Author name: Michael T.

How Contracts Can Help Firms Navigate the Uncertainty of Global Tariffs Last week, President Trump signed an executive order imposing a sudden minimum 10% tariff on nearly all U.S. imports. The sweeping measures, which average 29% across all affected nations, were followed by a targeted 125% tariff on Chinese imports—wiped out trillions in global equity value within 48 hours. Then, just as abruptly, the Trump administration announced a 90-day pause for all but China, triggering a 9.5% rebound in the S&P 500. This isn’t just volatility; it’s a stress test. Firms still relying on static sourcing models and boilerplate contracts are gambling with their margins. In a world where trade policy can flip overnight, strategic contract management isn’t a back-office task: it’s frontline anticipatory thinking and action. Major tariff impositions—such as the 2018–2020 U.S.–China trade war and the 2024 U.S. tariff spike under Executive Order 14098—sent companies scrambling to protect their supply chains and profitability. In this environment of extreme trade uncertainty, contract management has become a critical strategic function. We draw on decades of experience in global contracting, supply chains, and international trade, combining hands-on government and industry roles with rigorous economic analysis of U.S. import and export patterns. Our insights, reflecting both operational depth and data-driven expertise, are shaped by years of studying how markets and contracts respond to disruption. Using these insights, we outline five ways businesses can strengthen their contractual frameworks to navigate the new tariff regime while protecting operations from disruption. 1. Strengthen Force Majeure Clauses to Account for Tariffs Force majeure provisions should explicitly include “material changes in trade policy, tariffs, sanctions, and import/export restrictions” to ensure structured renegotiation if sudden tariffs make agreements commercially unviable. A proactive approach involves updating force majeure language to cover “government-imposed tariffs, retaliatory duties, and other material trade barriers,” requiring notification timelines and renegotiation frameworks, and defining mechanisms for cost-sharing when tariffs exceed certain thresholds. Several risks need mitigation in this area. Courts may view tariffs as foreseeable business risks, so it’s important to define specific tariff percentage thresholds (e.g., “tariff increases exceeding 15% from contract date rates”) that trigger the clause. Counterparty push-back can be addressed by referencing established precedent, such as the Federal Acquisition Regulation 52.212-4(f) Excusable Delays clause that explicitly recognizes “acts of the Government in either its sovereign or contractual capacity.” In real-world application, a company recently rejected a supplier’s claim that steel price increases constituted force majeure, but Trump’s announcement on April 2nd affecting 185 countries represents a fundamentally different scenario that caught entire industries by surprise. Real-world application can be seen with Howmet Aerospace, which declared a force majeure event to avoid fulfilling certain supply contracts impacted by new tariffs. This move, prompted by President Trump’s sudden 20% tariff on aerospace imports, gave Howmet the right to halt shipments of critical components if tariffs made performance commercially unviable. By invoking the clause, the company signaled it would not absorb the tariff costs on its own. The announcement caught the industry’s attention—airlines, plane makers, and suppliers across the aerospace sector began scouring their contracts to assess tariff exposure and renegotiate terms. Howmet’s bold use of a force majeure clause set a precedent, prompting other firms to tighten contract language around tariffs going forward. 2. Implement Price Adjustment & Cost-Sharing Mechanisms Contracts can include price escalation clauses structured with tariff pass-through clauses, where if a tariff increase raises costs beyond an agreed threshold (e.g., 5% or more), the contract allows for renegotiation of pricing. Shared burden agreements mean buyers and suppliers agree in advance on how additional costs will be allocated (e.g., 50/50 cost-sharing beyond a 10% tariff hike). Indexed pricing models use external benchmarks like import duty rates that automatically adjust based on trade policy changes. Renegotiation based on harmonization import code interpretation has proven effective, as one large energy company importing fabricated steel pipes established a free trade zone and worked with the Department of Commerce to re-classify the Harmonized Tariff Schedule (HTS) code to lower or eliminate tariffs. Walmart provides an excellent example of cost-sharing implementation. The retail giant used its purchasing power to negotiate cost-sharing with suppliers. Facing a broad sweep of new import tariffs (ranging from 10% up to 50% on goods from dozens of countries), Walmart demanded price concessions from its overseas vendors to offset the duties. In practice, this meant foreign manufacturers had to reduce their selling price to Walmart, effectively splitting the tariff burden. In contrast, Volkswagen chose a price adjustment approach in response to a new 25% U.S. import tariff on all foreign-made cars. VW announced it would add an “import fee” surcharge to vehicles it sells in the U.S. that are made abroad. This is essentially a price adjustment directly tied to the tariff. Rather than quietly raising the sticker price, VW made explicit that an extra charge would apply to imported models, reflecting the tariff cost. Several risks require mitigation in this area. Documentation challenges can be addressed by establishing clear baselines by documenting current HTS codes, duty rates, and preferential trade agreement status at contract signing. Verification issues can be solved by requiring third-party verification or government documentation of tariff payments. Market competitiveness concerns should be addressed by including requirements that suppliers demonstrate efforts to minimize tariff impacts. Currency fluctuation complications can be managed by creating comprehensive adjustment formulas that account for both tariff and currency impacts separately. 