Navigating trade turbulence: safeguarding UK businesses amidst US tariff introductions

In a bold move that has sent ripples through the global economy, President Donald Trump’s recent announcement of sweeping tariffs on Chinese, Canadian and Mexican goods entering the United States has sparked significant concern amongst its international trade partners.

The latest development is the announcement of a 25% tariff on all steel and aluminium imports.[1] It’s still unclear whether widespread tariffs will be imposed on UK goods, but economists have warned that Britain could be negatively affected by wider trade policies even in circumstances where tariffs are not imposed on the UK.

A tariff is a domestic tax levied on goods as they enter the country. Generally, tariffs are proportional to the value of an import and the most common form of tariff is where a percentage of a product’s value is charged. Any charge would be physically paid to the US government by the company importing the goods, which would generally not be the foreign exporter.

Consumer and business groups have raised alarms that tariffs could adversely impact supply chains and lead to increased prices on the US domestic market. By way of example, Mattel, the toy manufacturing giant, has hinted at potential price increase in the US to make up for the impact of the tariffs on imports of Chinese goods (where around 40% of the firm’s production takes place)[2]. 

In turn, the imposition of tariffs by the US may be likely to lead to:

• retaliatory tariffs being applied on US goods by other countries
• contractual disputes, as the imposition of tariffs may significantly affect a buyer’s ability to profitability resell imported goods

Who bears the risk?

Where new tariffs are imposed that affect a contract for the supply of goods, who bears the risk will largely depend on the contract itself. In general, the buying party would be contractually responsible for paying the tariff, and therefore bear the risk. In this case it could choose to raise resale prices to pass the cost of the tariff to consumers, risking reduced sales, or opt to absorb the cost of the tariff. But either option may result in lower profits. 

As a result, a buyer affected by tariffs might wish to either renegotiate the contract price or suspend or terminate the contract, unless the contract automatically provides for price decreases in the event of the imposition of tariffs. Its ability to do so is likely to depend on the contract terms themselves, and in particular:

• Whether price review clauses are included, and if so, whether the imposition of tariffs would "trigger" these.
• Whether there are any rights to terminate the contract on notice.
• Whether the contract has been drafted so that the imposition of tariffs could be considered a "force majeure" event that would entitle it to suspend performance – however this may be unlikely – see below. 

This is not to say that the imposition of tariffs is usually a "positive event" for the supplier under a contract – whilst in the short term they may be able to contractually insist on a price agreed before tariffs were imposed, in the long term they may say a decrease in sales which may result in it having to drop its wholesale supply price and/or divert its attentions to other markets. 

Force majeure

If a company finds itself in the position whereby it is unable to fulfil a contract due to circumstances outside of their control, they may seek to rely on the principle of force majeure.

In general English courts have been hesitant to allow parties to suspend performance in reliance on force majeure due to a change in global economic circumstances.[3] In order for a party to be able to attempt to rely on force majeure and suspend performance due to the imposition of tariffs, it is likely that:

• The imposition of tariffs would need to have clearly been set out as a relevant force majeure event in the contract.
• The contract would need to set out that the affected party would be entitled to suspend performance if the occurrence of the force majeure event (i.e. the imposition of tariffs) merely hindered it from performing its contractual obligations rather than prevented it from performing its contractual obligations – even in these circumstances there would be strong arguments that the imposition of tariffs would not hinder its ability to perform its obligation to pay the contract price. 

In addition, the mere existence of a force majeure clause does not necessarily mean that a party can be excused from performance in circumstances when a force majeure event arises; it will usually only be effective once notice has been served in accordance with the terms of the contract. If they fail to provide proper notice, parties risk losing the benefit of a force majeure clause. There is also often an obligation to take reasonable steps to mitigate the effect of the force majeure, which can also be implied by law, and force majeure clauses can interact closely with other contractual obligations such as business continuity plans. Businesses facing difficulties in fulfilling contractual obligations should seek advice as early as possible in order to ensure they protect themselves.

What can affected parties do?

It is important to review any contracts that may be affected by new tariffs to ascertain if such a situation is covered by the contractual terms. Whether affected parties can remove themselves from or renegotiate a contract if affected by tariffs will vary on a case-by-case basis, depending on the contractual terms.

Businesses should also consider engaging with contractual partners to try to resolve disputes before pursuing contractual claims, for example through alternative dispute resolution methods, such as mediation. As above, tariffs may ultimately disadvantage both parties, and suppliers may be receptive to seeking a solution. 

Going forwards, given that there may be a global trend towards greater tariffs, parties to global supply contracts should consider:

• Incorporating contractual clauses that allow for either automatic or negotiated price adjustments based on changes in tariffs, which can help distribute the financial burden between the parties.
• seeking legal advice to ensure that your contracts include necessary protections against legitimate risks, and on any right to terminate an agreement in the event it is no longer commercially beneficial. 

Conclusion

While the direct impact of President Trump’s tariffs on the UK remains uncertain, the broader implications of these trade policies could lead to the greater introduction of tariffs globally, and therefore greater uncertainty for international supply contracts.

Affected parties need to carefully review their supply chains, contractual terms, and engage proactively with partners to mitigate risks and navigate the evolving trade landscape.