Escalating Tariff War Freezes Corporate Supply Chain Changes

The Trump administration’s shock-and-awe trade war has stunned America’s corporate boardrooms into a state of paralysis.

With investors jolted by a stock rout pushing the S&P 500 to dip into bear market territory, many companies are slowing down production but avoiding major supply chain changes.

Companies “are absolutely frozen in place,” said Dan Cannistra, a partner at Crowell & Moring who advises corporations on international trade. “They have no idea what to do.”

In-house legal counsel are weighing the short-term pain of tariffs against uncertainty about how long those measures will last. They’re mulling supply chain strategies and reviewing contracts to steer around risks like suppliers suing over pricing changes.

Luis Arandia, a partner in international trade law at Barnes & Thornburg, said his clients immediately began asking how the potentially “catastrophic” levies apply to their businesses and how to mitigate their impact.

“It’s been C-suite reaching out and saying, ‘We need help,’” he said.

China’s pledge of 34% reciprocal tariffs—and President Donald Trump’s threat Monday of an additional 50% escalation—and a pending retaliatory move by the EU this week have all muddied the waters, leaving companies struggling with two big unknowns: How much will the battle escalate, and how long will it last?

Clothing companies are grappling with the question, “Do we need to completely reevaluate our entire supply chain?” said Nate Herman, senior vice president of policy at the American Apparel and Footwear Association.

The industry sources from countries slated to face high rates of Trump tariffs, like Vietnam, Cambodia, Indonesia, and Bangladesh, Herman said, and imports 97% of the goods it sells in the US. Reshoring production often isn’t feasible, he added.

“It takes a long time to move supply chains, and most places you would move to are not in a better position than where you are now,” Herman said.

C-Suite Panic

The tariffs Trump announced last week would be the highest US duties on imports in over a century.

Goods imported from China will face a 54% tariff. Planned tariffs on Vietnam, where many companies moved manufacturing after Trump’s first-term China tariffs, would be 46%.

In-house lawyers should be ready advise on risk when companies seek to avoid a high tariff, said Alon Rotem, the chief legal and strategy officer at the clothing reseller ThredUp.

“Anytime there’s a dislocation in the company’s business model, basically, legal implications follow,” Rotem said. General counsel will be reviewing vendor and supplier contracts, looking for provisions like force majeure that could let them renegotiate or get out of a contract, and thinking about SEC disclosures if they’re at a public company facing a material impact.

At Sandler, Travis & Rosenberg, P.A., managing partner Lenny Feldman said that over the last few months he’s been in touch with the CEOs of companies more frequently than ever before. They’re asking how they can tackle trade issues proactively—for example, by running their talking points by him before meeting with the White House, he said. Feldman also serves as general counsel and customs counsel to the National Customs Brokers & Forwarders Association of America.

Should I Stay Or…?

The Trump administration’s stated end goal of the tariff wars—to lure American manufacturing back home—might yet prove elusive.

Some trade lawyers are warning corporate clients not to move supply chains at all until the dust settles.

“Stay put,” Feldman said. A company could spend millions to wind down operations in one country and set up in another, only to learn tariffs were subsequently lifted on their first location, he said. “Now is not the time to take a knee-jerk reaction.”

And apparel and shoe companies face a struggle to build new factories in the US, Herman said: Materials costs stand to skyrocket from tariffs, while major export markets will dry up due to retaliatory tariffs, especially in Canada and the EU. And it’s difficult to staff factory jobs in the US, he added.

Some industries prepared for the tariffs by stockpiling imports, but that only goes so far, he said: In the clothing industry, for example, “it’s hard to predict fashion for next fall right now.”

Construction industry customers are moving cautiously until there’s more certainty about how costs will be affected, said Ken Simonson, chief economist of the Associated General Contractors of America. A surge in demand for domestic goods, away from newly higher-priced imports, would likely encourage domestic producers to also raise their prices and could create supply chain problems, he added.

Builders source many products globally, Simonson said—like elevator components from China, decorative floor tile from Italy, and appliances from Europe.

Given that Trump has wavered on the Canada and Mexico tariffs multiple times, Simonson warned, it’s too soon to look at options for tariff arbitrage.

Softening the Blow

Companies have some ports in this storm, but navigating their complexities is tricky.

For example, while imported autos face a 25% tariff, cars that fall under the US-Mexico-Canada agreement get a carveout: The value of the US-sourced portion can be deducted from the full value for tariff purposes. For example, a $20,000 car with half US-sourced content would only face the 25% tariff on $10,000.

Still, the provision is confusing, because many companies don’t have data that lets them easily make that calculation, Cannistra said. Further, accounting for how intangibles like engineering and design contribute to a car’s overall value isn’t straightforward, he added.

Going forward, companies will also pay much closer attention to customs documentation, to take advantage of provisions that apply tariffs differently on different parts of products, said Clinton Yu, a partner at Barnes & Thornburg.

“You may have clients that before they didn’t care about a breakout in the invoice between, ‘Hey, this is 60% rubber and 40% steel,’” he said. “Now that minor detail is going to make a huge difference.”