Managing Tariff-Related Legal Risks in Contracts with Chinese Exporters: A Legal Guide for International Buyers
In recent years, geopolitical tensions and global economic realignments have brought tariffs back to the forefront of international trade. As countries resort to protectionist policies and retaliatory measures, foreign buyers engaged in sourcing from China face heightened uncertainty and legal risk in their cross-border contracts. In such a volatile environment, managing the legal consequences of tariffs is no longer a matter of commercial prudence—it is a strategic imperative.
This article aims to help international procurement professionals, legal counsel, and compliance officers understand and mitigate tariff-related legal risks when entering into or performing contracts with Chinese exporters. Drawing from U.S. legal perspectives and international best practices, it provides a structured framework for contract review, renegotiation, and risk allocation—both for current agreements and future transactions.
I. Tariff Volatility as a Legal Risk
Tariffs, by nature, impose additional costs on cross-border transactions. Their sudden imposition or escalation can severely disrupt pricing structures, render contracts commercially unviable, and create performance risk on both sides of a trade relationship.
For international buyers sourcing from China, tariff increases can cause Chinese suppliers to default, delay performance, or seek price renegotiation. In extreme cases, financially weaker suppliers may become insolvent. These outcomes introduce both operational disruption and legal exposure. Therefore, understanding how tariffs intersect with legal rights and obligations under international sales contracts is essential.
II. Reviewing Existing Contracts: Legal Due Diligence and Red Flags
When tariffs rise after a contract is signed, the first step is to conduct a legal audit of existing agreements. This involves identifying suppliers or counterparties that are most sensitive to tariff shocks and least able to absorb additional costs.
Key questions to guide your legal review:
1. Who bears the burden of tariffs?
(1) Is there a clause explicitly stating which party must pay newly imposed tariffs?
(2) If silent, what is the default position under the governing law or INCOTERMS used (e.g., FOB, CIF)?
2. Do force majeure or hardship clauses apply?
(1) Is there a force majeure clause that includes government action, such as tariffs, as a triggering event?
(2) Is there a price adjustment or hardship clause allowing renegotiation when unforeseen cost increases occur?
3. Are there rights to renegotiate or terminate?
(1) Does the contract permit either party to initiate renegotiation if tariffs render performance uneconomical?
(2) Is there a clause allowing early termination in the event of supplier insolvency or financial distress?
4. What is your preferred outcome?
(1) Would it be more commercially beneficial to renegotiate rather than terminate?
(2) Are you prepared to offer extended deadlines or concessions to keep the supplier afloat?
5. Have accommodations been documented in writing?
Any extension of time or price concessions should be clearly documented to avoid disputes over waiver or modification.
6. Do you have back-to-back arrangements?
If your contract with the Chinese supplier is part of a larger supply chain (e.g., resale to an end customer), ensure your obligations upstream and downstream are aligned. Do your supplier agreements contain mirror clauses on force majeure, pricing, and termination?
7. Does your hedging strategy still work?
If you’ve hedged your exposure to price volatility using futures, FX derivatives, or other instruments, tariff-induced volatility may render your hedge ineffective. Misalignment between the physical trade contract and the financial hedge can introduce basis risk and create unintended losses.
III. Renegotiation Strategies for High-Risk Contracts
If your legal review identifies contracts at risk of default due to tariffs, proactive renegotiation may be necessary. However, such renegotiation must be handled carefully to preserve legal remedies and avoid waiving rights.
Best practices include:
(1) Negotiate in good faith, but avoid making verbal concessions—document every adjustment.
(2) Use side letters or contract amendments to record renegotiated prices or delivery terms.
(3) Insert conditional concessions, e.g., price increases contingent on proof of tariff impact.
(4) Evaluate counterparty financial health, especially if insolvency risk is suspected. You may want to trigger early termination rights before you become an unsecured creditor.
(5) Consider temporary standstill agreements that allow both parties time to reassess obligations without triggering default.
IV. Forward-Looking Contract Drafting: Designing for Resilience
For new contracts, the opportunity to manage risk is greater. The goal is to build resilience into the contract from the start by clearly allocating tariff risk and introducing flexibility.
1. Tariff Allocation Clauses
State explicitly who is responsible for paying tariffs, including:
(1) Newly imposed tariffs after contract signature
(2) Increases in existing tariffs
(3) Reimbursement mechanisms (e.g., if the buyer pays upfront, the seller must deduct from invoice)
2. Price Adjustment Mechanisms
Include price reopener clauses that allow renegotiation if tariffs increase beyond a certain threshold. Key components:
(1) What triggers a price review (e.g., tariffs exceeding 10%)?
(2) What data must be provided (e.g., customs records)?
(3) What is the process for renegotiation (e.g., 15-day good faith negotiation period)?
(4) What happens if parties cannot agree (e.g., mediation, price determined by neutral expert, or termination right)?
3. Force Majeure and Hardship Clauses
Ensure that tariffs, trade sanctions, and government restrictions are expressly included in the force majeure definition. Alternatively, adopt a hardship clause modeled on international principles (such as Article 6.2.2 of the UNIDROIT Principles), allowing renegotiation when performance becomes excessively burdensome.
4. Termination Rights for Insolvency
Insert clauses that allow termination if the counterparty becomes insolvent, is subject to restructuring, or shows clear signs of financial distress (e.g., missed payments, supply chain disruption). For buyers, such clauses serve as an early exit strategy.
5. Back-to-Back Clauses
Where possible, ensure contractual alignment between your purchase and sale contracts:
(1) If you sell goods purchased from a Chinese supplier to a third-party buyer, the terms relating to force majeure, pricing, and delivery delays should mirror those in your upstream contract.
(2) This protects you from liability where supplier non-performance is caused by tariffs.
6. Short-Term Contracts
In periods of high uncertainty—such as ongoing trade wars or elections that may shift tariff policy—short-term or spot contracts may reduce exposure. While longer-term deals provide price stability, they also increase the risk of economic frustration due to changing tariffs.
7. Evaluate Hedging Strategy Impact
Review whether your hedging instruments (e.g., commodity futures, FX forwards) remain effective in light of tariff-induced distortions. If significant divergence occurs between physical supply and financial positions, the hedge may lose effectiveness, or even add risk.
(1) Consider revising hedge ratios or structures.
(2) Evaluate the contract’s reference pricing mechanism—does it reflect market changes caused by tariffs?
V. Dispute Resolution and Governing Law Considerations
The choice of law and dispute resolution mechanism can significantly influence the outcome of a contract dispute involving tariffs.
(1) Contracts governed by civil law systems (such as China or much of Europe) may recognize concepts like economic hardship or rebus sic stantibus more readily than common law systems (e.g., the U.S. or U.K.), where force majeure interpretations are stricter.
(2) Consider arbitration under international rules (e.g., ICC, SIAC, CIETAC) for greater neutrality and enforceability.
(3) Ensure that any renegotiation or contract modification follows the formalities required under the governing law, especially regarding consideration and waiver.
VI. Final Thoughts
Tariff volatility is here to stay. In this environment, international buyers must adopt a more legalistic and proactive approach to contract risk management. By conducting early legal reviews of high-risk contracts, clearly allocating tariff risk in new agreements, and preserving flexibility through price adjustment and force majeure clauses, buyers can safeguard both their commercial relationships and financial position.
Ultimately, the goal is not merely to enforce contracts—but to ensure they remain viable in a world of shifting trade rules.