The global trading landscape has always been subject to shifting policies and unpredictable events, but the recent 10% ad valorem tariff on imports from China—imposed by President Donald Trump in February 2025—has made it more volatile than ever. These tariffs also apply to Hong Kong, and there is no de minimis treatment available, meaning all qualifying goods must be formally declared and have duties paid upon entry. This blog post explores how businesses can incorporate “tariff clauses” and cost-sharing provisions into their supplier agreements and freight contracts to effectively manage escalating trade costs.
1. Understanding the New Tariff Regime
National Security and Public Health Concerns
Under the International Emergency Economic Powers Act (IEEPA), the Trump administration justified a new tariff regime primarily by citing national security and public health concerns—particularly the flow of fentanyl and other illegal drugs from China into the U.S. Although reducing illegal drugs is the chief rationale, these measures also entail broad economic implications for businesses sourcing products from China.
Key Components of the Tariffs
- 10% Ad Valorem Tariff: As of February 4, 2025, the U.S. applies a 10% tariff on all imports from China, including goods from Hong Kong .
- No De Minimis Treatment: All shipments, regardless of size or value, must go through the formal entry process. Tariffs must be paid on every consignment, eliminating the previous duty-free threshold.
Retaliation and Potential Suspension
China has retaliated with tariffs on about $21.2 billion worth of U.S. exports, effective February 10, 2025. The U.S. government has stated that the imposed 10% duty may be suspended if China takes “appropriate actions” to alleviate the opioid crisis, though no specific benchmarks or timelines have been set.
Because the exact duration and future of these tariffs remain uncertain— hinging partly on geopolitical developments—it’s crucial for companies to protect themselves in contracts through well-crafted clauses that account for unexpected duty increases and other cost fluctuations.
2. Why Tariff Clauses Are Critical
When a sudden 10% tariff can significantly dent a company’s profit margin, a robust tariff clause in contracts ensures there is a clear plan for handling price fluctuations, compliance issues, and potential shipping delays. Such contractual safeguards are particularly relevant because:
- Reduced Profit Margins: Even a small percentage hike can translate into considerable cost increases for importers, forcing them to renegotiate terms or pass costs to customers.
- Disputed Responsibilities: Without prior agreements, suppliers and buyers may argue over who shoulders the tariff burden, creating friction that can damage long-term partnerships.
- Freight Logistics Challenges: Increased duties often lead to more extensive customs checks, leading to potential delays. Clarifying who bears additional storage or demurrage fees is essential.
- Ongoing Volatility: Tariffs are tied to broader geopolitical negotiations, so they can remain in effect for years—or disappear overnight. A dynamic clause that accounts for such fluidity is invaluable.
3. Incorporating Tariff Clauses in Supplier Agreements
a) Defining the Trigger Points
Clearly outline the events that would activate a tariff clause. For instance, specify that any government-imposed tariff changes—like the current 10% or further escalations—will be managed in a predetermined manner. Potential triggers include:
- Tariff rate increases or decreases.
- Retaliatory measures by other countries.
- Expiration or amendment of existing duty exemptions.
b) Cost-Sharing Provisions
One strategic approach is to allocate additional costs associated with new or increased tariffs between buyers and sellers. For example, you might choose a 50/50 split of new tariff expenses if they exceed a certain threshold. This can maintain trust with suppliers, as both sides share the financial burden rather than placing it entirely on one party.
c) Price Adjustment Clauses
In more flexible supplier relationships, consider employing a price adjustment formula. For instance, if the additional tariff cost surpasses 5% of the total invoice value, the sales price automatically increases by a corresponding margin. By having a transparent mechanism in place, both parties can quickly adapt to new legislative changes without lengthy renegotiations.
d) Renegotiation Terms
Despite set cost-sharing provisions or triggers, some extreme circumstances—such as tariffs soaring to 25% or higher—may warrant a complete renegotiation of the contract. Specify how parties can re-enter discussions, the timeframe for doing so, and the potential outcomes (e.g., contract termination, temporary suspension, or partial fulfillment).
4. Navigating Freight Contracts Under Tariff Volatility
a) Contractual Links to Tariff Changes
Freight contracts should also feature tariff clauses. For instance, if shipping costs rise because of extended border inspections or custom holds tied to new trade regulations, outline how these costs and delays will be managed. This could involve a surcharge structure or detention-free days to accommodate slower clearance procedures.
b) Delivery Timeline Adjustments
Shipping delays can occur when customs authorities scrutinize containers more carefully due to new tariff rules. Build in additional cushion for shipping timelines within your freight contracts. By doing so, neither party is unfairly penalized if inspections or border delays extend beyond the original schedule.
c) Force Majeure vs. Tariff Clauses
While a force majeure clause typically covers unforeseeable events like natural disasters or war, it may not account for tariff-related costs or shipping complications. A separate tariff clause ensures that such fluctuations are addressed upfront, rather than falling into a gray area in the event of disputes.
5. Practical Tips for Contract Negotiation
- Consult Legal & Trade Experts: Seek professionals familiar with import regulations under the International Emergency Economic Powers Act (IEEPA) to ensure your contract language is compliant with federal rules.
- Review Existing Documents: Any long-term supplier or freight agreements lacking tariff clauses should be updated proactively, anticipating not just U.S. tariffs but potential retaliatory duties as well.
- Implement Robust Record-Keeping: Track changes in shipping schedules, customs documentation, and costs meticulously to validate any price adjustments under your tariff clauses.
- Stay Updated on Policy: Remain alert to modifications in the tariff regime—especially if China changes its stance on illicit drug control—or if the U.S. modifies or suspends the 10% rate.
Conclusion
Negotiating contracts under volatile tariffs demands foresight and flexibility. While current U.S. tariffs under President Trump’s new regime can disrupt global supply chains, businesses can mitigate risk by proactively incorporating tariff clauses and cost-sharing provisions into both supplier and freight contracts. These legal safeguards clarify responsibilities, preserve relationships, and maintain profitability when sudden policy shifts threaten to erode margins.
As the trade environment evolves—whether through changes in U.S. enforcement, Chinese retaliation, or the potential suspension of tariffs—companies with well-structured contract provisions will find themselves far better equipped to absorb cost volatility and protect their bottom line. By staying informed, fostering transparent partnerships, and preparing solid contractual terms, businesses can seize emerging opportunities and thrive even amid shifting international trade policies.
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