Our Voices

Strategies in Response to the New U.S. China Tariffs

By Jeffrey Rinde, Robert Appleton, Ning Zhang, Wei Zhang

On March 22, 2018, President Trump announced tariff sanctions on Chinese imports, directing the U.S. Trade Representative (USTR) to propose within 15 days a list of products covered by the tariff increases, which will be subject to a public comment period. The Trump administration has publicly complained that the Chinese have engaged in unfair trade practices to acquire U.S. technology and put U.S. companies at a competitive disadvantage, which has resulted in a significant loss of U.S. jobs. The final list, which the USTR will select from 1,300 product categories which it has identified, is designed to target Chinese products that are believed to benefit from improper access to U.S. technology and is widely expected to cover information technology, consumer electronics and telecommunication sectors. While the scope of the products subject to the tariffs remains to be clarified, the significant impact of such tariff increase on the products Chinese suppliers are importing to the U.S. cannot be understated. If a Chinese supplier has an on-going agreement or a purchase order which involves it shipping any goods to the U.S. which are subject to the new tariffs, we have prepared the following roadmap to help reduce any economic uncertainties:

1. Obtain a report on any shipment of goods already made or scheduled to be made to the U.S. and the status of inventory of goods to assess the potential impact. Regardless of whether the Chinese supplier or the U.S. buyer is responsible for the increased tariffs, the economics and relationship of the parties will be affected by the increased tariff. The key contractual terms in the agreement or purchase order the Chinese supplier should pay close attention to include the following:

a. The party responsible for the tariff;
b. The delivery terms and possibility to claw back goods previously shipped;
c. Force majeure terms, and whether they allow for termination or suspension of such agreement or purchase order as a result of the tariff;
d. Amendment and termination clauses; and
e. Governing law and dispute resolution clauses to assess defense strategy and legal costs should any disputes arise.

2. Navigate possible remedies or work-around solutions or negotiate exit/termination with the counterparty. As discussed above, with the levying of new tariffs, the economic relationship of the parties will shift. It is important to engage the Chinese supplier's trade partners in discussion as early as possible to identify the possibility of any waivers or amendments to the existing arrangement.

3. Depending on the terms of the purchase order or agreement, the increased tariffs will cause damages to either or both parties to the agreements. If the Chinese supplier is considering a breach or a voluntary termination (or expecting the counterparty to do the same), it should evaluate its potential damages and the damages of the counterparty, the litigation risks and potential liabilities under the governing law, and dispute resolution procedures provided by the purchase order or agreement. Even if the purchase order or agreement does not provide for the termination in the event of a tariff increase, the Chinese supplier should engage legal counsel to explore the possible defenses for a voluntary termination, for example, impossibility to perform or frustration of purpose, as well as any affirmative defenses. It is also important to preserve all evidences in anticipation of a litigation or other dispute resolution procedures.

4. Whether the goods are covered by the increased tariffs depends on the country of origin and the rules applicable to such country. If the commercial consequences are severe yet the other party is not willing to negotiate a mutually agreeable solution and an option for voluntary termination is not available, it might be possible to circumvent the tariffs by engaging a contract manufacturer or toll manufacturer in another country, especially the treaty countries with U.S. to the extent that the governing agreements or purchase orders do not prohibit such practice.

5. Finally, in view of the recently enacted reduced tax rates in the U.S. and the increasingly complicated relationship between the U.S. and China, it may be desirable to set up overseas manufacturing capacities, especially in the U.S. Though this does not solve the immediate issues arising from existing contractual obligation resulting from the increased tariffs, it may benefit foreign companies in the long run. There are many industrial parks in the U.S. actively seeking foreign investment to set up manufacturing facilities, and more and more non-US companies have elected this option in recent years.

In addition to the practical and legal solutions for private party contractual disputes, the parties can also challenge the tariffs directly. A Presidential decree of tariffs does not translate into an automatic imposition of tariffs in every case. A company may challenge, seek a waiver, an injunction, or pursue an appeal of a tariff, through litigation, diplomatic channel, or other venues. For example, a recent regulation promulgated by the Department of Commerce, excluded tariffs on "articles for which there is a lack of sufficient production capacity of comparable products."

In the memorandum signed by President Trump on March 22, the Secretary of Treasury was also directed to propose actions in 60 days to address concerns about Chinese investment in industries or technologies deemed important to the United States. There is no interpretation on what may be deemed as "important" but the new measures are likely to impose significant restrictions on the investment flow into U.S. high-tech companies, including early-stage companies by Chinese investors. China's government criticized the U.S.'s planned actions, warning it will take "all necessary measures" to respond and protect its interest.