When the temporary exemptions on steel and aluminum tariffs granted to Canada, Mexico and the European Union expired on May 31, 2018, the commercial development industry found itself faced with a sudden and dramatic increase in construction costs. While the tariffs had already been in effect for several weeks for steel imported from other nations, the inclusion of these U.S. allies within those countries subject to the tariffs marked a critical shift.
While China currently produces around half of the world’s steel, only 3 percent of U.S. steel imports come from China. By contrast, the U.S. Department of Commerce reported nearly a third of steel imports came from Canada, Mexico and the E.U. in 2017. Similarly, almost half of aluminum imports come from these previously exempt countries. Thus, where developers and contractors had previously held out hope that these major steel and aluminum sources would avoid tariffs, they are now faced with a new question: what do they do now? While some have sought exemptions under Section 232 of the Trade Expansion Act, the process is complicated and exemption approval is far from certain.
The end result is that many are speculating about the cost of end products and the likelihood of future projects. But it is important to consider the tariff’s impact on construction projects already in development. While many projects include certain protective measures such price escalation provisions or pre-construction material purchase requirements, these are not complete solutions.
Though such terms are designed to address potential changes in raw material costs, they are often limited to “reasonable” price increases or pre-purchasing raw materials for certain phases of design-build projects. Forced to deal with the sudden cost spike, parties may find themselves increasingly at odds and entering the uncertain waters of litigation. But what are the risks associated with such disputes? And how can developers and contractors work to avoid potential pitfalls in any resulting litigation?
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