Special Edition: Trump Tarrifying the World (Legal Implications and Ways to Address the Upcoming Tariffs)
To Letters of Intent, the podcast for dealmakers and risk takers. I am Pankaj Raval, founder of Carbon Law Group. Today, we're jumping into something that's got real world implications and that everyone's talking about, and that is tariffs.
Sahil Chaudry:That's right. I'm Sahil Chaudhry, associate attorney at Carbon, and this isn't speculation anymore. As of 04/05/2025, the new Trump tariffs will have officially gone into effect. A universal 10% tariff will now apply to all imports into The US, with additional country specific tariffs, like 34% on China, Twenty Percent on the EU, and more, rolling out this week.
Pankaj Raval:So let's break it down, Saadel. So this is the biggest trade action since the 1930s. This is crazy. The universal 10% tariff means that every importer, regardless of origin or industry, is now paying more to bring goods into The US than pretty much ever before.
Sahil Chaudry:And if you're importing from China, India, The EU, or Japan, those tariffs are stacking on top. For example, goods from China are now subject to a total 54% tariff. That's a huge margin killer.
Pankaj Raval:That's crazy. Yeah. I mean, we're just seeing this. Know everyone saw that image of Trump holding up that board during the press conference talking about, okay, these are the reciprocal tariffs that he's going to be essentially enforcing as of April 5. But even without it going into effect yet, we see the markets are in turmoil and we're already seeing supply chain and panic and the stock market reacting negatively.
Pankaj Raval:And this isn't just a policy move, it sounds like this is a full on economic shift. Businesses that don't move fast are going to feel it hard.
Sahil Chaudry:Pankaj, I'm already talking to our clients about this because imagine you've baked in your profit margin already have Imagine if you've already got a PO that's already in effect, that's effectively a contract. Now, when these tariffs kick in, it's just eating into your margin, and a lot of small to mid sized businesses are running on very thin margins that rely on volume, but if you have a tariff that is increasing to something like 54% now with China, China had 34%, but that's on top of their already 20% tariff, that's a huge change in how you plan your business. So it's really important to understand these tariffs because they're going to have real world implications. I mean, from a big picture perspective, I think perhaps the Trump administration is bargaining here to get the reciprocal tariffs reduced by other countries, but in the short term, this is going to hit small to mid sized businesses hard, and we want to be there for our clients to figure out how do we navigate this. So I want to start with just an understanding of where does this power even come from?
Sahil Chaudry:So you have Section three zero one of the Trade Act of 1974, which allows for retaliating against unfair trade practices. That's what this tariff measure is. You have Section two thirty two, which permits tariffs for national security related matters. You have Section two zero one, that's intended to safeguard domestic industries. Now, these give the executive branch broad authority, and courts have historically upheld it, which means you don't need Congress to vote in favor of the tariffs.
Sahil Chaudry:It's a huge power the president has.
Pankaj Raval:Interesting. So it means businesses essentially can't litigate their way out of this. They need a protective strategy, not just courtroom hope, is what you're saying?
Sahil Chaudry:Yeah, exactly. This is not something it actually falls squarely in our wheelhouse, which is this is a contract matter now. This is negotiating, and our clients are going to have to think about, okay, well, as, let's say you're an importer, and you're selling to your customers here, and you're also buying from your suppliers. So there are two ends of this spectrum here where you may need to negotiate with your supplier to take this tariff into account, and then you may need to ask your buyer to pay a little bit more in order to accommodate the tariffs. So there's negotiating and business component, but then there's also a contract component.
Sahil Chaudry:And before we get to the contract component, there are some potential narrowly tailored regulatory exceptions that could help. They're tough, but they could help. There's, for example, the Section three zero one exclusion. If your product is on the tariff list, but qualifies for an exclusion, you can get temporary relief from the tariffs, retroactive refunds on duties that have already been paid, and exemptions that apply to all these exemptions apply to all importers of that product. Now, here's the kicker: in order to qualify, you need to show that there's no viable US supplier, that there is significant economic harm, and that the product isn't tied to sensitive strategic sectors.
