Navigating Steel and Aluminum Tariffs in Automotive and Manufacturing Long-Term Supply Contracts
Despite recent optimism that certain aspects of the United State’s trade war with China may soon be resolved, its effects will be long lasting in certain regions and industries. The automotive and manufacturing sectors in the Midwest have been particularly hard hit by tariffs imposed on steel and aluminum. According to the Federal Reserve, manufacturing output shrank over two straight quarters this year. The auto industry has been cutting jobs at a rate not seen since the “Great Recession.”
The recent tariff trouble began in March 2018, when President Donald Trump signed two proclamations placing tariffs on imported steel and aluminum. The tariffs are authorized under Section 232 of the Trade Expansion Act of 1962 on the grounds of national security. The president’s action imposed a 25% tariff on imported steel and 10% on imported aluminum.
From auto suppliers to makers of construction equipment, tariffs have had a significant impact on the bottom line. Most companies that operate in the automotive and manufacturing industries participate in supply chains, buying from lower tier suppliers and selling to higher tier customers.
Long-term, fixed price contracts typically govern customer and supplier relationships. And when it comes to tariffs, there’s the rub. Because tariffs have driven steel and aluminum prices significantly higher, companies that entered into long-term contracts at pricing levels that didn’t take into account the impact of a 25% tariff on steel—in other words, virtually all of them—are stuck with contracts that are unprofitable. Most companies are not, pursuant to the terms of their contracts, able to pass through price increases resulting from the tariffs.
There are, however, some strategies that automotive and manufacturing companies struggling with tariffs can seek to implement. The Department of Commerce and Bureau of Industry and Security have established a process whereby individual importers may request exclusions from the tariffs. Approximately one year following imposition of the tariffs, companies had filed 45,328 exclusion requests, and 21,464 had been granted.
Another option is to attempt to renegotiate unprofitable contracts in an effort to recoup increased costs of raw materials. While a customer may be under no contractual obligation to reopen negotiations on a long-term, fixed price contract, there are instances where it makes business sense for all parties to sit down at the negotiating table. Companies that supply specially-manufactured parts that are critical to a customer are likely to have the most success negotiating a unilateral price increase. Those who make parts that can be more easily sourced from another supplier have less leverage.
More broadly, companies need to apply the lessons learned from today’s tariffs in future contract negotiations. Rather than merely accepting a customer’s boilerplate terms regarding pricing in a long-term supply contract, companies must proactively negotiate for price escalation clauses which take into account the impact of tariffs and other unforeseen circumstances. Otherwise, when the next round of tariffs arise, they’ll be back in the position of begging for relief from customers, rather than exercising their rights under a contract.
The Dragich Law Firm has extensive experience helping automotive and manufacturing companies negotiate and enforce contracts. For assistance, please contact David Dragich at email@example.com or 313-886-4550.