There are turbulent developments in world trade that call for extra (proactive) alertness in adjusting international commercial and trade contracts to avoid disputes. As a result of these developments, volumes, cost levels, delivery times and continuity may be threatened. The focus on sustainability also plays a role.
Turbulent Developments at a Global and National level
In its annual ‘Trade and Development Report 2019’ of 25 September 2019 the Trade Organization of the United Nations, Unctad, warns of a weaker global economic growth in 2020 and even of the risk of a recession. 2019 has seen the weakest growth in the global economy in the last decade. According to Unctad, the warning lights are flashing. There are trade wars, currency drops, a lingering Brexit and movement in long-term interest rates. There are no signs that policymakers are preparing for a possible storm. After the last crisis, the global economy is still fragile due to the high level of debt and limited structural improvements.
Unctad insists on looking not only at the short-term threat of recession but also at the long-term challenges, such as the increase in carbon dioxide and climate protection. In fact, climate protection requires a new wave of investments to deal with energy and to reduce carbon dioxide emissions. The report emphasizes the increased green investments, which can be an important source of income and jobs following the so-called ‘Green New Deal’.
Also at a national level the ‘Macro Economische Verkenning 2020’ (Macro Economic Exploration 2020) of the Netherlands Bureau for Economic Policy Analysis (CPB) of September 2019 points to a decline in growth in 2019 and 2020[2]. The tight labour market is a national bottleneck in growth, but there are mainly international risks for the Dutch and other European economies. The report mentions: Brexit, the tensions in the US-China relationship and the concerns about Italian state finances. In the long run, the ageing of the population in the Netherlands and sustainability issues will be the main challenges that the government needs to address.
Impact on Trade Contracts
The aforementioned developments may have consequences for commercial contracts with internationally operating companies (import and export). It is wise to take this into account. Without the intention to be complete, we list some potential risks.
The imminent Brexit in itself will lead to risks at a higher cost level, longer delivery times and even continuity issues. Transport and customs/exports are likely to increase time and costs through extra handling, tariffs and investments in IT systems. British workers and EU workers are likely to find it more difficult to work in each other’s territories, or at least this will entail additional paperwork and/or costs. Brexit could impact the continuity of British companies and companies that depend on trade with Great Britain.
Trade wars also carry the risk of higher cost levels, longer delivery times and possibly an impact on continuity, especially in trade with the United States and China. In the current situation, account must also be taken of further escalation at the expense of free world trade, such as possible suddenly increased (financial) sanctions, tariffs or anti-dumping issues.
A dip in economic growth and/or even a possible recession may lead to lower or interrupted flow of volumes of sales and purchases. In an economic downturn, disputes can usually less quickly be resolved at a commercial level and this entails an increased risk of legal proceedings.
The focus on sustainability puts pressure to speed up the reduction and/or compensation of carbon dioxide emissions. This impacts business operations, but it may also provide opportunities for companies depending on their line of business and current footprint. Also government incentives for sustainability provide opportunities to accelerate improvements in the supply chain. It is wise to anticipate on these developments by timely upgrading business operations and commercial contracts with trading partners.
Recommendations to Check Trade Contracts
In view of the aforementioned developments, we advise to proactively subject commercial contracts to a sanity check. This includes amongst other things: mapping out who bears the burden of paying tariffs, levies and taxes (and are there any hardship clauses in this respect), is there built-in flexibility for upscaling and downscaling of volumes, room to (re)negotiate prices, are there buffer stock arrangements with critical suppliers, what are the term and termination provisions and do these include sufficient flexibility to respond quickly to changing circumstances, is the choice of law and forum still adequate, and are the force majeure provisions covering major global trade events?. If the contracts are fixed in term and key topics such as volumes and price, unforeseen escalation of relationship(s) may end in lengthy and costly settlements, and even years of litigation or arbitration.