Sahil Chaudry:So even if the next application window isn't open yet, clients should start to get the paperwork ready and the economic data ready now so that they're ready to apply for this kind of exclusion.
Pankaj Raval:Interesting. Interesting. That's really, really interesting exclusion you brought up. Mean, this is an interesting exception to these tariffs that I think a lot of businesses are going to be interested in learning about because if I'm producing clothes, if I'm a clothing manufacturer and I'm producing in Bangladesh, it's a big question. Know, is there a viable U.
Pankaj Raval:S. Supplier of those clothes? Exactly. Is there significant economic harm if, if, you know, I can't import from them and it doesn't sound like, you know, clothing would be tied to sensitive strategic sectors. What does that mean for cosmetics?
Pankaj Raval:What does that mean for a lot of industries that we work with? So I think there's going to be there are a lot of questions that this brings up, but I think super helpful to learn more about the Section three zero one exclusion.
Sahil Chaudry:And then that's yeah, to who actually who pays the tariff?
Pankaj Raval:Right, exactly, yeah. Who does pay the tariff style?
Sahil Chaudry:So it comes down to Incoterms, which is this international norm. These are the international business norms that govern these types of transactions. So for example, you've got two main concepts. One is FOB, which is free on board, where the buyer takes ownership once the goods are loaded onto the ship. You, if you're the importer, you pay the shipping insurance and the tariff when the goods arrive.
Sahil Chaudry:The second option is CIF, cost, insurance, and freight, where the seller pays for shipping and insurance to The US. But if you're the importer, you still are paying the tariff because the importer of record is on the hook at customs. Either way, whether it's FOB or CIF, if you're the importer of record, you're paying the tariff, period. Interesting.
Pankaj Raval:If you don't have these clauses in your contracts already, sounds like you need them probably yesterday. What do you do? So basically,
Sahil Chaudry:there are ways that you can apply for a regulatory exemption, but those are pretty, that's basically temporary relief. I mean, we want to advise our clients with how do you plan long term for this? And one way that we can do that is by negotiating contract clauses. For example, there are three important contract clauses that you would want to negotiate for in this new Trump tariff era. Number one is a tariff adjustment clause.
Sahil Chaudry:So if tariffs or other duties are imposed or increased by a government authority, the seller reserves the right to adjust prices accordingly. So that way it's kind of like a loan with a variable interest rate, right? It's like, okay, if there's a tariff imposed, we're allowed to increase the price, and this lets you increase the price without breaching the contract. The second is called a force majeure clause. So, for example, normally force majeure clauses include things like an act of God, you know, natural disasters, but you can include changes in trade laws, imposition of tariffs, or governmental action that affects the cost or availability of goods.
Sahil Chaudry:Most clauses don't cover trade policy shifts, but you can negotiate for that clause. The third type would be a change in law clause. Let's say there's a change in law that significantly increases the cost of performance, the parties will agree to renegotiate in good faith. This gives both parties an escape hatch without triggering a contract fight.
Pankaj Raval:Interesting. Interesting. Okay. So this is great if you're contracting right now, but what happens if I've already signed a contract and the quote accepted, the PO is in? Can you still increase the price based on these changes?
Sahil Chaudry:Well, it's tough, but it's not impossible. That's where the uniform commercial code comes in. If you're selling goods, and most of our listeners who are in this business are importing or distributing goods, the UCC gives you two legal tools to work with. One is UCC section two six fifteen, practicability. If a government action like a sudden tariff hike makes performance commercially impracticable and that change wasn't foreseeable, you may be excused from performance or allowed to adjust your obligations, but it's a high bar.
Sahil Chaudry:Courts only grant relief if the cost spike is substantial and truly outside the seller's control. Then we've got UCC section 2,209, contract modification in good faith. This lets you modify an existing contract without new consideration, as long as it's done in good faith. So if you could show that the tariffs increase your costs after the deal was signed, you have legal grounds to approach the buyer and renegotiate the price.
