Miguel Vasquez

Two months on from “Lib­er­a­tion Day”, and it is ev­i­dent that the volatil­i­ty and un­cer­tain­ty in mar­kets since the turn of the year is more like­ly to con­tin­ue than not. The month of April brought world­wide fear and pan­ic as the US im­posed sig­nif­i­cant tar­iffs on im­ports from coun­tries around the world, notwith­stand­ing the ex­is­tence of trade agree­ments with those coun­tries. Chi­na, Cana­da and Mex­i­co, were amongst the most sig­nif­i­cant­ly af­fect­ed, with Chi­na in par­tic­u­lar re­spond­ing by im­pos­ing re­tal­ia­to­ry tar­iffs.

Mid-April and May ush­ered in lev­els of op­ti­mism with sus­tained pe­ri­ods of eco­nom­ic re­cov­ery stem­ming from the US’s 90-day sus­pen­sion of its more sig­nif­i­cant tar­iffs, but main­tain­ing a flat 10 per cent tar­iff for most coun­tries ex­cept Chi­na (which was not af­ford­ed a sus­pen­sion).

Fur­ther progress was made how­ev­er, par­tic­u­lar­ly in US-Chi­na re­la­tions, as tar­iffs on goods im­port­ed from Chi­na were low­ered from 145 per cent to 30 per cent, with re­tal­ia­to­ry tar­iffs on US goods con­se­quent­ly drop­ping from 125 per cent to 10 per cent. This pos­i­tiv­i­ty ap­pears to be short lived how­ev­er, as tar­iffs on all steel and alu­mini­um im­port­ed in­to the US (in­clud­ing from Cana­da, Chi­na and the Eu­ro­pean Union, but ex­clud­ing the UK), dou­bled to 50 per cent as of June 4.

When cou­pled with fur­ther es­ca­lat­ing ten­sions be­tween the US and Chi­na, and the stay of the de­ci­sion of the US Court of In­ter­na­tion­al Trade on May 28, 2025, which con­demned the le­gal­i­ty of cer­tain US tar­iffs, trade part­ners and in­vestors have rea­son to re­main cau­tious, and to con­sid­er what mea­sures can be tak­en to ad­dress the fall­out from these glob­al trade wars.

It is there­fore crit­i­cal to un­der­stand what can be done in the event of uni­lat­er­al ac­tion tak­en by a trade part­ner, and how com­mer­cial con­tracts en­tered in­to can be af­fect­ed by these tar­iffs.

In Part 2 of this se­ries on tar­iffs, we will delve in­to the le­gal mea­sures that coun­tries such as Cana­da and Chi­na could pur­sue against the US as a re­sult of its new tar­iff regime, po­ten­tial US de­fences in re­sponse, the ram­i­fi­ca­tions for com­mer­cial con­tracts, in­clud­ing force ma­jeure and trans­fer pric­ing is­sues, and how Cari­com can strate­gi­cal­ly re­spond to these de­vel­op­ments.

As dis­cussed in Part 1, the glob­al trade frame­work is shaped by the 1994 Gen­er­al Agree­ment on Tar­iffs and Trade (the 1994 GATT), which is ad­min­is­tered by the World Trade Or­gan­i­sa­tion (WTO). It pro­motes lib­er­alised trade through the prin­ci­ples of

(a) the most-favoured-na­tion rule;

(b) the na­tion­al treat­ment rule; and

(c) tar­iff “bind­ings” or a “bound rate” on goods. Coun­tries af­fect­ed by trade mea­sures that pur­port to breach these prin­ci­ples have sev­er­al av­enues un­der the 1994 GATT with­in which to chal­lenge these mea­sures.

