This is a quick post on what myself and experts have observed for negotiations on tariff uncertainty in contracts recently.
Let me start with what I’ve seen in my world. Some, emphasis on some, higher-end industrial products have long-term purchase agreements in place. For these parties, tariffs were already an issue even before the rapid increase after Liberation Day, and these long-term contracts had explicitly covered the risk of tariffs - not surprising that many were to be borne by the buyer here in the U.S.
That’s not to say that they can just blindly pass on price increases as if nothing has changed. Some high-end suppliers in advanced tech industries are willing to absorb some of the cost of tariffs. The U.S. market is too valuable where their margins (presuming tariffs come down and stay down) are higher than in China. Suppliers are sometimes even willing to offer generous and very late deadlines to cancel orders with long lead times.
What I’ve described above however is a very limited set of high value, high price, high margin industrial goods. That’s the exception, not the norm.
For the vast majority of arrangements, the situation is more as my good friend Kimberly Kirkendall (inactive CPA) , President at International Resource Development, Inc. , describes:
“Most companies still do not have supplier contracts, relying on purchase order T&Cs. For companies without a contract it’s important to negotiate in terms of “how do we keep both of our businesses going together” rather than making ultimatums.
The risk of blindly expecting the supplier to absorb the impact of the tariffs is to set yourself up for either (1) the supplier degrading the product to reduce costs – cheaper/smaller/thinner materials and / or subcontracting to less qualified partners or (2) fraudulent behavior such as reducing the invoice cost by charging some of the cost to service fees and/or they transship through another location and claim a new Country of Origin. Number (1) can cause product failure, and creates product liability risk, number (2) creates serious legal liability risk for the customer importer of record.
How can you prevent this? It’s a good time to increase inspections and keep regular contact with your suppliers.”
Kim also addresses this issue with Kathryn Read on Kim's excellent podcast on trade and supply chain:
And another good friend, Jeffrey Goldstein , President at Onward Global, drives home these points as well:
“While negotiating with Chinese suppliers, it’s important for US buyers to remember that the state of China’s weakened economy and prior U.S. tariff concessions to U.S. buyers has already created lots of hardships for suppliers, many of them already making low margins.
So while asking for another 5-10% is one thing, asking for 10-20% may simply be impossible or irresponsible for suppliers to absorb. Many will directly say so. Those who do not though, and who make such large concessions, ought to be carefully evaluated because at what cost are they doing so? Desperation and dependency on a single buyer’s business? Cutting corners in quality compliance? Outsourcing assembly to unethically managed workshops?
Financial risk is the highest it’s been in China’s supply-chain since 2008’s aftermath. If not careful and really knowing the state of their supplier’s business, US buyers risk thinking they’ve walked away with a negotiating win only to have created much larger risks / losses a few months down the road (e.g., factory bankruptcy where all production is confiscated by government authorities, newspaper headline about prison labor, etc.).”
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