3. Build Flexibility Through Multi-Sourcing and Contingency Plans Contracts should encourage diversified sourcing strategies through multi-sourcing provisions that include clauses permitting sourcing from alternative suppliers across different trade regions. Supplier substitution rights ensure buyers retain the right to shift purchases to approved alternatives without penalties. Regional reallocation provisions define processes for shifting production from China to Mexico, India, or Vietnam, depending on cost and tariff impacts. Hasbro exemplifies this strategy. The U.S. toy maker embarked on an aggressive diversification of its manufacturing footprint during the U.S.–China trade war. Anticipating new tariffs on toys, Hasbro accelerated plans to shift production out of China. It

With global inflation impacting economies worldwide and logistics and freight costs reaching unprecedented levels, many are reconsidering offshoring and supply chain strategies, especially in China. Key questions are arising: Is offshoring still a viable option? Is it worth the investment? What factors should I weigh before sourcing products outside Australia ? To address these questions effectively, it’s essential to examine the specific costs associated with the products you are considering, including the quantities you plan to order. This analysis is vital before finalizing any purchases. There are two primary cost categories to evaluate: Tangible and Intangible costs, discussed in detail below, along with the critical factors to consider for each before making an offshoring decision. Tangible Costs When comparing the costs of importing goods to sourcing from domestic suppliers, it’s useful to obtain a Free In Store (FIS) quote. This quote represents the total cost for goods delivered to your warehouse. An FIS quote for imported items typically includes: FOB (Free On Board) price Insurance and freight charges Applicable tariffs Customs clearance fees Domestic shipping costs from the port to your warehouse To accurately estimate an FIS quote, consider the following: Freight: Look up transportation costs online and assess: Whether to use sea freight or air freight The size of the container: 40’ standard, 20’, or less than container load (LCL) The number of items that fit in the container Transportation to your warehouse: Evaluate: Proximity of your warehouse to the seaport Size of the container being used Tariffs: Identify the HTS (Harmonized Tariff Schedule) code for your product Determine the applicable tariff percentage Understand the expected duration of the tariff Intangible Costs While tangible costs can be quantified, intangible costs are inherently more challenging to assess. Here are some examples of intangible costs associated with sourcing from China: Supply Chain Responsiveness: Managing your supply chain can be more complex when dealing with a factory in China compared to local suppliers. Obsolescence and Trading Position: There is a risk that ordered goods may become unnecessary by the time they arrive due to market changes. Funding: Purchasing from China often involves upfront inventory costs, while Australian suppliers may offer more favorable payment terms, affecting cash flow. Management from Afar: Travel and executive oversight represent intangible costs that can accumulate over time. Product Liability Insurance: Some retailers may require this, and while Australian suppliers typically have it, insurance from Chinese suppliers may not provide the necessary coverage. Recourse for Damaged Goods: If products arrive damaged, recourse can be limited, unlike with domestic purchases where payment may not have been made yet. Order-to-Market Delays: Sourcing from overseas may necessitate placing orders months in advance, whereas local suppliers can fulfill orders much more quickly. Transit Time: Delivery from international suppliers generally takes longer than from domestic sources. “Made in China” vs. “Made in the Australia” Labels: The country of origin can affect consumer perceptions and market demand differently based on the product and sector. In conclusion, the motivation behind sourcing from China often stems from the desire for cost savings that enhance competitiveness. Regardless of where your products are manufactured, it’s crucial to ensure you maintain that value advantage. This makes it essential to weigh the pros and cons of domestic sourcing against imports from China. Purchasing from China should ideally be about 20% cheaper, but as a general guideline, aim for at least a 5% cost advantage (taking FIS costs into account). However, exceptions do exist, so don’t hesitate to contact us with any questions!