First, a dis­pute set­tle­ment mech­a­nism to ad­dress vi­o­la­tions of the 1994 GATT could be ini­ti­at­ed, by re­quest­ing con­sul­ta­tions at the WTO through the Dis­pute Set­tle­ment Body (DSB), with the de­fault­ing state. The aim of the process is to se­cure a pos­i­tive so­lu­tion, prefer­ably one that is mu­tu­al­ly ac­cept­able, with each state re­quired to act in good faith. Af­fect­ed coun­tries such as Cana­da and Chi­na may al­lege that the mea­sures tak­en by the US are in­con­sis­tent with com­mit­ments un­der the 1994 GATT, or more par­tic­u­lar­ly that:

• Ar­ti­cle I’s “most-favoured-na­tion”, which re­quires equal tar­iff treat­ment on “like” prod­ucts for all WTO mem­bers un­less cer­tain ex­cep­tions ap­ply, has been vi­o­lat­ed. As mem­ber states must charge the same tar­iff, or ac­cord the same ad­van­tage or favourable com­pet­i­tive op­por­tu­ni­ty on a “like” prod­uct re­gard­less of the mem­ber state ori­gin of the prod­uct, the US’ im­po­si­tion of high­er rates on spe­cif­ic coun­tries in com­par­i­son to oth­ers, ar­guably vi­o­lates this prin­ci­ple;

• The com­mit­ment of tar­iff “bind­ings” or “bound rates” pur­suant to Ar­ti­cle II, has been vi­o­lat­ed. A “bound rate” is a max­i­mum rate that mem­ber states can­not ex­ceed on tar­iffs for a cer­tain prod­uct, and which are con­tained in HS sched­ules or in sched­ules of con­ces­sions. If the US tar­iffs ex­ceed the bound rates for spe­cif­ic prod­ucts, then trade part­ners may claim a vi­o­la­tion of Ar­ti­cle II. Cana­da may com­plain that the 25 per cent tar­iff on steel and alu­mini­um which was re­in­stat­ed in Feb­ru­ary 2025, ex­ceeds US bound rates, par­tic­u­lar­ly if ap­plied to prod­ucts pre­vi­ous­ly sub­ject to low­er or ze­ro tar­iffs un­der pri­or agree­ments;

• Ar­ti­cle III’s “na­tion­al treat­ment” rule, which man­dates that im­port­ed goods be treat­ed no less favourably than “like” do­mes­tic prod­ucts, nor a re­stric­tion be ap­plied which af­fords pro­tec­tion to a do­mes­tic prod­uct, has been vi­o­lat­ed. One of the stat­ed pur­pos­es of the re­cent US tar­iffs has been to pro­tect its do­mes­tic in­dus­try. There is there­fore an ar­gu­ment that im­port­ed goods are be­ing treat­ed less favourably than “like” US prod­ucts, in con­tra­ven­tion of the oblig­a­tion.

Since Feb­ru­ary 4, the US, Chi­na and Cana­da, have each re­quest­ed con­sul­ta­tions through the DSB in re­spect of trade mea­sures im­posed by the re­spec­tive states on each oth­er, al­leg­ing var­i­ous breach­es of 1994 GATT oblig­a­tions.

Each com­plaint, how­ev­er, is still at the con­sul­ta­tions stage. If con­sul­ta­tions fail to ar­rive in a set­tle­ment with­in 60 days, the com­plain­ing state may re­quest a pan­el to ad­ju­di­cate the dis­pute and to de­liv­er a re­port of the find­ings of the pan­el. If the pan­el finds any of the mea­sures to be in­con­sis­tent with GATT oblig­a­tions, it may rec­om­mend their re­moval or mod­i­fi­ca­tion, which must be com­plied with if adopt­ed, un­less the in­fring­ing state lodges an ap­peal to the WTO’s Ap­pel­late Body. Ad­mit­ted­ly, this body has not been func­tion­al since De­cem­ber 2019 due to an ap­point­ment im­passe.

