The Trump Tariff Shock: Navigating New Economic Waters for Cambodian Exporters

Recent trade policy shifts in the U.S. have introduced new challenges to the global economic landscape. An announcement on April 2nd regarding "reciprocal" tariffs led to market fluctuations and supply chain uncertainty. Cambodia, facing a staggering 49% tariff on its U.S. exports, stands among the most severely impacted nations.

A subsequent announcement on April 9th provided a 90-day window for negotiations, potentially allowing countries to adjust their tariff rates. An interim tariff was established, with specific rates for certain categories and countries.

Reciprocal tariffs are trade measures used to balance tariffs imposed by another country, aiming for equitable trade terms. Governments may adopt these measures to address trade imbalances and protect domestic industries.

The objectives behind these tariffs can vary. Potential goals include (1) encouraging the relocation of production to the U.S.; (2) pressuring trade partners to reduce barriers to goods; (3) generating revenue; (4) a combination of these goals.

This 90-day period presents an opportunity for Cambodian businesses to prepare for potential regulatory changes.

For Cambodian exporters and manufacturers exporting to the U.S., even the interim 10% tariff could impact profitability depending on how risk is allocated in existing contracts. A thorough legal review of these agreements is essential to understanding available options and developing commercially viable solutions—preferably after confirming the U.S. buyer/importer's commitment to honoring contractual terms.

The agreed-upon Incoterms are crucial as they determine which party is responsible for costs, including shipping, insurance, and, critically, import duties and tariffs. The specified Incoterm will significantly influence which party absorbs the financial burden of these new tariffs.

We recommend that the exporter chooses the appropriate Incoterms to ensure that the responsibility for paying tariffs falls on the buyer in the importing country. Terms like Delivered Duty Paid (DDP) place this responsibility on the seller, while terms like Ex Works (EXW), Free Carrier (FCA), Free on Board (FOB), Cost, Insurance, and Freight (CIF), and Cost and Freight (CFR) typically transfer this responsibility to the buyer.

Force Majeure Considerations

Cambodian  manufacturers might instinctively look to force majeure provisions for relief. However, these clauses present significant challenges:

• While they may cover "acts of government," the foreseeability of these tariffs is questionable given their prominence in Trump's campaign platform.
• Performance remains technically possible, making impossibility arguments difficult.
• The core issue concerns financial burden allocation rather than performance impossibility.

To the extent a contract is already in place, the Material Adverse Change (MAC) clause may provide a better option for renegotiation or termination. It can be argued that these tariffs significantly raise costs and disrupt supply chains beyond what was initially agreed, warranting a review of terms to address the new economic realities.

For future contracts, Cambodian  exporters should consider adding or revising the MAC clause to cover major changes in the importing country's trade policy, such as new or increased tariffs. This could allow the exporter to be excused from or suspend performance of contractual obligations if such situations arise.

After clarifying immediate options, parties should explore contract renegotiation strategies. Instead of relying on broad MAC clauses, consider specific tariff pass-through provisions to directly address new costs and responsibilities. Effective provisions might include:

• Cost allocation frameworks: For example, tiered structures where suppliers cover tariffs up to certain thresholds, with buyers handling the excess.
• Notification and documentation protocols: Establishing clear processes for communicating tariff impacts with supporting evidence.
• Flexible price adjustment mechanisms: These could include periodic renegotiation triggers, automatic adjustments with reasonable caps, or other tools that adapt to rapidly changing global market conditions.

If termination is necessary, parties should carefully assess financial implications, such as potential damages and penalties under the governing law. Any negotiated resolution should be formally documented through appropriate settlement instruments, with attention to potential tax consequences.

In the face of increased tariffs, companies must prioritize effective mitigation and duty saving strategies. The financial impact of additional reciprocal tariffs, compounded by existing duties, can significantly strain operational budgets and profit margins. Without proactive measures, businesses may face increased costs and disruptions in their supply chains. Businesses can alleviate immediate financial burdens and position themselves for long-term resilience and competitiveness in theglobal market by implementing appropriate mitigation strategies. In a rapidly evolving trade environment, these strategies are critical to maintaining cost efficiency, preserving market share, and ensuring business continuity.

Exporters who act decisively during this critical window will position themselves most advantageously for whatever permanent framework emerges under the new administration.

Having well-versed and experienced KPMG professionals assisting you in navigating the tariff shock will help reduce friction, risks, and associated transaction costs of exporting to the US market under current circumstances. Our KPMG services include, but are not limited to:

Staying on top of the impact of tariffs is key to making strategic decisions. We work closely with our U.S. Trade & Customs practice, which has designed the Tariff Modeler to assist companies in assessing the impact of tariffs. By analyzing your import data globally, we can help provide insights and develop strategies to mitigate the impact. Importantly, while an initial analysis is valuable, we believe these tariff pressures will persist. Therefore, we can provide ongoing trade data analytics so that you can gain access to tariff impact analytics globally with the latest tariff regulatory tracking.

Managing disruption from tariffs requires a multifaceted strategy. By leveraging short- and long-term duty mitigation strategies, companies can optimize tariff liabilities and promote supply chain resiliency while enhancing their competitive edge in the global market.

We provide tailored tariff mitigation strategies and solutions that align with your specific business goals. Some potential strategies (immediate, mid-term, and long-term) may include: