sharing of tariff increases with suppliers, mitigating and spreading the financial impact. These clauses can be beneficial in long-term contracts where costs are unpredictable.

Mitigation and Litigation Strategies: If tariffs render certain contracts economically unviable, working with legal counsel to review litigation or negotiation options may help manage risks and resolve disputes without compromising long-term supplier relationships. We have found it to be helpful to undertake a simple supply chain charting exercise to visually depict the supply chain traffic lanes and then focus on the high traffic, big ticket items and lanes. There is no one solution fits all approach and the DCG trade professionals are here to assist with developing tailored solutions that fit the particular supply chain.