Con­verse­ly, pur­port­ed­ly in­fring­ing states could in­voke sev­er­al de­fences or ex­cep­tions to jus­ti­fy their tar­iffs regime, based on the pro­vi­sions of the 1994 GATT. Any of the fol­low­ing de­fences or ex­cep­tions may be in­voked:

­—Emer­gency Ac­tion on Im­ports Ex­cep­tion, pur­suant to Ar­ti­cle XIX: The in­fring­ing state may claim that its tar­iffs are tem­po­rary safe­guards to pro­tect do­mes­tic in­dus­tries from se­ri­ous in­jury due to in­creased quan­ti­ties of im­ports in­to that ter­ri­to­ry, of “like” or di­rect­ly com­pet­i­tive prod­ucts. Safe­guard mea­sures must how­ev­er be an “un­fore­seen de­vel­op­ment” and, cause or threat­en to cause “se­ri­ous in­jury”. Ar­ti­cle XIX al­so con­tains a pro­ce­dur­al re­quire­ment that a state give no­tice in ad­vance of the mea­sure, to oth­er mem­ber states;

—Gen­er­al Ex­cep­tions pur­suant to Ar­ti­cle XX: The ex­cep­tions list­ed are wide rang­ing and al­lows the jus­ti­fi­ca­tion of mea­sures that are nec­es­sary to pro­tect pub­lic morals, hu­man life, or health. How­ev­er, mea­sures must not be ap­plied ar­bi­trar­i­ly or un­jus­ti­fi­ably dis­crim­i­nate be­tween coun­tries, and must not be a dis­guised re­stric­tion on in­ter­na­tion­al trade;

—Se­cu­ri­ty Ex­cep­tion pur­suant to Ar­ti­cle XXI: Ar­ti­cle XXI al­lows mea­sures nec­es­sary to pro­tect “es­sen­tial se­cu­ri­ty in­ter­ests” re­lat­ing to fis­sion­able ma­te­ri­als or from which they are de­rived, arms and am­mu­ni­tion traf­fick­ing, or in time of war or oth­er emer­gency in in­ter­na­tion­al re­la­tions. The US has pre­vi­ous­ly cit­ed na­tion­al se­cu­ri­ty to jus­ti­fy tar­iffs, and have in­deed al­ready cit­ed it in its con­sul­ta­tions. It is like­ly to as­sert that the mea­sures ad­dress vul­ner­a­bil­i­ties in crit­i­cal in­dus­tries such as semi­con­duc­tors and crit­i­cal rare min­er­als, or to com­bat drug traf­fick­ing and mi­gra­tion.

Sep­a­rate and apart from the in­ter­na­tion­al im­pli­ca­tions, US tar­iffs cre­ate sig­nif­i­cant con­sid­er­a­tions for com­mer­cial con­tracts, par­tic­u­lar­ly as it re­lates to force ma­jeure, and trans­fer pric­ing.

Force ma­jeure claus­es con­tained in con­tracts ex­cuse a par­ty’s non-per­for­mance where ex­tra­or­di­nary un­fore­seen events be­yond its con­trol, ren­der per­for­mance im­pos­si­ble or im­prac­ti­ca­ble. These events gen­er­al­ly in­clude acts of God, ri­ots, in­sur­rec­tions, wars, hos­til­i­ties, na­tion­al dis­as­ters, or gov­ern­men­tal ac­tions. The sud­den and un­ex­pect­ed im­po­si­tion of US tar­iffs, par­tic­u­lar­ly the 10 per cent uni­ver­sal tar­iff and ex­ces­sive tar­iff on Chi­nese goods, raise the ques­tion of whether these mea­sures may qual­i­fy as force ma­jeure events, par­tic­u­lar­ly where they make per­for­mance com­mer­cial­ly un­vi­able.

