Managing Risks on the Tariff Roller Coaster Ride

The President’s announcement of a 90-day pause on the sweeping reciprocal tariffs announced last week (see our prior alert) was welcomed by investors and the business community, though a baseline 10% rate applies to all countries other than Canada, Mexico, and China, and China is now subject to the rapidly escalated tariff rate of 125%. The current expectation is that a flurry of bilateral negotiations will now commence. In this uncertain climate, companies that rely on or support cross-border trade can still take steps to plan, acknowledging what is currently unknown (the outcome), and focusing on the “likelies.”

The “likelies” are:

• materially increased tariffs will remain on key trading partners: the current 10% floor is already three times the average tariff rate that existed before last week’s announcement;
• tariffs on Chinese products will be materially higher than other markets; and
• the long-standing U.S. Government policy of ensuring tariff level certainty to enable business continuity has been rejected by the Trump Administration. That uncertainty is – for now – here to stay.

The new tariff environment potentially increases legal and business risks for importers and those that support their business, but those risks can be mitigated before the ultimate tariff picture solidifies. 

Exposure at the Border: Importers are legally affirmatively required to engage in “informed compliance” in reporting accurate information on the entry form submitted to the Bureau of Customs and Border Protection. Any inaccuracies that result in failures to pay correct duties can result in civil and criminal penalties. The greater the overall amount of duty, the greater the potential penalties, since penalties are typically tied to the amount of duty that an importer should have paid. Knowing failures to pay duties can also result in False Claims Act liability, which is an area of recent increased enforcement. The new tariffs thus present for importers a good opportunity to reassess the accuracy of their customs entries and compliance processes. 

Exposure to Litigation with Customers and Suppliers: Importers can assess whether there is contractual clarity on who bears the risk of increased duties, or whether such duties otherwise change contractual obligations in order to avoid costly breaches and litigation.

Competitive Risks: Importers can begin to assess whether they are in a more vulnerable position to tariffs than their competitors – or conversely, have a competitive advantage – in order to develop strategies to solidify advantages or fix vulnerabilities.

Financial Risks: Importers can assess the projected economic impact of higher tariffs on their business plan so that they can ascertain and address liquidity risks and other consequences of revenue shortfalls.

Manufacturing Risks: Importers can assess whether there are possible short, medium or long term opportunities to mitigate tariff risk, such as shifting manufacturing to countries where the tariff outcomes are likely to be favorable.

Supply Chain Risks: Importers reliant on imported parts and components can map their supply chains in order to assess and address sources of potential rising material costs.

Investor and Financing Risk: The tariffs also create uncertainty for investors and financial institutions that support international trade, and vulnerability to tariffs will certainly be a key line of inquiry in the M&A, private equity and lending markets.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta L. Nightingale, an O’Melveny partner licensed to practice law in the District of Columbia; David J. Ribner, an O’Melveny partner licensed to practice law in the District of Columbia and New York; Pamela A. Miller, an O'Melveny partner licensed to practice law in New York; Steven J. Olson, an O'Melveny partner licensed to practice law in California; Jennifer B. Sokoler, an O'Melveny partner licensed to practice law in New York; Meaghan VerGow, an O'Melveny partner licensed to practice law in the District of Columbia and New York; and Amanda M. Santella, an O'Melveny partner licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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