Pankaj Raval:Interesting. Interesting. That's super helpful. That's super helpful to to know because I think a lot of sellers are probably feeling the pinch right now. They're probably unsure of what to do.
Pankaj Raval:Having that insight is, I think, super helpful.
Sahil Chaudry:If you're a small business owner, you're a small to mid sized business owner, you probably aren't aware of these rules, and then you also don't have the wherewithal to do the paperwork, the contract drafting, the filing of the forms here to execute on these strategies. I don't think any business owner really should expect that they have the wherewithal to do that, I do think that's where we come into play.
Pankaj Raval:Right, absolutely. Absolutely. It's a big question, and I think also you don't want to burn bridges, right? I mean, are suppliers, these are people who are probably doing business together for some time and want to continue those relationships. The reality is this is going to really cut into margins for sellers and buyers potentially based on who's paying the tariff.
Pankaj Raval:It sounds also that you can't just throw these objections or these issues in last second, right? I guess it probably works best when you probably make sure you want to document it right in the original quote date, You want to point to the date when the tariffs were enacted and then maybe also have your team make sure that gives client notice of the change as early as possible. Anything else that you recommend to do that would help people take advantage of some of these nuances in the law to adjust pricing or cover themselves based on these changes in tariffs?
Sahil Chaudry:Yeah, I think our clients who are importers need to negotiate for a clause in your terms and conditions that covers change in law or tariff impact. But even if you don't, if you're not able to, we do have this UCC option that gives you a narrow path to adjust the deal, especially if you act fast and you document everything.
Pankaj Raval:That's good to know. People can't really sit on this. They can't, like, bring it up in a month or two. They've gotta bring it up now.
Sahil Chaudry:Right. Exactly. And so if we were to propose an action plan for our clients who are importers, I would say review all your contracts for pricing flexibility, see if you've got any terms that could connect in terms of a force majeure or a tariff adjustment clause, and if you don't have that, it's a good idea to include that. Two, identify the HTS codes and country of origin risk. So each of these tariffs is classified under an HTS code.
Sahil Chaudry:So you want to first make sure that your goods are actually classified under the lowest tariff possible. And number two, you want to evaluate what's your risk based on the country you're importing from, and you're going to have to start those negotiations with your suppliers and your buyers. Absolutely. You need to do an audit of your Incoterms in every purchase order, and you need to prepare a three zero exclusion package. If you're importing at scale, you want to get that temporary relief that the government is able to offer if you're importing something that has no viable substitute in The US.
Sahil Chaudry:And maybe it's time to reevaluate your supply chain. There may be some countries that are better in terms of the tariff rates where you could shift your production and get a better tariff rate. For example, near shoring. If you compare the tariff rates on China versus Mexico, Mexico is probably a better option if it becomes viable as a supplier.
Pankaj Raval:Really interesting. Really interesting. Man, there's probably gonna be a lot more to talk about here. There's probably a lot gonna be a lot more questions as we learn more about how these tariffs come into play. So if you're not sure where to start, reach out to us.
Pankaj Raval:We'd love to chat more about this. This is what we do. This is how we help clients. We are a global law firm that has helped clients all around the world deal with these issues, and we'd love to help you if you're struggling with trying to sort through this somewhat mess of a new regulation that the Trump administration has come out with. With that said, we have wrapped today's episode of Letters of Intent.
Pankaj Raval:It's a special edition talking about the recent tariffs that have just been put forth by the Trump administration and will be coming into effect tomorrow, April 5. This is the podcast for deal makers and risk takers. We live in a world of risk and if you are a deal maker, if you're in business trying to do transactions, you're our client, you're someone we would love to work with or at least talk to and see how we can help you. Just know the Trump tariffs are real, they are hitting businesses hard, but also there are tools, strategies, legal levers you can pull to stay ahead of the game.
Sahil Chaudry:If you found this helpful, subscribe, leave a review, and share this episode with someone in your network who imports product or negotiates supplier agreements. We'll be back next week with more legal insights for founders and operators, play to win.
Pankaj Raval:Thanks so much, Kyle. See you next time. See you next time.
