While Canada was given a short reprieve yesterday from the tariffs threatened by US President, Donald J. Trump, President Trump appears to have doubled-down signalling that these 25% tariffs will be coming by February 1.

If this is to be believed, the days of US and Canadian weighted average tariffs in the 2.2-3.4% range are over, and Canadian businesses need to begin preparing for the challenges these sorts of significant tariffs will bring – including the likelihood of Canadian retaliatory measures, which we reported on here. 

The balance of this Report will review some basic preparation steps that can be taken right now.

 Contract Review

Purchasers and sellers engaged in the international trade in goods will be impacted by tariffs no matter which side imposes them and should take the time to review sales contracts to ensure these tariffs are planned for in the pricing of the goods.  Attention should be paid to how contracts address price, and the expected impact of future tariffs, and the indirect effect of these tariffs on things like raw materials.  The ability to renegotiate or terminate for these unexpected disruptions, changes in law, and who ultimately has responsibility for any adjustments required should also be reviewed, among a whole host of other considerations. 

Use of Proper Incoterms®

The International Chamber of Commerce’s Incoterms® are used internationally to ensure the obligations for both purchasers and sellers are clear to each other.  The proper use of Incoterms can help prevent confusion regarding the responsibility for additional costs resulting from increased tariffs, although care also needs to be taken in their use – especially if being used inconsistently with the underlying contractual agreements, or where they are being misunderstood by those in sales!

A good Incoterm for sellers looking to avoid obligations in a customs tariff environment might be Ex Works (EXW).  Purchasers looking to avoid the same uncertainty might be thinking about DDP (Delivered Duties Paid).  But the right Incoterms really depend on the deal, misuse of these terms can lead to unexpected consequences, and quickly erase one’s expected profits on a sale, or increase one’s costs on a purchase – depending on one’s respective side in the purchase and sales transaction.

Price Adjustment Clauses / Cost-Pass On Clauses

When drafting contracts or reviewing current contracts, consideration will now likely be required on how prices may be adjusted, or costs passed on, based on the Trump Tariffs or Canadian Retaliatory tariffs.  While gross-up clauses can work in these situations, there are also some hidden issues involved in gross-ups, which will need to be addressed by competent professionals.

Takeaways

While the Trump Tariffs remain uncertain, if they are implemented, it seems that Canada will follow with Retaliatory Tariffs.  The key to surviving this new protectionist regime will be preparation, including contractual review and amendment.

Steps taken TODAY can lessen the burden later!

Want a PDF copy of this blog?