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 opened new production lines in India and Vietnam, aiming to reduce China’s share of its U.S.-sold product sourcing from 67% in 2018 down to about 50% by the end of 2020. At the same time, Hasbro built up inventory in the U.S. (incurring extra warehousing costs) to hedge against potential supply disruptions.
This multi-sourcing strategy meant investing in alternate factories/suppliers and front-loading shipments before tariffs hit. Hasbro’s leadership framed it as part of a long-term risk mitigation ethos—treating tariff exposure like any other supply chain risk. By late 2019, Hasbro had indeed lowered its China dependence and could supply more toys from tariff-safe countries. They recently announced plans to further reduce dependence on China.
These approaches come with risks requiring mitigation. Quality variances can be addressed by maintaining detailed product specifications and qualification processes that all alternative suppliers must meet. Minimum volume commitments should include conditional language stating that minimum commitments can be reduced proportionally if tariff conditions necessitate supplier shifts. Intellectual property exposure requires strengthening IP protection clauses and considering jurisdictional segmentation of sensitive technology. Supplier relationship strain can be managed by framing diversification collaboratively, offering longer contract terms in exchange for flexibility. Administrative costs should be built into pricing models to account for the true cost of supplier diversification.
4. Manage Cost Expectations
Contract managers must establish transparency around price variability through “should-cost” models that base contracts on expected costs with predefined price variation triggers, ensuring suppliers don’t exploit tariff hikes for excess profits. Regular cost review mechanisms facilitate quarterly or semiannual contract reviews for structured discussions on pricing adjustments. Scenario planning clauses outline predetermined responses for different tariff scenarios. Value analysis brainstorming enables engineering and design teams to evaluate a product’s cost components and identify alternative materials or suppliers that incur lower tariffs. Foreign-trade zones (FTZs) allow companies to import goods and then seek to negotiate exemptions with the Department of Commerce, an approach many firms have successfully employed.
Stanley Black & Decker put this into practice by evaluating a variety of scenarios for potential tariffs. They essentially had a contingency plan for each scenario: for example, if a 10% tariff on certain components kicked in, they would offset X% via sourcing changes and Y% via price increases. If a 25% tariff on finished goods occurred, perhaps a different mix. By communicating this to analysts, Stanley showed that it had quantified the effect of tariffs and decided in advance how to react. This kind of planning meant no panicked moves; when tariffs were announced, Stanley could implement price increases months later in a measured way. It also reassured investors that the company could handle the headwinds. In short, scenario modeling gave Stanley a head start in managing cost expectations—knowing roughly how margins and prices would look under different tariff regimes.
Several risks need to be addressed in this area. Confidentiality concerns can be managed by creating tiered disclosure approaches where sensitive information is shared with limited stakeholders or third-party auditors. Cost model disputes should be preempted by establishing industry benchmarks and reference data sources in advance. Strategic pricing risk requires implementing periodic market-testing and competitive benchmarking to verify pricing remains market-competitive. FTZ compliance risk can be addressed by including requirements for documentation and compliance processes, with penalties for violations. Duty drawback complexities should be managed by assigning clear responsibility for maintaining records necessary for drawback claims.
5. Leverage Trade Agreements and Tariff Mitigation Strategies
Contract managers should integrate United States–Mexico–Canada Agreement (USMCA) preference clauses to ensure goods sourced from Mexico and Canada meet USMCA content rules, reducing exposure to tariff increases. Tariff engineering strategies involve structuring contracts to allow minor modifications to products that shift them into lower-duty categories. Bonded warehousing and duty drawbacks include logistics provisions that take advantage of duty deferral programs, allowing companies to reclaim tariffs on re-exported goods.
GoPro shifted U.S.-bound production to Mexico in 2019 to mitigate the impact of Section 301 tariffs on goods from China. While the move positioned GoPro to benefit from USMCA’s tariff-free provisions, eligibility depends on compliance with the agreement’s rules of origin. If GoPro’s Mexican-made products meet USMCA content thresholds, they can enter the U.S. duty-free. This strategy exemplifies how manufacturers can leverage free trade agreement (FTA) supply chains to maintain market access while minimizing tariff exposure.
These approaches come with risks that need to be mitigated. Compliance documentation risk can be addressed by including explicit supplier responsibilities for maintaining and providing certificates of origin. Regulatory changes to rules of origin require building periodic compliance review requirements into contracts. Customs authority scrutiny can be managed by requiring suppliers to provide binding customs rulings or legal opinions supporting product classifications before implementing changes. Incorrect HTS classification risk should be addressed by including indemnification clauses covering fines or duties resulting from supplier-provided classification errors. Trade agreement termination risk requires including specific provisions addressing what happens if an underlying trade agreement is terminated during the contract term.
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Tariffs are increasingly used as leverage in global trade disputes. To mitigate risk, companies must strengthen force majeure clauses, implement price adjustment mechanisms, diversify sourcing strategies, and enhance cost transparency. The most resilient businesses will be those that embed flexibility and foresight into their contracts, ensuring they can adapt swiftly to disruption rather than scramble to recover from it.
Source Daniel J. Finkenstadt – Harvard Business Review