Mitigating Legal Risks in International Trade Contracts with Chinese Exporters Amid U.S.-China Tariff Escalations

In the evolving landscape of global trade, the U.S.-China tariff war has emerged as a significant disruptor, introducing unprecedented legal and financial risks for international buyers engaging with Chinese exporters. With tariffs on Chinese goods potentially rising to 125% and China’s retaliatory tariffs reaching 84%, the stakes for contract performance have never been higher. These tariff hikes, far exceeding the 25% increases of prior trade disputes, challenge the traditional judicial view that tariffs constitute foreseeable commercial risks. For foreign buyers, navigating these uncertainties requires a robust understanding of contractual risk allocation under both Chinese law and the United Nations Convention on Contracts for the International Sale of Goods (CISG). This article provides a comprehensive analysis of tariff-related risks, judicial interpretations, and practical strategies for drafting contracts to safeguard against the volatility of the U.S.-China trade conflict.

1. Allocation of Tariff Cost Increases in the Absence of Express Contractual Provisions

When international trade contracts lack specific provisions addressing tariff risk allocation, the burden of additional costs due to tariff increases typically falls on the party responsible for customs duties as per the contract’s agreed terms, international trade practices, or applicable law. For instance, under the commonly used Free on Board (FOB) Incoterm, the importer (buyer) bears the tariff costs, as the exporter’s responsibility ends once goods are loaded onto the vessel. Conversely, under Delivered Duty Paid (DDP) terms, the exporter assumes all duties, including tariffs, until delivery to the buyer.

This principle, rooted in the rigidity of contractual obligations, implies that absent statutory grounds such as force majeure or change in circumstances, parties cannot unilaterally demand price adjustments due to tariff hikes. Attempting to do so risks being deemed a breach of contract, potentially leading to liability for damages. For foreign buyers, this underscores the critical need to scrutinize Incoterms and explicitly address tariff risk in contracts to avoid unexpected cost burdens.

2. Can Tariff Increases Constitute Force Majeure to Excuse Contract Performance?

Under the Civil Code of the People’s Republic of China (Articles 180 and 590), force majeure is defined as an unforeseeable, unavoidable, and insurmountable objective event that prevents contract performance. Typical examples include natural disasters, wars, or government bans. However, Chinese judicial practice generally does not recognize tariff increases as force majeure.

The rationale is twofold: First, tariff hikes, especially in the context of prolonged U.S.-China trade tensions, are not entirely unforeseeable. Second, while tariff increases elevate costs, they do not render contract performance physically or legally impossible—only economically burdensome. Courts have consistently held that economic hardship alone does not satisfy the stringent criteria for force majeure. Thus, a buyer invoking force majeure to refuse performance due to tariff-driven cost increases risks being found in breach, liable for damages to the exporter.

3. Can Tariff Increases Justify Contract Modification Under the Doctrine of Change in Circumstances?

Article 533 of the Civil Code allows for contract modification or termination when an unforeseeable, non-commercial risk event renders continued performance grossly unfair to one party. Unlike force majeure, which excuses performance, the doctrine of change in circumstances requires judicial intervention to adjust or terminate the contract.

Historically, Chinese courts have been reluctant to apply this doctrine to tariff increases. During the 2017-2018 U.S.-China tariff disputes, when tariffs peaked at 25%, courts ruled that such increases were foreseeable commercial risks for sophisticated traders (e.g., cases (2023) Nei 02 Min Zhong 1704, (2021) Yue 1971 Min Chu 12896). However, the current tariff escalation—125% by the U.S. and 84% by China—represents an unprecedented magnitude, potentially exceeding reasonable foreseeability and causing demonstrable unfairness.

Given this context, courts may adopt a more flexible stance. Buyers seeking to invoke change in circumstances must demonstrate that the tariff hike was unforeseeable at the time of contracting and that continued performance would result in significant inequity. Timely application to a judicial or arbitral body is essential, as unilateral refusal to perform without such a ruling constitutes a breach.

