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Ahead of the Curve Auto Supplier Blog

March 02, 2018

Steel and Aluminum Tariffs Are About to Hit the Auto Industry

After months of speculation, the White House announced yesterday that tariffs will be imposed next week on all aluminum and steel imported into the United States. The concept of imposing tariffs has been impending for months, and it is still possible that the actual tariffs will not be in place next week. It is, however, time to prepare for the impact they could have on your business. The announcement from President Trump did not contain much detail, but it did clarify the percentage of tariffs that will be imposed: 25% on steel imports and 10% on aluminum imports. There is speculation about whether the details of the tariffs will exclude certain countries, but at this point, the indication is that these tariffs will be imposed on all imports. 
 
The tariffs will likely affect the automotive industry directly or indirectly in the coming months and—if the announcement is accurate—“for a long time” to come. It is best to be prepared now so you can plan ahead. 
 
Are You Purchasing Steel and Aluminum Directly?
 
If you are purchasing steel or aluminum directly from a foreign source, these tariffs will likely impact your business directly and immediately. It is time to dust off your raw material contracts to determine how your steel and aluminum are priced. Start by looking at the price term in your contract—are the prices firm or subject to change based on market conditions and other fluctuations? How is the price set? Is it a set price or a formula based on a market transaction price?  How does the market transaction price handle duties and tariffs? Look at your delivery term to determine which party may be responsible for paying duties, taxes, and tariffs. And look at the market position of your supplier to see if it can sustain these tariffs if the burden is on the supplier alone. 
 
Even if you are purchasing steel or aluminum from a company based in the United States, these tariffs may affect you. If you are buying steel or aluminum sheets directly, it is possible that your raw materials supplier is purchasing ingots and other base materials from outside the United States and these purchases could be subject to the tariffs. Review your contracts to determine whether this is possible and to identify which party is responsible for payment of duties, taxes, and tariffs on these base materials. 
 
Contractual Terms to Review
 
Whether you are purchasing steel or aluminum directly or not, your business could be impacted by the tariffs through your supplier or its suppliers down the chain. Your suppliers may seek to either pass these costs to you or they may reach out to renegotiate price. And, you may need to look at passing these increases on to your customers as well. Before those phone calls are made, it would be helpful to understand your contractual position. There are a few provisions you should review.
 

Price

How are your parts priced? If you are purchasing parts from a supplier that is directly purchasing steel or aluminum raw materials, your price may not be firm. Your contractual price may be based in part on the market price for steel or aluminum. And your contract may detail how the market price may affect the price you pay. Further, the market price formula itself may also dictate whether tariffs are included or not. These same issues apply to you if you are affected by the tariffs and are reviewing your contract with your customer to determine if you can pass through the increase to them. 
 
Delivery
 
Delivery term is key if you are purchasing steel or aluminum directly from a foreign source. The delivery term in your contract will likely determine responsibility for these tariffs. If you are not purchasing steel or aluminum directly from a foreign source, your delivery term may also be an important provision indicating that payment of these steel or aluminum tariffs are not part of your contract. But keep in mind, if the impact lands on your doorstep, your delivery term to your customer will also be key in any attempt to pass the increase through to your customers. 
 
Force Majeure
 
Suppliers heavily impacted by these tariffs may look to their force majeure clause in order to alleviate the impact. Typically, force majeure cannot be claimed if an event increases the “price” of performance or the event is foreseeable. But whether force majeure can be claimed will depend on a variety of factors, including the particular terms of the force majeure clause included in your contract, the impact of the tariffs on the contract at issue, the impact of the tariffs on you or your supplier, and so on. A good understanding of your force majeure clause will be important before you begin these conversations with your suppliers and customers. 
 
Hardship Clause
 
Hardship clauses are rare in automotive contracts in the United States. But if you are dealing with foreign customers or suppliers, your contract may include a hardship clause. Typically, these clauses allow for renegotiation of the contract terms if an unexpected event changes the economic expectations of the parties for the contract. If your contract includes such a provision, it will likely be used by your supplier, or could be available to you with your customer, if the tariffs impact your supply.  


Contracts Currently Being Negotiated
 
If you are currently in the midst of contract negotiations on parts that may be impacted by the tariffs, use this opportunity to specify how these tariffs or others in the future—here in the United States or others imposed in response—will affect your supply. Through price and other provisions, you can properly allocate responsibility for these eventualities and provide more certainty in your supply chain. 
 
Better to Prepare Than to React
 
With the announcement yesterday ending most speculation about the tariffs, it is time to be prepared for the impact. Before you get that call from your supplier or you pick up the phone to call your customer, understand the road map to your negotiations by understanding your contract.  Warner attorneys have been staying on top of these eventual tariffs and their potential impacts, and we are ready to assist you in charting a path to lessen the unavoidable impact these tariffs will have on your automotive supply chain. 

 

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