The relentless uncertainty created by President Trump’s trade policies is not going away.
After a Supreme Court decision ruling against the President’s use of emergency powers to impose tariffs, the administration now hopes to mandate tariffs under the U.S. Trade Act, which authorizes the U.S. to impose retaliatory tariffs against nations engaged in unfair trade practices that put American companies at an economic disadvantage, including forced labor.
In mid-March, the U.S. Trade Representative announced that investigations are being launched against dozens of trading partners, including the 27 European Union Member States, to determine if they are doing enough to prohibit and limit trade with countries that use forced labor, potentially leading to a new wave of tariff chaos.
U.S. companies are now caught between a rock and a hard place. To minimize the impact of tariffs on consumer prices, they may look to cut costs with their suppliers or move production to lower-tariff countries. But these responses can backfire, increasing workers’ rights violations and, by extension, increasing companies’ exposure to the very same legal regimes the administration is using to justify new tariffs.
To counter the rollercoaster effects of U.S. trade policy, companies should prioritize injecting stability into their supply chain relations by staying the course with existing suppliers where possible, resisting the urge to make abrupt changes to orders, and steering clear of reflexive tariff-shopping. They should work with suppliers to identify viable solutions for dealing with tariff risks in the short, medium, and long term, ensuring they do not aggravate or create new risks for workers in the process.
This stability-first strategy will not only foster supply chain resilience and mitigate legal risk, but also, and most importantly for this author, it will help protect workers.
How tariff-driven sourcing decisions heighten legal risk
We often hear about tariffs being passed down to American consumers. Less discussed is their effect on human rights in global supply chains—and how kneejerk tariff-related sourcing decisions can expose importers to heightened legal risk under an increasing array of human rights laws. To illustrate how sourcing decisions can affect labor rights, consider a simple supply contract for the sale of goods between a U.S. buyer and a developing-country supplier of auto parts, electronics, apparel, or agricultural products.
Here, if a company abruptly drops prices, reduces, or cancels orders, they may inadvertently trigger mass layoffs, wage cuts, lowering of health and safety standards, and even wage theft, where workers are not paid for labor already performed. If workers organize to push back on lower or unpaid wages, the stage can be set for more repressive measures like union busting.
Human rights issues may also arise if buyers abruptly increase their orders in lower-tariff countries. Manufacturers facing large spikes in order volumes may push their workforce for excessive overtime or subcontract to producers that supplement capacity but aren’t properly vetted for labor compliance.
Ironically, tariff-related decisions that increase labor risks also increase companies’ exposure to the forced-labor regime the Administration is using to justify new tariffs, including Section 307 of the Tariff Act and the U.S.-Mexico-Canada Agreement. Both forbid goods made in whole or in part with forced labor from being sold in the US and give authorities broad powers to sanction importers, including by seizing shipments, temporarily or permanently banning certain exporters or goods, and issuing financial penalties. Companies linked to forced labor can thus suffer operational, financial, and reputational damage. These company-specific sanctions can, in turn, trigger country-specific investigations, which is where tariffs come into play.Â
Compliance concerns do not end there. For U.S. companies doing business in the EU, responding to tariffs in a way that ties them to labor violations could get them in trouble under the EU’s Forced Labor Regulation (EUFLR), as well as the Corporate Sustainability Due Diligence Directive (CSDDD). The EUFLR, like the U.S. Tariff Act, operates on a strict liability or no-excuse standard, meaning that if a shipment is believed to have been made with forced labor, the goods cannot be sold internally, regardless of what the importer knew or didn’t know about forced labor in their supply chain and the measures they may have taken to prevent it.
By contrast to the trade laws, the CSDDD, which affects (very) large U.S. companies doing business in the EU, operates on something closer to a negligence standard. Here, liability hinges not on the simple occurrence of a labor violation, but rather, on what the company did and didn’t do to prevent the violation from happening and to stop and remediate it after the fact. The CSDDD gives companies more opportunity and flexibility to comply, even as it reaches farther to assess the quality of corporate decision-making and addresses labor violations broadly—not only forced labor.