Sourcing from China raises a prevalent concern regarding quality control. Many importers operate under the impression that choosing to source from China means making compromises on both costs and quality. However, this doesn’t have to be the case if proper procedures are established, even though implementing these can be quite labor-intensive. A common mindset among importers is the assumption that manufacturers inherently know what they’re doing, often leaving quality assurance to chance. Recently, I encountered a thought-provoking article by British writer James Palmer, who discusses a significant challenge in the arena of China sourcing. His piece, titled “Chabuduo: Close Enough…” highlights a troubling mindset that many importers encounter while navigating their sourcing programs. What is Chabuduo? Chabuduo translates to “close enough” and embodies a philosophy that complicates supply chains in China and impacts U.S. businesses. For instance, if a factory’s gate doesn’t lock properly, they might secure it with wire instead of fixing it. If you order brown stuffed teddy bears, you might receive red ones instead—after all, it’s “close enough,” right? The assumption is that a low price justifies these compromises, but ignoring this issue isn’t feasible for serious importers aiming for sustainable business practices. Importers face the reality that a single poor-quality shipment can jeopardize their operations. The anxiety over quality control can lead to sleepless nights, with concerns about whether the next shipment will meet expectations. This worry can become self-fulfilling; if a factory perceives a lack of attention to detail from the buyer, they may reciprocate with lesser quality output, perpetuating a damaging cycle. Addressing Quality Control in China To break this cycle, it’s crucial to focus on solutions rather than worries. Importers need to prioritize quality alongside cost. Avoiding the pitfalls associated with Chabuduo—a culturally accepted standard—requires diligence to ensure that products meet high standards. Rather than accepting “close enough,” importers should maintain a mindset of “Can I achieve better?” The appeal of sourcing from China stems from the potential to enhance products and manufacture them efficiently. While the Chabuduo philosophy exists to an extent, for China to retain its status as “The World’s Factory,” it cannot be the norm. Our clients, surprisingly, rarely encounter problems with quality control. The secret lies in their meticulous approach: they thoroughly vet factories, meticulously detail specifications, and conduct regular inspections—every time. The instances of Chabuduo often arise when accountability systems and procedures themselves are lax. Conversely, rigorous attention to detail leads to superior quality. A notable example is Foxconn, the manufacturer behind the iPhone, demonstrating how adherence to strict processes results in exceptional quality. We have found that an effective sourcing program in China stems from robust procedures and an uncompromising stance against accepting “good enough.” As Jim Collins, author of Good to Great, aptly put it, “Greatness is not a function of circumstance, but a matter of conscious choice.”

