Your International Manufacturing Contract Is Probably Putting Your Company at Risk

Home | China Law Blog | Your International Manufacturing Contract Is Probably Putting Your Company at Risk Table of Contents Toggle Your Manufacturing Contract is Probably Out of Date International trade has become incredibly volatile. Tariffs shift overnight. Governments impose export controls, quotas, and licensing requirements with little or no notice. Supply chains that once seemed stable now face regulatory minefields at almost every turn, and a week of certainty can vanish in a moment. If you’re still using a manufacturing contract from a few years ago—or worse, a recycled template—it probably isn’t protecting you anymore. It could be quietly killing your margins and increasing your risks. This is not alarmism; we see it every day with manufacturers who thought their agreements were fine—until they weren't. Modern supply agreements in 2025 need specific provisions for tariff protection, regulatory change triggers, and supply chain flexibility that are rarely found in older trade agreements. Hidden Liabilities in Legacy Manufacturing Agreements The global resurgence in tariffs is a day-to-day and ever-shifting cost reality. When the U.S. imposed a 25% tariff on steel imports in March 2018, manufacturers with fixed-price supply agreements saw material costs jump by hundreds of dollars per ton overnight. We have watched this same pattern repeat in other sectors. Consider these real-world scenarios: A $2.3 million loss: An electronics manufacturer with a 2019 contract was blindsided when semiconductors were reclassified under new trade restrictions, requiring immediate compliance with stricter export licensing requirements. A $3 million loss: A U.S. food exporter diverted a beef shipment at the last minute after sanctions against Russia hit just days before arrival. The reroute and resale triggered a $3 million loss. Their supplier contract had no clause on who bore the risk. An automotive supplier saved $1.8 million: This company renegotiated its contract in 2020 to include escalation clauses, which protected them during the 2021 aluminum shortage. Without updated clauses, manufacturers risk: 10–20% margin drops within weeks of a new trade action. Breach-of-contract claims costing $150K–$500K in legal fees. Months of production delays from unforeseen export bans or quotas. The good news is that these risks are preventable with the right contract language. Essential Provisions for Your Modern Supply Contract Every modern supply contract should be built with the current volatile trade environment in mind. Here is what you should include to protect your business: 1. Force Majeure Clauses for Regulatory and Trade Shifts Your contract’s force majeure clause must go beyond “Acts of God” to protect against regulatory changes. This provision should: Explicitly cover tariffs, sanctions, export controls, and regulatory shifts. Include cost-based triggers, not just "impossibility" of performance. Clearly spell out remedies, such as the right to suspend, renegotiate, or terminate the agreement. 2. Price Escalation and Cost-Sharing Clauses The global lithium market provides a clear example of this risk, with battery-grade lithium carbonate prices surging over 400% between 2021 and 2022 according to industry reports. To avoid being caught off guard, your contracts should: Set clear triggers: if raw material costs rise more than a predefined percentage (e.g., 8–10%) over the baseline, pricing automatically adjusts. Define a cost-sharing mechanism: for example, the supplier absorbs the first 5% of a cost increase, the next 10% is split, and any increase beyond that is reimbursed by the buyer. Require the supplier to provide documentation, such as invoices and customs data, to justify cost changes. 3. Change in Law Provisions This clause should compel both parties to return to the negotiation table if new tariffs or export restrictions materially alter the costs or performance of the agreement. 4. Clear Termination Rights Protect your business with a clear and defined exit strategy. Include the right to terminate the contract if tariff increases or trade restrictions exceed a set threshold, making the agreement no longer commercially viable. 5. Jurisdictional Risk and Indemnification Do not rely on boilerplate language. Clauses should be tailored to each jurisdiction, especially in markets with less developed commercial law. Furthermore, your contracts should stipulate that suppliers must indemnify you for penalties, tariffs, or damages resulting from inaccurate data they provide. You should also reserve audit rights to verify their compliance. A Practical Example of a Tariff Adjustment Clause Here is a sample clause you can adapt for your specific situation. This language is designed to prevent unilateral risk absorption. If any Governmental Action (including but not limited to tariffs, sanctions, export controls, or regulatory changes) causes the total cost of performance under this Agreement to increase by more than twenty-five percent (25%) compared to the baseline established at contract execution, either Party may terminate this Agreement by providing the other Party with sixty (60) days' prior written notice. In such event, the Parties shall cooperate in good faith to wind down any outstanding obligations in an orderly manner, and neither Party shall have any further liability or obligation under this Agreement except for those that accrued prior to the effective date of termination. Heads up: All of the clauses discussed in this post are examples. They are not one-size-fits-all solutions. Get legal advice specific to your situation. Beyond contract structure, there's another area where outdated agreements create unnecessary costs: Tariffs. Are You Overpaying Tariffs Without Knowing It? One of the most overlooked risks in older agreements is in your tariffable value. Many manufacturers are unknowingly paying tariffs on costs that are not tariffable. These costs often include: Transportation and freight R&D expenses Licensing fees Mold and tooling costs Marketing costs We routinely see manufacturers paying tariffs they don’t even owe. The fix often involves clearer contract language—or a separate agreement—to properly document these costs and create a defensible trail for customs audits. See How to Use Your Manufacturing Contract to REDUCE Your Tariffs. FAQs on International Manufacturing Contract Management 1. Can I amend an existing contract instead of rewriting it? Yes. In many cases, an amendment is a faster and more cost-effective option. However, you should never amend a contract without a lawyer, because with an amendment it is absolutely critical that your amendment make clear exactly what is amended and what is not amended. 