In responding to tariffs, companies should carefully consider the legal implications under both the trade and the due diligence regimes.
How contracts can help (or hurt)
To mitigate legal risks, promote supply chain resiliency, and protect workers’ rights, companies should proceed in a way that may feel counterintuitive: They should not only stay the course with existing suppliers, but use this tumultuous moment as an opportunity to rethink their supplier relationships, including their contracts.
To see why compliance requires a contractual “makeover,” understand that the best way, hands down, to respond to a forced-labor investigation is to provide reliable information to the authorities proving that the supply chain is clean. Visibility is crucial, in other words, but is very difficult to obtain if the parties don’t trust one another—and traditional supply contracts tend to promote distrust.
Traditional contracts place all the responsibilities, risks, and costs related to upholding human rights on suppliers. This is usually achieved via a contractual requirement that the supplier must comply perfectly with the buyer’s code of conduct, which gives the buyer the right to immediately cancel orders, terminate the contract, and sue for damages at the first sign of human rights-related trouble. As a result, traditional contracts do little to encourage suppliers to tell buyers if something bad has happened. In fact, they encourage suppliers to do the opposite—hide problems to keep the contract. This is bad for visibility and for workers: if you can’t see it, you can’t fix it.
Traditional contracts also overlook how the buyer’s own purchasing practices—e.g., poor forecasting, last-minute order changes, too-tight turnaround times, long payment terms, low prices—impact labor rights. But research has shown a correlation between poor purchasing practices and labor violations. By creating a legal fiction where commercial performance is entirely separate from social performance, traditional contracts undermine effective risk-management, which affects legal compliance.
By contrast, responsible contracts that commit both parties to work together to uphold human rights can foster the cooperation, mutual respect, and trust needed to ensure transparency, resiliency, and compliance.
In addition to embedding shared responsibility for human rights in their contracts, companies should pay attention to what their contracts say about remediation, which is often nothing. Remediation provisions set out what the parties will do to address labor violations that could arise in the course of manufacturing the order. Companies that do not include remediation (or “right to cure”) clauses in their contract may be shooting themselves in the foot twice: first, by increasing the likelihood that labor violations will go undetected and come back later to haunt them; and, second, by compromising the transparency needed to respond to government investigations and avoid or lift a trade ban.
According to official U.S. guidance, remediation is now a practical requirement for companies to lift or modify a withhold release order, allowing future shipments to be sold on the U.S. market. Under the EUFLR, remediation does even more work, cleansing seized shipments of their forced-labor stain and allowing their sale in the EU.
For these reasons among others, the Responsible Contracting Project, a non-profit initiative housed inside Rutgers Law School, strongly recommends including a remediation-first clause in the contract.
Time and again, we hear that what’s killing companies isn’t the tariffs themselves but the volatility of American trade policy. The way to cure this is not to tariff-shop, but rather to inject stability into the supply chain whenever possible. That is what will ease the rollercoaster effects of shifting policy, support resilience, mitigate compliance risks, and protect workers. Responsible contracting can help.
Sarah Dadush is a Professor of Law at Rutgers Law School whose teaching and scholarship focus on international business and human rights. She is the founding Director of the Responsible Contracting Project (RCP), a non-profit initiative with a mission to drive better outcomes for people and the planet through better, more responsible contracts. RCP develops practical tools, including model contract clauses, template codes of conduct, and implementation guidance that companies can use to improve the human rights performance of their contracts and, by extension, their supply chains. In addition to leading RCP, Dadush serves as a leading member of several working groups, including the American Bar Association Business Law Section Working Group on Human Rights Protections in International Supply Contracts and its European counterpart, the Working Group on Responsible and Sustainable Supply Chains.
