Legal Risks in International Trade Contracts Amid U.S.-China Tariff Disputes

The intensification of U.S.-China tariff disputes, coupled with targeted sanctions, has significantly heightened legal risks in international trade contracts. Despite the prevailing trend of economic globalization, characterized by the cross-border flow of goods, technologies, and services, rising trade imbalances, protectionist policies, and geopolitical tensions have reshaped the global trade landscape. The unprecedented surge in tariffs, often not explicitly addressed in existing contracts, raises critical questions about whether such changes constitute “force majeure” or “hardship” (akin to “change of circumstances” under Chinese law) to justify contract modifications or termination.

1. Force Majeure and Hardship Under International Trade Conventions

The United Nations Convention on Contracts for the International Sale of Goods (CISG)

For contracts between parties in CISG member states, unless explicitly excluded, the CISG governs over domestic law. Article 79 of the CISG provides an exemption from liability for failure to perform due to an “impediment” beyond a party’s control, akin to force majeure. The requirements are: (1) the impediment must be uncontrollable; (2) unforeseeable at the time of contract formation; (3) unavoidable or insurmountable; and (4) directly causing non-performance.

Applying these to the U.S.-China tariff surge:

• Unforeseeability: Since 2018, U.S. tariff adjustments have been frequent, driven by trade protectionism. Parties should reasonably anticipate such changes, undermining claims of unforeseeability.
• Avoidability: Tariff impacts can often be mitigated through supply chain adjustments, origin changes, or contractual price mechanisms, suggesting the impediment is not unavoidable.
• Causation: Tariffs typically increase costs rather than render performance impossible, complicating direct causation claims.

Given these factors and the historically limited success of Article 79 claims, invoking force majeure due to tariff surges carries high risk. The CISG does not explicitly address “hardship” (comparable to change of circumstances), and whether Article 79’s “impediment” extends to situations where performance becomes significantly more onerous remains debated. Courts typically require satisfying the same stringent Article 79 criteria, making hardship claims equally challenging.

2. Chinese Law: Force Majeure and Change of Circumstances

Under Chinese law, the Civil Code of the People’s Republic of China addresses force majeure in Article 180, mirroring CISG Article 79’s requirements: the event must be unforeseeable, unavoidable, and insurmountable. As noted, the sustained and predictable nature of U.S.-China tariff adjustments since 2018 weakens unforeseeability claims. Tariffs generally increase costs rather than prevent performance, and without explicit contractual provisions designating tariff changes as force majeure, invoking this doctrine is precarious.

Article 533 of the Civil Code governs “change of circumstances,” allowing contract modification or termination if an unforeseeable, non-attributable event significantly undermines the contract’s purpose or fairness. The sharp tariff hikes under recent U.S. policies (far exceeding prior 25% increases) and China’s retaliatory measures may support claims that continuing performance is inequitable. Chinese courts, however, are cautious, as recognizing change of circumstances disrupts binding contracts.

In Shanghai Fujiade Import & Export Co., Ltd. v. Beijing Muhuayuan International Trade Co., Ltd. (Case No. (2019) Jing 0105 Min Chu 31831), a Beijing court recognized a tariff hike three days post-contract (25% of the contract value) as a change of circumstances, allowing termination without breach due to failed negotiations on cost allocation. This is an outlier, as mainstream rulings, such as Hubei Company v. Shanghai Company (Case No. (2023) Hu 0117 Min Chu 20616) and Jilin Company v. Baotou Company (Case No. (2023) Nei 02 Min Zhong 1704), treat tariff fluctuations as foreseeable commercial risks, particularly for experienced traders, absent explicit cost-sharing terms.

The current tariff escalation’s unprecedented scale and frequency may shift judicial perspectives, potentially recognizing a qualitative leap beyond normal commercial risk. Courts may consider factors like the timing of tariff changes relative to contract formation, the extent of cost increases, and their impact on fairness. Nonetheless, outcomes remain uncertain, and courts often favor termination over modification due to challenges in assessing revised commercial terms.

3. Practical Strategies for Foreign Buyers

The volatility of U.S.-China tariff policies necessitates proactive risk management in contracts with Chinese exporters. Below are tailored recommendations:

For Ongoing Contracts

• Contract Review and Risk Assessment
  Thoroughly review existing contracts, focusing on governing law, cost allocation (e.g., tariffs, taxes), delay provisions, and exemption clauses. Assess exposure based on your role (importer vs. exporter) and anticipate counterparty requests for modifications. Develop contingency plans, such as alternative suppliers or renegotiation strategies, to align with commercial objectives.
• Negotiation and Documentation
  Prioritize amicable negotiations to preserve mutually beneficial relationships. Explore solutions like adjusting origins of goods or reallocating costs. Given the uncertainty of force majeure or hardship claims across jurisdictions, negotiation remains the most effective forum. Conduct discussions formally, documenting communications (e.g., written records, approved recordings) and requesting supporting data to bolster potential litigation or arbitration positions.
• Legal Consultation
  Engage legal professionals to navigate tariff-related risks. Share business models and objectives to obtain tailored advice on compliance, cost mitigation, and dispute preparedness. Proactive legal input minimizes exposure to adverse rulings or counterparty claims.

For Future Contracts

To mitigate risks in future agreements, adopt robust contractual frameworks:

• Governing Law and Jurisdiction: Select a governing law and dispute resolution mechanism (e.g., arbitration) that balances predictability and enforceability. Consider jurisdictions with established trade law precedents.
• Tariff and Cost Allocation: Explicitly define responsibility for tariffs and taxes, including escalation clauses for significant increases. Incorporate price adjustment mechanisms to address cost fluctuations.
• Force Majeure and Hardship Clauses: Clearly enumerate events qualifying as force majeure or hardship, including tariff hikes or sanctions, and specify remedies (e.g., suspension, termination, or renegotiation). Tailor clauses to the chosen governing law.
• Flexibility Mechanisms: Include provisions for origin changes, delivery adjustments, or alternative performance options to mitigate tariff impacts.
• Dispute Resolution: Opt for arbitration or mediation clauses to ensure efficient, neutral dispute resolution, avoiding protracted litigation.

4. Conclusion

The U.S.-China tariff disputes present significant legal challenges for international trade contracts, particularly in invoking force majeure or hardship to address tariff-induced cost surges. Under the CISG, Chinese, U.S., and English laws, such claims face stringent requirements and judicial skepticism, though China’s evolving tariff landscape may prompt more flexible interpretations. Foreign buyers must proactively manage risks through diligent contract drafting, strategic negotiations, and legal consultation. By embedding clear, adaptive clauses in contracts and prioritizing dialogue, buyers can navigate the complexities of tariff volatility while safeguarding commercial interests.