Navigating Trade Wars: Perspectives from China

This article is the fifth insight from Clyde & Co’s series examining the legal ramifications of tariffs imposed by and against the US following the inauguration of US President Donald Trump. As the world’s top trading nation, China inevitably takes center stage in the ongoing trade war.

In this insight, Legal Director Flora Tang and Associate Sicong Jiang analyze the issues that trading entities dealing with Chinese businesses may face, providing guidance on how commodities and shipping companies can manage these challenges. Ultimately, the aim is to ensure affected parties are equipped to identify risks in advance, and seek effective legal remedies. 
 
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Force Majeure

As in our first ‘Navigating Trade Wars’ insight considering the Singaporean perspective, Force Majeure clauses may provide contracting parties with relief when the performance of their obligations is affected by any unforeseen events. Unlike in Singapore however, force majeure has a clear legal definition in China.

Under Article 180 of the Chinese Civil Code, force majeure refers to circumstances that could not be foreseen, avoided and overcome, thereby preventing contractual performance. In the context of the trade war, parties seeking to rely on force majeure to terminate contracts shall prove:

1. the new tariffs were unforeseeable at the time of contract formation;
2. the impact was unavoidable despite reasonable efforts; and
3. the consequences have rendered the contract’s purpose unachievable.

In judicial practice, if a new tariff is unforeseeable (e.g., no prior trade tensions existed when the contract was entered into) and beyond reasonable expectations, it may be able to be deemed as a force majeure event, provided all other legal requirements are satisfied. On the contrary, if public signals of trade disputes or policy shifts were evident at the time of contract formation (e.g., ongoing U.S.-China trade tensions), Chinese courts may tend to treat such risks as foreseeable commercial risks and therefore, barring force majeure claims/defences. For example, in (2019) Chuan 0193 Min Chu No. 10989, the court held that tariff hikes arising from pre-existing trade frictions constituted a foreseeable risk, thus dismissing a force majeure defence. 

Therefore, while China is more likely than Singapore and other common law jurisdictions to accept Force majeure claims for unexpected tariff changes, courts may deny them if trade tensions are deemed ‘predictable’.

Change in Circumstances

Article 533 of the Chinese Civil Code permits parties to renegotiate or terminate contracts (via court or arbitration) if post-signing changes (e.g., tariff spikes) cause severe contractual imbalance. To invoke this doctrine, parties must prove: (1) the change was unforeseeable at the time of contract formation and is not commercial risk, and (2) continued performance would be grossly unfair to the parties.
 
Chinese courts usually apply this provision cautiously by requiring clear evidence of un-foreseeability and unfairness. For example, in (2021) Yue 1971Min Chu No.12897, the court held that the imposition of import tariffs between countries is within the scope of commercial cost budget factors that need to be considered in international trade. The plaintiff still made the second instalment payments after new tariffs were imposed, which indicates that they may have foreseen the possibility of tariff changes at the time of signing the contract and have agreed to continue to perform the contract. In addition, the impact of tariffs only increases the cost of US projects and does not entirely rule out the possibility of equipment being used for other regions or projects. The plaintiff can still achieve the purpose of the contract by adjusting the project location.

Delays and Demurrage

As mentioned in our third Navigating Trade Wars insight, the ultimate responsibility for demurrage and delay risks depends on contractual terms. For example, under trade contracts, DDP (Delivered Duty Paid, per Incoterms® 2020) typically requires seller to bear tariff-related risks and demurrage costs, while under EXW (Ex Works, per Incoterms® 2020), buyers usually assume these risks upon taking goods at the seller’s premises; under charterparties, shipowners would usually claim demurrage etc. from charterers, who in turn seek reimbursement from counter-parties under the trade contracts terms.

Navigating Contractual Uncertainties

The ongoing trade war underscores the urgent need for businesses to adopt proactive strategies to manage contractual uncertainties. As discussed, under Chinese law legal doctrines such as force majeure (Article 180) and change in circumstances (Article 533), alongside trade-term-specific obligations (e.g., DDP/EXW), offer potential avenues to renegotiate or terminate contracts. To mitigate risk exposure, we suggest parties:

1. Review contracts carefully to ensure clauses explicitly address tariff volatility, dispute resolutions, and liability allocation etc.
2. Document trade war impacts, such as maintaining records of government notices, cost escalations, and mitigation efforts to substantiate claims based on the arguments of unforeseeability or unfairness.
3. Leverage tariff-tracking tools to proactively monitor policy shifts to anticipate risks and adjust strategies.

Conclusion

As trade tensions persist, businesses that can combine legal foresight with adaptive strategies will be best positioned to safeguard their interests in this volatile landscape. For more information or personalized guidance on navigating trade war-related disputes in China, please feel free to contact the authors. If you would like to receive an email alert whenever Clyde & Co's team adjusts the Tariff Tracker, please register your details here:

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