When the Trade War Hits Home | How Chinese Tariffs affect Ohio Manufacturers

The United States recently imposed tariffs on over 6,000 product categories that represent approximately $200 billion worth of Chinese imports. The move largely affects multinational corporations that source materials and components from China including automotive parts, food ingredients and construction supplies, but is having effects on manufacturers and supply chains of all sizes.

What are some considerations to avoid negative impacts in future contracts?

What can manufacturers expect with respect to the tariffs?

Producer prices in the manufacturing sector are already rising at around the fastest pace in 5 years.[1] For many manufacturers, the tariffs have created a ripple of increased costs along their supply chains. Small manufacturers in Ohio are already feeling the effects, causing them to hold off on new investment and hiring plans to compensate for rising costs and slowed demand for raw materials,[2] which have rendered USA-made products less attractive than foreign counterparts.[3] Large manufacturers can control expense by raising prices, but this is simply not an option for many small manufacturers.

How can parties mitigate the risks associated with their existing contracts?

As a result of these sweeping tariffs, existing supply contracts could become less profitable and possibly lead to more defaults.[4] Manufacturers should examine their contracts to determine the allocation of costs and risks of the tariffs. In many international commodities contracts, the buyers are obligated to pay import taxes, the increased cost of which will strongly affect buyers and will also impact middlemen acting as both buyer and seller. Those negatively impacted may be able to utilize price review clauses to allow renegotiation in certain circumstances, like certain percentage increases in price.

If the impact is severe enough to completely prevent the performance of the contract, a force majeure provision can suspend or terminate the agreement. But usually performance at an increased cost is not enough to trigger a force majeure clause, unless there is a provision specifically referring to acts by the government AND the government act renders performance impossible. Parties should examine their supply contracts to determine who bears the burden of import taxes and whether there are risks of termination or insolvency as a result of increased prices.

[1] David Flickling, Trump Tariffs Stick It to U.S. Manufacturers, Bloomberg.com (April 4, 2018) available at https://www.bloomberg.com/gadfly/articles/2018-04-04/trump-tariffs-stick-it-to-u-s-manufacturers-not-china.

[2] HFW Briefings, Forewarned is Forearmed: What are the Risks if Tariffs Spark a Trade War and How Can You Prepare? (March, 2018) available at http://www.hfw.com/Forewarned-is-forearmed-what-are-the-risks-if-tariffs-spark-a-trade-war-and-how-can-you-prepare-March-2018

[3] Rajesh Kumar, As Trump’s tariffs bite, small U.S. manufacturers begin to tap the brakes, (May 4, 2018) available at https://www.reuters.com/article/us-usa-trade-tariffs/as-trumps-tariffs-bite-small-u-s-manufacturers-begin-to-tap-the-brakes-idUSKBN1I5108

[4] Id.

Michele Hoza is an attorney in the Business and Mergers & Acquisitions practice group at Buckingham. Nate Fulmer is a Law Clerk in the Taxation Practice Group.