4. Do Sanctions Qualify as Force Majeure or Change in Circumstances?

Parallel to tariff hikes, U.S. sanctions—such as those administered by the Bureau of Industry and Security (BIS) or the Office of Foreign Assets Control (OFAC)—pose additional risks. Sanctions may target entities via lists like the BIS Entity List or OFAC’s Specially Designated Nationals (SDN) List, restricting trade or financial transactions.

Under Chinese law, sanctions are evaluated similarly to tariffs for force majeure. Courts typically view sanctions as foreseeable, given their basis in publicized legal or regulatory frameworks. However, exceptional cases—such as sanctions triggered by sudden geopolitical events (e.g., Russia-Ukraine conflict)—may meet the unforeseeability criterion. Even then, the sanction must render performance impossible, not merely costly, to qualify as force majeure.

For change in circumstances, sanctions may justify contract modification if they cause significant price volatility or cost increases that render performance grossly unfair. Courts assess this on a case-by-case basis, considering whether alternative performance methods exist or if judicial remedies are available to the sanctioned party. Buyers must carefully evaluate sanction risks and seek legal advice before invoking these doctrines.

5. Tariff Risks Under the CISG Framework

For contracts governed by the CISG—applicable when both parties are from contracting states unless explicitly excluded—tariff-related risks are addressed under Article 79. This provision excuses non-performance due to an “impediment” beyond a party’s control, unforeseeable at contracting, and unavoidable or insurmountable. These criteria align closely with Chinese law’s force majeure requirements, leading to similar outcomes: tariff increases, while costly, do not typically constitute an exempting impediment.

The CISG lacks explicit provisions on change in circumstances (hardship). However, some national courts have interpreted Article 79 to encompass hardship in extreme cases, such as a 70% price surge deemed unforeseeable and grossly unfair. Where Chinese law applies alongside the CISG (e.g., via choice-of-law clauses), the Civil Code’s change in circumstances doctrine may fill this gap, offering a pathway to contract modification.

6. Practical Strategies for Mitigating Tariff Risks in Contract Design

To shield against tariff volatility, foreign buyers should adopt the following contractual strategies:

a. Price Adjustment Clauses

Incorporate clauses allowing dynamic price adjustments based on tariff changes. Specify triggers (e.g., tariff increases exceeding 5% of the contract value) and a clear formula (e.g., New Price = Original Price × (1 + Tariff Increase Percentage)). Example: “If import tariffs increase by more than 5%, the buyer shall provide official government documentation within 30 days, and both parties shall share the additional costs equally.”

b. Renegotiation Clauses

Include provisions mandating renegotiation if tariffs significantly disrupt the contract’s economic balance (e.g., cost increases exceeding 20% of the contract value). Define timelines (e.g., 15 days to initiate talks) and fallback mechanisms (e.g., contract termination if no agreement within 60 days). Example: “If tariff changes increase performance costs by over 20%, parties shall renegotiate within 15 working days; failure to agree within 60 days permits either party to terminate.”

c. Force Majeure and Change in Circumstances Clauses

Explicitly list significant tariff hikes as force majeure events or grounds for invoking change in circumstances. This strengthens the buyer’s position in negotiations or disputes, though enforceability depends on judicial interpretation.

d. Dispute Resolution and Governing Law

Opt for arbitration in China, where tribunals may offer greater flexibility in honoring party intent. Select Chinese law as the governing law for familiarity and predictability. Example: “Disputes shall be resolved by arbitration at the China International Economic and Trade Arbitration Commission (CIETAC) under Chinese law.”

Conclusion

The U.S.-China tariff war, with its extraordinary 125% and 84% tariff hikes, has reshaped the risk landscape for international buyers contracting with Chinese exporters. Traditional judicial views classifying tariffs as commercial risks are under strain, opening potential avenues for invoking change in circumstances. However, reliance on force majeure remains challenging due to the foreseeability and non-impossibility of tariff impacts. By strategically drafting contracts with price adjustment, renegotiation, and tailored force majeure clauses, and by choosing arbitration under Chinese law, buyers can build a robust “legal shield” to navigate these turbulent waters. Proactive contract design is not merely a precaution but a necessity in today’s volatile trade environment.

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