US-China tariff wars: navigating volatility

Key takeaways

• A period of intense volatility is reshaping the global trade landscape, driven by shifting US policy and its ripple effects on markets, supply chains, and regulatory frameworks.
• Businesses face rising exposure to tariffs, contract disruption, competition law risk, and tax disputes – particularly around digital services.
• Agility, legal foresight, and proactive contract and tax structuring are now critical to managing risk and maintaining resilience.
• Multinationals should reassess their trade exposure, pricing models, dispute resolution routes, and investment protections as the environment continues to evolve.

Market volatility and geo-political impact

• Volatility will remain high as financial markets try to price the still unfolding new, transactional world order. The changes are expected to be every bit as seismic as those from the Global Financial Crisis and from Covid.
• Forecasts from the Yale Budget Lab and others show signs of stagflation are growing for the US economy meaning slower growth, higher inflation and higherforlonger rates. A challenging backdrop to mid-term elections in 2026.
• The 90-day pause in most reciprocal tariffs and subsequent tariff changes on the tech sector illustrate not only the volatility that businesses and their investors must try to navigate. They also throw light on the need for the US to refinance some $9 trillion of its sovereign debt this year alone. Higher bond yields anticipating higher inflation would only add to the debt service cost including payments to China as the second largest foreign holder of US bonds.
• The forecast US slowdown is also expected to transmit to other economies, notably China. The overall impact suggests slower global growth ahead even after a recovery period of about 3 years from the initial shocks.
• Yale also expects that Europe and the UK may experience a modest economic benefit due to substitution effects. But those countries also face geopolitical spillover risks and the need to correct in some cases structurally low productivity. The funding demands to achieve ambitions for productive investment in net zero and defence security are significant and will likely, against the current macroeconomic backdrop, require increasingly novel financial structures and perhaps further loosening of fiscal conditions to unlock patient capital.

Practical considerations

• Check, brace and check again your organisational resilience - it's going to be tested at least as hard as from the GFC and Covid: rom supply chains to tax;from revenue shocks to cost structures; from compliance to yesterday's regulatory regime to that unfolding including spillovers into service sectors.
• Conduct scenario planning based on possible escalation or reversal of current policies.
• Monitor developments other geopolitical hotspots that may compound trade instability.

Contractual enforcement and default risk

• Rising defaults and performance failures are expected to increase due to disruptions in supply and tariff costs.
• Parties should prepare for disputes involving force majeure, MAC (Material Adverse Change), and frustration – albeit recognising that many governing
  laws apply these provisions narrowly.
• Termination rights and clauses granting one party a discretion that effects the rights of both parties (e.g. in valuation mechanisms) are emerging flashpoints.

Practical considerations

• Conduct urgent audits of cross-border commercial contracts.
• Consider whether reservation of rights is needed when faced with a counterparty in breach.
• Document decision-making processes contemporaneously to support future dispute resolution.

Protect your commercial interests and manage pricing

• Companies should consider reorganising supply chains, redefining transfer pricing, or renegotiating terms with suppliers.
• Passing on tariff costs onto buyers may lead to potential disputes, especially if pricing structures in contracts do not account for sudden tariff changes.
• Contracts may include clauses like force majeure or hardship to address tariff shocks, but their applicability can be limited, especially with foreseeable tariff impositions.
• The situation is likened to the Covid-pandemic, where contracts concluded during the pandemic were assessed differently due to awareness of the
  situation.

Practical considerations

• Review Existing Contracts: Examine current contracts for clauses that allow price adjustments due to tariff changes, ensuring these clauses are lawful and clearly defined.
• Negotiate Amendments: If contracts lack mechanisms for tariff-induced price changes, consider negotiating amendments with partners to include relevant provisions.
• Update Contract Templates: Future agreements should incorporate clauses addressing potential tariff fluctuations, such as price variation mechanisms or broader force majeure clauses.
• Monitor Tariff Policies: Stay informed about global tariff policies and their impact on supply chains and pricing strategies.
• Seek Legal Advice: Ensure compliance with applicable laws, particularly in jurisdictions with strict contract law, such as the UK or Germany.

EU competition law risk posed by tariffs

• Tariffs used as a political tool has significant implications for global competition and competitiveness.
• They may reduce foreign competition and allow domestic firms to gain excessive market power.
• The new tariff plans can also adversely affect consumer welfare by impacting prices, product quality, and choice, and may stifle innovation due to reduced
  competitive pressure.
• Additionally, tariffs can lead to price fixing and collusion among domestic firms.

Practical considerations

• Monitor Tariff Changes: Continuously assess how tariffs might affect your competitive position and market dynamics.
• Evaluate Market Strategies: Consider how tariffs might alter competitive strategies, including pricing, product development, and market entry or exit decisions. Adjust business strategies accordingly.
• Antitrust Compliance: Ensure robust compliance with antitrust laws, as increased tariffs do not exempt companies from scrutiny regarding collusion, price fixing or other anti-competitive behaviour.
• Innovation Focus: Encourage continued innovation despite potentially reduced competition. Maintaining a competitive edge is crucial for long-term success.

The tax collision: DSTs and trade retaliation

• DSTs have become a bargaining chip: US tariffs in retaliation for discriminatory tax measures, such as DSTs that are targeting the US tech giants.
• As part of trade deal, UK is reportedly considering lowering the DST rate in exchange for tariff exemptions, but to make up tax revenue shortfall, the Chancellor is widening its scope to include AI and content streaming.
• European Commission President has noted that it is considering taxing advertising revenues, in addition to DSTs, if trade negotiations with the US collapse.
• As tariffs are widespread and there is ongoing uncertainty with respect to their application to sectors and countries, multinationals are caught in the cross-fire of negotiations and retaliatory measures on all sides. As such, multinationals must proceed with caution when considering long term and expensive restructuring of supply chains.
• Internal Revenue Service’s APMA staff reductions in the US are weakening bilateral tax dispute resolution routes.

Practical considerations

• “Unbundle” the value of the goods from any intangibles and/or services included in the price of goods purchased from related parties to reduce the transaction value subject to customs duties.
• Review of contractual arrangements between related parties and undertake financial analysis of the impact of tariffs on the profits of group entities to determine which entities bear the greatest burden of the additional costs and identify opportunities to adapt transfer pricing policies for the Group to ensure that costs borne are commensurate with the risk profile of the respective contractual parties in inter-group transactions.
• Assess the viability of Advanced Pricing Agreements in light of diminished US capacity to support bilateral long term tax dispute resolution. Plan for approaching tax authorities on a unilateral basis to achieve tax certainty.

International dispute resolution options

• WTO dispute settlement mechanisms are effectively non-functional due to the frozen appellate body (though China has submitted a dispute to the WTO).
• As a result of this, national trade review mechanisms and investor-state dispute settlement are becoming more important for companies considering their options.
• Structuring investments through jurisdictions with strong BIT (bilateral investment treaty) coverage can offer additional protection against retaliatory
  measures.

Practical considerations

• Engage local counsel early in trade review mechanisms at national level.
• Monitor investment treaty developments closely, particularly for capital-heavy industries.
• Consider undertaking a review of how foreign investments are held, to determine whether restructuring inbound and outbound investments is needed to access investment treaty protections.

To speak with us about any of these issues:

• Camilla de Silva – Global investigations & enforcement
• Andy Hartwill – Market strategy & macro outlook
• Basil Woodd-Walker – Commercial disputes & arbitration
• Andrea Pomana – EU competition & regulatory
• Svetlana Maloney – Transfer pricing, tax controversy and customs duties