2. What is the difference between a manufacturing contract and a supply chain agreement? A manufacturing contract covers the production of goods, whereas a supply chain agreement is broader, covering sourcing, logistics, and vendor management. Both need modern protections, as a weak point in either can expose you to significant risk. 3. Which jurisdictions are most problematic for force majeure? Jurisdictions with less developed commercial law often have a legal system that favors domestic companies. It is critical to obtain specific legal advice for each jurisdiction in which you operate to ensure your contracts are enforceable. See e.g., Do Not Let Force Majeure be a Major Force In Your China Contract 4. How do I know if I'm overpaying tariffs? If you haven’t had a tariff classification review in the past year, or if costs like R&D, marketing, shipping, tooling, or licensing aren't clearly documented and separated from your product’s price, there’s a good chance you’re overpaying. Our tariff attorneys have legally reduced duties for well over half of the companies that have engaged us—often significantly. 5. What is a tariff classification review, and how often should I get one? A tariff classification review ensures your goods are classified under the correct HTS codes. Many companies assume this was done correctly the first time—but codes change, and Customs' interpretations evolve. Annual reviews are a best practice, especially if your inputs or sourcing has changed. Companies that haven't reviewed their classifications in over a year often discover they've been overpaying duties or using outdated codes that no longer apply to their products. 6. Can contract language really change my tariff obligations? Yes. Tariffable value is often determined by how costs are documented and allocated in your contracts. If things like R&D, molds, or freight are bundled into the product price with no breakdown, you may end up paying more duty than legally required. My law firm has drafted more R&D contracts this year than in the last five years combined, and that's all because of tariffs. 7. How can I tell if my current manufacturing contracts are putting my company at risk? Start by asking whether they account for tariffs, export bans, or commodity price spikes? Do they allocate costs clearly? If you can’t answer these questions quickly, or if your contracts predate recent trade disruptions, you're likely exposed. 8. What's the difference between a "material adverse change" clause and the regulatory provisions you're recommending? Traditional material adverse change clauses are often too vague and require proving significant business impact, which can take months in court. The regulatory change provisions we recommend are triggered by specific, measurable events—like a 10% tariff increase or new export licensing requirements—regardless of overall business impact. 9. Should I be worried about my supplier's financial stability in this volatile trade environment? Absolutely. Trade disruptions often hit smaller suppliers hardest, and their financial distress becomes your supply chain problem. You may want your international manufacturing agreement to include supplier financial reporting requirements, early warning triggers (like missed payments to other vendors), and step-in rights that let you source directly from their sub-suppliers if needed. We're seeing more manufacturers require quarterly financial statements and proof of trade finance facilities, and we are doing more foreign company due diligence reports than ever since COVID ended. 10. How do I handle contracts with suppliers in multiple countries when trade rules keep changing? Multi-jurisdictional supply chains should have a master service agreement with country-specific addenda that can be updated independently. This structure lets you modify terms for one country (say, adding China-specific export control language) without renegotiating your entire global relationship. Each addendum should specify which country's laws govern disputes and include jurisdiction-specific force majeure triggers. This approach has saved our clients months of negotiation time when new trade restrictions hit specific regions. However, the safest approach is often separate contracts with each local subsidiary. The choice between these structures depends on your company's risk tolerance, operational integration across regions, and the specific regulatory landscape of each jurisdiction. The Cost of Waiting If your manufacturing contract is more than a few years old, you are likely exposing your company to unnecessary risk. Vague, outdated language in supply chain agreements can cost you in lost margins, legal fees, and production delays. Modern, proactive contracts clearly allocate risk, define cost-sharing, and prevent you from overpaying tariffs on non-dutiable costs. Get a Complimentary Contract Risk Assessment We offer complimentary reviews of international manufacturing agreements to identify your biggest risks—most often gaps in tariff allocation, outdated force majeure clauses, and missing price escalation provisions. You’ll receive clear, actionable recommendations to strengthen your contracts. Don’t wait for the next trade disruption to expose costly weaknesses. Protect your margins—and your supply chain—now. However, the safest approach is often separate contracts with each local subsidiary. The choice between these structures depends on your company’s risk tolerance, operational integration across regions, and the specific regulatory landscape of each jurisdiction." } }] } Check Out Our China Law Services Share Twitter Facebook LinkedIn E-mail Comment Dan Harris Dan Harris is a founding member of Harris Sliwoski, an international law firm where he mostly represents companies doing business in emerging market countries. Most of his time is spent helping American and European companies navigate foreign countries by working with the international lawyers at his firm in setting up companies overseas (WFOEs, Subsidiaries, Rep Offices and Joint Ventures), drafting international contracts, protecting IP, and overseeing M&A transactions. In addition, Dan writes and speaks extensively on international law, with a focus on protecting foreign businesses in their overseas operations. He is also a prolific and widely-followed blogger, writing as the co-author of the award-winning China Law Blog. Harris Sliwoski Attorney Read more posts [email protected] Read More International Manufacturing Learn more about our International Manufacturing Law Practice Related Posts September 15, 2026 Your AI-Drafted China Contract Says It Needs a Lawyer. Listen to It. September 11, 2026 Forensic Accountants in China Business Litigation: How True Numbers Can Tell the Wrong Story September 4, 2026 China NNN Agreement or Trademark Registration? You Usually Need Both September 1, 2026 AI Didn't Replace Lawyers. It Gave Us the 48-Page Contract. August 27, 2026 Do I Need a China NNN Agreement or a China Manufacturing Agreement? Usually Both. August 26, 2026 China’s New Overseas Investment Rules: Can Your Chinese Investor Actually Get the Money Out? 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