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Ahead of the Curve Auto Supplier Blog

October 17, 2018

Suppliers Begin to Tackle Tariff Costs

The Trump Administration recently imposed new tariffs on steel and aluminum under Section 232 of the Trade Expansion Act of 1962 and tariffs on Chinese imports under Section 301 (see related blog HERE). The political response has been mixed, with debate over whether the tariffs will actually help American businesses at all. It remains unclear.

What is clear is that the tariffs are already impacting the automotive industry. Many supply chains depend on raw materials and components imported from countries impacted by the tariffs. This has resulted in a different debate that is as practical as it is political—who is responsible for the cost of the tariffs?

In many cases, the importers of record have looked to pass the cost of the tariffs up the supply chain. These requests turn on the suppliers’ contractual relationships with their customers. In some cases, automotive suppliers are turning to force majeure clauses in their contracts. These provisions relieve parties of their contractual obligations due to a significant and unforeseen event or act of God that is beyond the parties’ control.  However, there is no one-size-fits-all force majeure clause. Instead, courts interpret each according to its own unique language. In the past, it has been an uphill battle to convince courts that force majeure clauses apply to events that strictly impact a company's costs or profitability. However, courts may now be giving force majeure claims a more serious look given the unprecedented challenges of a global trade war.

Force majeure is just one trend to watch. Suppliers are also looking closely at contract terms and conditions relative to pricing. Although some contracts provide concrete fixed-pricing models, others afford some flexibility. It's important for a seller to understand whether its contract requires it to repeatedly accept buyer releases or whether there is flexibility to deny a release or purchase order until the tariff costs can be negotiated into the price. Shipping terms are similarly important, as some contracts require one party to shoulder the burden of duties and tariffs as part of its delivery obligations.

Other suppliers are looking to get creative, including working collaboratively with supply partners to file tariff exceptions. Although the exception process has been fraught with red tape (see related blog HERE), it's also one of the very few available options to fight the rising prices. Still others are working up and down the supply chain to negotiate acceptable cost-sharing agreements, sharing the tariff load.

Regardless of the short-term approach, tariffs are here, and, at least for now, they are here to stay. Automotive suppliers should be aware of how and if their supply chain is impacted. And if it is, they need to act now to determine an approach to deal with these unprecedented costs. This includes examining long-term agreements, purchase orders, releases, and other contractual documents to determine the price flexibility.

Warner’s Auto Industry Group is immersed in the ins and outs of the new tariffs and the contractual issues at play, so we know what suppliers need to do to protect themselves in the new environment. As part of this work, we recently created a Tariff Response Team. This unique and focused group is developing solutions to help clients understand and adjust to the disruption the tariffs are causing.

Warner does not have all the answers but we have long been involved in the discussion, understand the issues, and are already engaged in the battles. Let us know if we can help you.

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