Navigating manufacturing in China can come with its challenges, particularly related to delays. However, with proper preparation, many of these delays can be avoided or minimized, leading to a more efficient sourcing process. Here are some strategies to help reduce the risk of delays and address them effectively when they arise: Place Orders Early: Begin your sourcing process well in advance. It’s advisable to prepare several months ahead to secure your orders—ideally, at least six months before the products are needed at their destination. Start identifying suppliers, obtaining samples, and finalizing product specifications two to three months prior to placing a formal order. For instance, if you’re preparing for the Christmas selling season, aim to place orders in March for delivery in August or September. This cushion allows for unexpected delays, ensuring you are not pressed for time. Avoid ordering in June for November deliveries, as this can be too risky. Implement Quality Assurance: Many delays stem from quality control issues that can arise during manufacturing. A robust quality assurance program can mitigate these problems. Employ timely inspections tailored to your business and product needs, including pre-production, in-process, post-production, and pre-shipment inspections. Discover more about setting up an effective quality assurance program and its inspections. Be Prepared for Customs Challenges: Customs-related delays can frequently occur, often due to missing documents that can hold up shipments for extended periods. To reduce this risk, conduct thorough research to ensure all necessary documents are completed, taxes and duties are paid in advance, and you are familiar with the regulations for importing your specific products. Delays are a reality when sourcing from China. The key to minimizing their impact is to be well-prepared.

Deciding to import from China is not a choice made lightly. Importers face a variety of factors to consider and extensive research when contemplating a shift in their supply chain to China. A key question often arises: What is the most effective way to purchase from China? The answer largely hinges on your unique requirements, with two primary sourcing methods to explore: Indirect Sourcing and Direct Sourcing. Indirect Sourcing Indirect sourcing involves purchasing goods from China via a third party, such as a trading company or importer. This approach typically revolves around off-the-shelf products rather than custom items. While the costs may be higher, it carries lower risk and allows for easier cash flow management. Direct Sourcing In contrast, direct sourcing means engaging directly with manufacturers in China. This route often yields the lowest initial costs yet comes with heightened risks that can strain cash flow. Effective risk management is crucial, and many importers opt to work with third-party representatives on-site, such as sourcing agents or full-service providers, to navigate this process more efficiently. To determine which option aligns best with your needs and to maximize value from your supply chain, consider the following factors: Price: Direct sourcing typically offers the lowest costs. Quality: While quality can vary, it’s easier to monitor with indirect sourcing. Volume: Indirect sourcing often allows for lower Minimum Order Quantities (MOQs). Customization: Unique products necessitate direct sourcing, whereas labeling can be managed through indirect sourcing. Convenience: Indirect sourcing is generally more convenient, although this convenience comes at a higher price. Types of Indirect Sourcing: Trading Companies are product specialists that purchase in bulk from manufacturers and resell to importers. This method is low-risk, relatively cost-effective, and convenient, especially if you work with a reputable supplier. Companies that order large volumes of existing products without customization will find indirect sourcing advantageous. Distributors/Wholesalers also serve as product specialists who procure goods directly from manufacturers, handling much of the sourcing process. By the time the products reach you, they’re already in a warehouse in Australia is typically limited, but this option offers significant convenience. Managing Your Supply Chain Directly: With an In-House China Office: This setup provides maximum transparency and control but demands a higher investment of time and financial resources. A dedicated sourcing team in a satellite office in China is beneficial for larger companies that import upwards of $5 million annually. Without a China Office: It is feasible to oversee a supply chain from the U.S. but requires communication during Chinese business hours for meetings and quality assurance. Occasional travel to meet suppliers may also be necessary. Importers often explore various strategies, including: Hiring an Australian based employee fluent in Mandarin and knowledgeable about Chinese culture. Employing a China-based worker who speaks English and understands Western culture. Working with a commission-based China agent. Alternatively, partnering with a China sourcing company can offer the advantages of a dedicated sourcing office without the corresponding overhead and management challenges. Each sourcing method presents distinct advantages and challenges, and the optimal choice depends on the individual importer’s needs and priorities.