In the context of the tariffs imposed by the Trump Administration on imported goods, a prevalent misconception has arisen that foreign suppliers automatically bear the cost of these tariffs. The reality, however, is more complex. The actual payment of tariffs is significantly influenced by the specific contractual agreements between U.S. buyers and their foreign suppliers.

The Fundamentals of Tariff Payment

Contrary to popular belief, tariffs are not inherently paid by foreign suppliers. Legally, tariffs are paid by the importer of record at the time the goods enter the United States. Typically, the importer of record is the U.S. buyer or its agent. The ultimate economic burden of these tariffs is determined by the contractual arrangements among the foreign exporter, the U.S. importer, and any downstream customers of the importer. The economic impact of tariffs can thus be considered a shared burden, which is distributed according to contractual terms (and influence by market dynamics such as bargaining leverage), rather than automatically falling on foreign suppliers as sometimes portrayed in political discourse.

Contractual Provisions

International supply contracts frequently include provisions that state which party is responsible for duties and tariffs. If the contract specifies that the importer, usually the U.S. buyer, is responsible, then the importer will bear the cost of the tariffs.

Conversely, if the foreign supplier is designated as responsible for the tariffs, the foreign supplier will pay these costs.

Sometimes the contract sets forth these responsibilities through the use of the ICC’s International Commercial Terms (also known as Incoterms), which provide a shorthand spelling out the responsibilities for various costs in international trade transactions. For instance, the term Delivered Duty Paid (DDP) indicates that the seller is responsible for all costs, including duties and tariffs, until the goods reach the agreed location inside the buyer’s customs territory.

Conversely, terms like EXW (Ex Works) or FOB (Free on Board) place the burden of import duties and tariffs on the buyer.

Some sophisticated contracts have provisions that anticipate potential changes in duties, and include provisions that allow suppliers to adjust prices in response to new tariffs. Such contracts may permit adjustments in prices or allocation of payment burden in the event of changes in laws and regulations, including those on taxes and duties, and their interpretation after the effective date of the contract.

Ambiguous Contracts

Often supply agreements contain only a general provision, such as “The buyer shall pay the duties on the goods purchased from the seller.” Imagine a situation where a new 54% tariff is imposed on goods imported from China subject to such a clause. The Chinese seller will undoubtedly take the position that the buyer must pay. But the combination of a new tariff and a vague contract provisions may lead to a dispute. Additionally, there could be arguments about whether “duties” and “tariffs” are legally distinct, introducing further complexities in international trade law.

Seller might argue that buyer is responsible for all duties, including new tariff. Buyer could counter that its obligation is limited to duties that existed when the contract was signed, arguing that it would not have agreed to the contract if unforeseeable and substantial tariffs were to be buyer’s responsibility.

In such cases, buyer would be tempted to invoke a force majeure clause, if one exists, in light of the unforeseen tariffs. Courts typically do not consider a new tariff to be a standard force majeure event, unless the force majeure clause specifically lists tariffs as a covered event.

Market Dynamics

When the contract does not explicitly address tariff responsibility, the economic burden becomes a matter of negotiation between foreign exporter and U.S. importer. Foreign suppliers will not naturally pay the tariff unless they are obligated or incentivized to do so. Even if the delivery term is DDP (meaning the exporter pays U.S. duties), in high-tariff environment, the exporter may try to raise its price to offset its loss.

If the U.S. buyer is responsible for the tariff (for example, under any Incoterm other than DDP, or in the absence of a contract term), the U.S. buyer will be obligated to pay the tariff to U.S. Customs and Border Protection. Buyer then has three basic options: (a) pay the tariff and absorb the loss; (b) seek to renegotiate pricing with the foreign supplier to shift or at least share the loss; or (c) pass the tariff onto its customer.

The actual outcome will be heavily influenced by the market power or negotiating leverage of the exporter, importer, and customer. Foreign suppliers with unique products or strong market positions may be able to pass tariff costs to U.S. buyers. Conversely, U.S. buyers with significant purchasing power might pressure foreign suppliers to absorb the costs. In competitive markets, suppliers may have no choice but to absorb some or all of the tariff costs to maintain their U.S. customer base.

Conclusion

It is a misconception that tariffs are directly paid by foreign suppliers (unless President Trump intends to seek monetary payments from trade partners to reduce their trade surpluses with the United States). In reality, U.S. importers pay the tariffs to U.S. Customs, and whether the cost is absorbed by the buyer or passed back to the supplier depends entirely on the terms of the contract.

For businesses engaged in international trade, understanding the allocation of tariff payments has practical implications. It is advisable to review existing contracts to understand tariff liability provisions, take steps to clarify duty responsibilities with counterparties, and discuss steps for transactions going forward. Additionally, businesses should consider building flexibility into pricing structures to account for potential trade policy changes and diversifying supply chains to reduce dependency on heavily tariffed countries. Understanding who pays tariffs is not merely a legal or accounting issue; it is a strategic business consideration. In a global marketplace subject to changing trade dynamics, clear contract terms can make the difference between a manageable cost and a profit-killing surprise.