By: Sarah Zomaya
Tariffs are taxes on foreign goods designed, in part, to incentivize U.S. buyers to purchase from domestic companies rather than import goods. When the government imposes a 25% tariff on an imported product, the U.S. buyer must pay an additional 25% before the imported product can be taken off the cargo ship.
President Trump imposed tariffs on $200 billion worth of Chinese products, effective September 24, 2018. The tariffs start at 10% but will increase to 25% on January 1, 2019, allowing many small businesses to make it through the holiday season with lower costs. Analysts speculate that consumer electronics, appliances, and furniture will bear the brunt of most of the tariffs.
Potential Effects of the tariffs
While big businesses, such as Target and Best Buy, will also feel the weight of these tariffs, small businesses are much more vulnerable because of their smaller profit margins. With already low profit margins, small businesses may not be able to make a large enough profit to stay in business once the tariffs increase to 25%. The tariffs likely will force small businesses to raise their prices even more, compelling consumers to purchase from larger retailers like the Amazons and Walmarts who are able to absorb the costs of the tariffs.
In response to the Trump tariffs, the European Union and other countries slapped the U.S. with tariffs of their own. These “revenge taxes” are the cause of Harley Davidson moving its production out of the country. If a large business, like Harley Davidson, has difficulty offsetting the tariffs, the future does not look very bright for small businesses. Even if a small business is not affected by the revenge taxes, the small business may still be forced to move production out of the U.S. Small businesses will see a decrease in profits following the tariffs and may have to move production outside of the U.S. in order to cut costs and stay in business.
Check out this map if you’re interested in how the tariffs have impacted industries across the U.S.
What to do about the tariffs – Economics
Economically, business owners can use multiple vendors to assure better pricing, implement pricing strategies, closely monitor inventory levels, and may even consider taking out a business line of credit in order to combat the tariffs.
What to do about the tariffs – Federal Waiver
You may have read that businesses can apply for a tariff waiver so that their imported products are not impacted by the tariffs. The deadline to apply for a tariff waiver was October 9, 2018. Don’t let this get you down because only 550 of 20,000 waiver applications were approved. Commerce Secretary, Wilbur Ross, has said that most of the application waivers were denied because a higher product price is not a good enough reason to grant the tariff waiver.
What to do about the tariffs – Breaching your Contract
What if you placed an order prior to the tariffs being imposed? With tariffs as high as 25%, many small businesses may not be able to account for this unexpected, additional cost. If a small business can’t afford to fulfill the contract because the price is too high or the profit margin will disappear, it may have no option but to breach the contract. If you don’t have a defense (legal reason for breaking the contract), you will incur damages for the contract breach. Those damages should be outlined in your contract.
Your contract language is important for another reason. If your contract contains a “force majeure” clause, you may be able to break the contract without any penalty. Force majeure clauses relieve a party from its contract when performance is prevented or hindered by circumstances beyond the party’s control. A force majeure clause may state that a party is not liable for breaching its contract if the breach is a result of “war, strike, fire, Act of God, earthquake, flood, embargo, governmental acts or order or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control of the party.” Even if a contract includes a force majeure clause, a court may not relieve a party from its contract just because the deal is economically burdensome.
If the Uniform Commercial Code (UCC) governs your deal, you may have another way out. The UCC may relieve a small business from its contract if the small business is complying with a governmental regulation or order. This will depend on whether the court determines that the tariff is a “governmental regulation or order,” but in the past, courts have been more willing to relieve a party from its contract when there is some form of governmental action.
Additionally, the small business may have the legal defense of “impracticability” or “frustration of purpose.” A small business will only have this legal defense if the contract would result in a substantial, unanticipated cost increase, thereby making it impracticable to go through with the contract. Tariffs that are implemented after the signing of a contract would seem to meet the “unanticipated” element but it needs to be substantial as well.
If you are unsure whether you should breach your contract and if you would have any legal defenses, you should discuss this possibility with your lawyer.
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*This post was authored on October 14, 2018.
Sarah Zomaya, at the time of this post, is a second year law student at Penn State’s Dickinson Law. She is from Southern California and is interested in corporate transactional law. Sarah is currently serving as Vice President of the Business Law Society and as an Associate Editor of the Dickinson Law Review.
Sources:
https://blog.trade.gov/2018/08/13/what-small-businesses-should-know-about-tariffs/
https://www.biz2credit.com/blog/2018/09/06/how-tariffs-impact-small-business/
https://smallbiztrends.com/2018/09/impact-of-tariffs-on-small-businesses.html
https://www.nav.com/blog/how-new-tariffs-could-affect-your-small-business-31001/
https://www.nytimes.com/2018/09/17/us/politics/trump-china-tariffs-trade.html
https://www.cnbc.com/2018/09/23/small-business-owner-thrilled-by-trumps-tariffs-on-china-others.html
https://www.law.cornell.edu/ucc/2/2-615
https://www.nytimes.com/2018/06/22/us/politics/trump-tariff-waivers.html
https://reason.com/blog/2018/07/30/tariff-waivers-flawed-steel-shortages
Charles L. Knapp, Nathan M. Crystal & Harry G. Prince, Problems in Contract Law: Cases and Materials, (7th ed. 2012).
Photo Source: https://smallbiztrends.com/2018/09/impact-of-tariffs-on-small-businesses.html
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