How­ev­er, re­liance on the clause de­pends on the spe­cif­ic lan­guage of the clause with­in the con­tract. A stan­dard force ma­jeure clause will con­tain the spe­cif­ic list of events which will sat­is­fy the test but still re­quires true “im­pos­si­bil­i­ty” of per­for­mance; the US tar­iffs are like­ly to cause in­creased costs and low­er prof­its but are un­like­ly to pre­vent per­for­mance. A par­ty in­vok­ing the clause must al­so demon­strate that rea­son­able steps were tak­en to mit­i­gate the im­pact. For ex­am­ple, a Cana­di­an sup­pli­er fac­ing a 25 per cent tar­iff on non-Unit­ed States-Mex­i­co-Cana­da Agree­ment (USM­CA) goods may be tempt­ed to in­voke force ma­jeure to sus­pend de­liv­ery oblig­a­tions if the tar­iff sig­nif­i­cant­ly in­creas­es costs; how­ev­er, un­less per­for­mance is legal­ly or phys­i­cal­ly im­pos­si­ble, such an ar­gu­ment is un­like­ly to suc­ceed.

Tar­iffs al­so have the po­ten­tial to cre­ate com­plex trans­fer pric­ing chal­lenges for multi­na­tion­al en­ter­pris­es. Trans­fer pric­ing refers to the price used to val­ue trans­ac­tions be­tween re­lat­ed en­ti­ties, which should be con­sis­tent with an arm’s length price. In­creased tar­iffs raise the cost of im­port­ed goods, which may dis­tort the trans­fer price record­ed in cross-bor­der trans­ac­tions.

For ex­am­ple, a Chi­nese sub­sidiary ex­port­ing goods to a US par­ent might be re­quired to re­vise its trans­fer price to re­flect the in­creased cost of en­try in­to the US mar­ket. This may re­duce the par­ent com­pa­ny’s US tax­able in­come, po­ten­tial­ly trig­ger­ing au­dits or chal­lenges from US tax au­thor­i­ties con­cerned with prof­it shift­ing. Sim­i­lar­ly, Cana­di­an sub­sidiaries deal­ing with 25per cent tar­iffs on non-USM­CA goods may strug­gle to find re­li­able com­pa­ra­bles for bench­mark­ing, as glob­al pric­ing mod­els are dis­rupt­ed. In such cas­es, ad­just­ments or al­lowances may be nec­es­sary to avoid dis­tor­tions in prof­its.

Multi­na­tion­al groups must there­fore en­sure that trans­fer pric­ing poli­cies re­main aligned with com­mer­cial re­al­i­ties, sup­port­ed by ro­bust doc­u­men­ta­tion, and ca­pa­ble of with­stand­ing scruti­ny from tax au­thor­i­ties across ju­ris­dic­tions.

Cari­com mem­ber states, though not a di­rect tar­get of re­cent US tar­iffs, face sig­nif­i­cant reper­cus­sions due to their re­liance on trade and in­vest­ment from the US.

In nav­i­gat­ing this land­scape, Car­i­om should con­sid­er a mul­ti­fac­eted re­sponse by:

(a) di­ver­si­fy­ing trade part­ners and deep­en­ing ties with Latin Amer­i­ca and Africa to re­duce de­pen­dence on the US;

(b) en­cour­ag­ing re­gion­al pro­duc­tion and pro­tec­tion of its mar­ket by strength­en­ing the Com­mon Ex­ter­nal Tar­iff on goods im­port­ed from third states;

(c) ne­go­ti­at­ing fur­ther pref­er­en­tial trade agree­ments, in­clud­ing bi­lat­er­al and mul­ti­lat­er­al agree­ments with the US to se­cure ex­emp­tions or re­duced tar­iffs for key ex­ports such as agri­cul­tur­al prod­ucts and en­er­gy; and

(d) par­tic­i­pat­ing with oth­er WTO mem­bers in chal­leng­ing US tar­iffs through the DSB, par­tic­u­lar­ly if the most-favoured-na­tion rule or tar­iff bind­ing com­mit­ments have been vi­o­lat­ed. By adopt­ing these mea­sures, Cari­com can mit­i­gate the eco­nom­ic fall­out from US tar­iffs, en­hance its in­ter­nal strength and ne­go­ti­at­ing pow­er, and deep­er eco­nom­ic re­gion­al in­te­gra­tion.