Automotive Industry Practice in the Age of Tariffs

Newsletter - TerraLex Connections
Automotive Industry Practice in the Age of Tariffs

By Homayune A. Ghaussi*

Introduction

 

For lawyers involved with the automotive industry, unless our practice involved international trade, tariffs used to be a topic that was once discussed in history class.  2018 marked a significant change in our relationship with tariffs.  The Trump administration this year imposed several tariffs that have impacted automotive suppliers and original equipment manufacturers (“OEMs”) across the automotive industry.  Dealing with some tariff related issue has now become a daily part of any automotive law practice.

 

The first tariffs to hit were tariffs on imported steel (25%) and aluminum (10%) under Section 232 of the Trade Expansion Act of 1962 (“Section 232”).  Initially, several countries and the European Union were excluded from application of the tariffs, but as of July 1, the tariffs have been imposed on all except for a handful of countries that negotiated exemptions or other deals with the administration, such as quotas on their imports. 

 

After the steel and aluminum tariffs came three waves of tariffs imposed under Section 301 of the Trade Act of 1974 (“Section 301”) on products imported from China.  Over 300 billion dollars of Chinese imports are now subject to this 25% tariff.  And there has been some mentions that more products may become subject to these Section 301 tariffs in the coming months.

 

In addition to these tariffs already imposed, the administration is currently investigating whether tariffs should be imposed under Section 232 on automotive imports.  It is not clear whether these tariffs may be imposed only on automobiles, or if they will also include automotive parts.  Speculation is that a 25% tariff may be imposed on automobiles and automotive parts imported into the United States.  Some nations have indicated they may be negotiating exemptions already. 

 

These tariffs imposed under Section 232 and 301 have also led to retaliatory tariffs being imposed by other nations on exports from the United States.  The automotive supply chain is a global supply chain that often involves subsystems and parts being assembled in one country using parts coming in from several other countries.  Navigating these tariffs globally is a new part of the business reality for automotive suppliers.

 

There are two main issues facing automotive suppliers in dealing with these tariffs: which party is contractually responsible for payment of the tariffs and how to obtain an exemption from the tariffs. 

 

Contractual Considerations

 
If your clients are purchasing steel or aluminum directly from a foreign source, or they are purchasing products from China, these tariffs will impact their businesses directly.  But even if they are not directly buying such imports, their business will likely be affected by their sub-suppliers’ purchases of such imports.  In this way, whether your clients are paying the imports, or if they are asked to pay for them in some manner through price increases or otherwise from their sub-suppliers, it is important for your clients to review their contractual terms to determine responsibility for these tariffs in order to prepare a strategy for handling the impact of the tariffs.   

 

Contractual Terms to Review
 

Price

How are the automotive parts at issue priced?  In the case of steel and aluminum tariffs, if your client is purchasing steel or aluminum directly, the price is likely indexed and fluctuates regularly.  Depending on how the price is indexed, the fluctuation may also take into account these new tariffs on imports.  It is important to review the price term carefully to understand whether and to what extent the index pricing, or other agreed price terms, may take into account the new tariffs.  On the other hand, if the price is firm, it will be important to review what is included in the price and what the contract terms provide for price change requests from the supplier.

 

 Delivery
 
Delivery term is key if your clients are purchasing directly from a foreign source. The delivery term in the contract will likely determine responsibility for these tariffs.  If they are not purchasing directly from a foreign source, the contractual delivery term may also be an important provision indicating that payment of these tariffs are not part of the contract and it is the supplier’s responsibility. But keep in mind, if the impact lands on your client’s doorstep, the delivery term for your client’s contract with its customer will also be key in any attempt to pass the increase through to the client’s customers. 


Force Majeure

 
Suppliers heavily impacted by these tariffs may look to their force majeure clause in order to alleviate the impact. Typically, force majeure cannot be claimed if an event increases the “price” of performance or the event is foreseeable. But whether force majeure can be claimed will depend on a variety of factors, including the particular terms of the force majeure clause included in the contract, the impact of the tariffs on the contract at issue, the impact of the tariffs on your client or its supplier as a whole, and so on. A good understanding of the contractual force majeure clause will be important before your clients begin these conversations with your suppliers and customers. 

 

In addition to force majeure, there should also be an analysis of applicable law, such as UCC Section 2-615, to determine if other relief is available for unexpected cost increases resulting from imposition of these tariffs. 

 

Duration/Requirements

 

Most business in the automotive industry is conducted under purchase orders issued to fulfill requirements of the buyer for a particular product for the duration of the “life” of the vehicle program.  This usually means the supplier is bound to supply the products for so long as that vehicle model is being manufactured and the supplier’s customer has requirements for the product being supplied.  Though this is usually the intent, it is not always carried out in the terms of the purchase orders or contracts entered into by the parties. 

 

When it comes to handling the increased cost of business arising out of these tariffs, suppliers should review their contracts to determine the duration of their current agreements to see if it is possible to terminate a relationship that may no longer be profitable, or may even be costly to them, and to see if the contracted quantities are sufficiently stated to require continued supply.  If these terms are missing, the supplier may be able to negotiate the cost of the tariffs in exchange for continued supply.  Buyers should also review their contracts to be sure they are protected under their contracts for continued supply at the agreed upon price, and to prevent a situation where a supplier may stop supply if the tariffs are not paid by the buyer. 

