Settling Supply Chain Disputes Arising from Steel and Aluminum Tariffs

29 November 2018 Dashboard Insights Blog
Author(s): Vanessa L. Miller

The impact of tariffs in the automotive industry remains a topic of interest. Automotive companies are assessing the impact of the tariffs in their supply chain and developing strategies for passing through increased costs.

John Trentacosta, a partner in Foley & Lardner LLP’s Detroit Office, who specializes in supply chain disputes and counseling, worked with a reporter at the Wall Street Journal to publish an article last week on this important supply chain issue: “Auto Industry Fights Over Who Should Pay Trump Tariffs.” The article examines disputes emerging across the auto industry over which company in the supply chain should bear the costs of higher steel and aluminum prices as a result of the tariffs.

Due to the fixed price, long-term contracts in place for “the life of the part/program,” most companies are not able to pass through price increases resulting from the tariffs. In the automotive industry, length program timeline and related supply contracts can span 5-10 years or longer, resulting in automotive suppliers being locked into pre-tariff pricing for many years. The tariffs have been particularly impactful in automotive because the average operating profit for auto parts suppliers is only 7% and, depending upon the type of auto component, can be much smaller.

In the article, John Trentacosta debunks the notion that pricing in automotive contracts will be renegotiated due to the tariffs. He states: “There’s this notion that these costs efficiently flow through the supply chain and are visited upon customers with a nice, neat label saying ‘Trump tariffs.’ It doesn’t really happen that way in the automotive supply chain. It’s getting stuck somewhere along the way.”

Despite the hurdles, we still have seen a number of suppliers reaching out to ask customers for price relief, even though there is no basis for seeking such relief under the parties’ fixed-price, long-term supply contracts. Where components are specially-manufactured and critical to a customer’s assembly or vehicle, suppliers have a certain amount of leverage that they can exert. In addition, automotive companies are looking to other strategies to avoid the imposition of tariffs, such as exclusions, rerouting components through intermediary stops or value-added collaborations pre-import, and reclassifying imports’ Harmonized Tariff Schedule (HTS) codes.

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