 

Hardship Clause

 
Hardship clauses are rare in automotive contracts in the United States. But if your clients are dealing with foreign customers or suppliers, the contract may include a hardship clause. Typically, these clauses allow for renegotiation of the contract terms if an unexpected event changes the economic expectations of the parties for the contract. If the contract includes such a provision, it will likely be used by suppliers, or could be available to your client with its customer, if the tariffs impact the supply.  


Contracts Currently Being Negotiated

 
If your client is currently in the midst of contract negotiations on parts that may be impacted by one of these various tariffs, or anticipated tariffs, your clients should use this opportunity to specify how these tariffs or others in the future—here in the United States or retaliatory tariffs imposed elsewhere—will affect the supply. Through price and other provisions, the parties can properly allocate responsibility for these eventualities and provide more certainty in the supply chain. 

 

Exemptions from Tariffs

 

For both the Section 232 tariffs on steel and aluminum and the Section 301 tariffs on goods imported from China, an exclusion process has been implemented to provide a process by which companies affected by the tariffs can seek an exclusion from application of the tariffs.  The process for the exclusions requests and the effect of a granted exclusion are slightly different for each process.

 

Section 232 Tariffs

 

The process for seeking an exemption from Section 232 tariffs went into place in July.  The basic premise for seeking an exclusion is a need to import the product that the purchaser cannot find in the United States either in the quantity or quality being imported.  Only individuals or organizations using the steel or aluminum at issue can file for an exemption.  There are also national security bases for exemptions, but these typically do not apply to the automotive industry.  At this time, there is no deadline for filing an application for exemption.

 

A separate application, which is an Excel spreadsheet, must be filed for each particular product for which an exemption is requested.  The applicant must include detailed information about the particular product, including chemical composition and other such physical characteristics.  The applicant may also attach or include other information it deems important for consideration.  All information submitted is public and made available for comment unless the applicant specifically request that certain information be kept confidential.

 

After receipt of a proper application packet, the application is posted on the regulations.gov website for a 30-day comment period.  There is no time period provided for when an application may be posted for comment.  After the comment period is concluded, the application will be considered for an exemption.

 

If an exemption is granted, the exemption is retroactive to the date the application was posted online.  Granted exemptions are generally good for one year, at which time a new application must be filed. 

 

Section 301 Tariffs

 

The process for seeking an exemption from Section 301 tariffs is similar to the process for Section 232 steel and aluminum tariffs, but does have some key differences.  Unlike Section 232 requests that must be filed by a purchase or aluminum or steel, Section 301 tariff exemptions may be requested by “interested persons, including trade associations.”

 

Section 301 tariff exemption requests are submitted to the United States Trade Representative.  The application itself is not a specific form, though a form previously used for comments to the potential tariffs is a preferred form for the application.  Unlike Section 232, Section 301 exemption requests are subject to a deadline of October 9, 2018. 

 

Like the Section 232 exemption requests, Section 301 requests are also posted online for comment.  The comment period here is shorter—14-days.  After the comment period, the exemption is reviewed for grant or denial.  If an exemption is granted, it is good for one year retroactive to July 1, 2018. 

 

Quota Exemptions

 

The administration recently also indicated that an exemption process would be provided for seeking an exemption from quotas agreed upon with certain countries, such as South Korea, in lieu of tariffs.  When the steel and aluminum tariffs were imposed, some countries (the list changes and should be checked) agreed to quotas on their imports of steel and aluminum in place of tariffs.  Needless to say, these quotas will significantly impact automotive supplies relying on steel or aluminum imports from these countries.  Once the countrywide quota is reached, all suppliers are prohibited from further imports.  The administration recently announced that an exemption process similar to the Section 232 process would be initiated for products subject to these quotas.  The process has not yet been announced.  It is expected to apply to orders placed before the quotas were put in place and may be limited to building materials.  Any products exempted from the quotas would then be subject to tariffs. 

 

Conclusion

 

We are now in a new world of tariffs and there is no telling how long these tariff wars may last.  It is important for our clients in the automotive industry to be prepared to deal not only with the tariffs currently imposed, but also any other tariffs that may come about.  The tariffs imposed, including retaliatory tariffs, make this subject one where our TerraLex partners will be key in helping our clients navigate the international tariffs schemes.


 

 

* Homayune A. Ghaussi is a Partner at Warner Norcross + Judd.  Homayune is dually focused in supply chain litigation and commercial contract negotiation. He represents clients in complex litigation and commercial disputes, including through jury trials and arbitration hearings. Homayune also counsels automotive, manufacturing and raw material suppliers throughout the United States and Europe on a variety of contracts. He thrives on providing clients with unique solutions to obstacles and creating strategies to achieve business goals efficiently, whether in litigation or contract negotiations. His proactive approach and ability to focus on the most important matters make him a valuable resource in and out of the courtroom. An executive at a Tier 1 automotive supplier, who regularly retains Homayune to better understand the potential legal ramifications of its customer contracts, said his advice was invaluable. “It allowed us to proactively address issues with our customer that we would have missed had we not had his guidance. I would retain Homayune as legal counsel in a heartbeat. I highly recommend him to others looking for legal support that is proactive and client focused.” Homayune is also a member of the Management Committee at Warner. Mr. Ghaussi may be reached at hghaussi@wnj.com.

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Tuesday, October 9, 2018
Automotive, Commercial Transactions and Finance / Consumer Transactions, Trade Law / Trade Regulation