Introduction: Defense Contracts in a Disrupted World
Defence procurement has always required foresight, but never has it demanded forward-thinking more than today. In 2025, as Donald Trump enters his second term, U.S. tariff policy has mutated into a tool wielded indiscriminately - even against long-standing allies. The European Union, Canada, India, Australia, Japan, and South Korea all find themselves subjected to steep new tariffs, often framed as reciprocal or punitive. The result is a profound disruption to global defence supply chains, calling into question the viability of traditional contract models.
Against this unstable backdrop, defence procurement contracts must evolve beyond static templates. They must embed adaptability, fairness, and strategic resilience to ensure long-term national security is not imperiled by shifting trade winds. This article explores how contracts can - and must - be retooled to weather this new era of geopolitical unpredictability.
The New Reality: Allies Under Tariff Fire
Trump’s aggressive tariff policies have swiftly ensnared traditional allies. As of mid-2025, Canada, once the bedrock of North American integration, faces widespread tariffs - 35% on select goods - with retaliatory levies on U.S. exports already imposed . The EU recently agreed to a lopsided 15% blanket tariff on many products under duress, while European officials lament the erosion of their economic sovereignty .
India has been hit particularly hard: a 25% “reciprocal” tariff followed by an additional 25% penalty related to its Russian oil imports has pushed total duties to 50%, triggering a diplomatic crisis and stoking concerns about the future of U.S.-India strategic cooperation .
Down in the Pacific, South Korea negotiated a trade deal allowing a 15% tariff in exchange for massive U.S.-based investment-an uneasy compromise under duress . Japan and South Korea responded in lockstep to “Liberation Day” tariff announcements of over 20%, while South Korean leadership scrambled to shield its export-reliant economy .
Australia, too, finds its role as a trusted security partner overshadowed by economic frictions, prompting public rebuke from its Prime Minister and a broader questioning of the U.S.’ reliability .
These developments bluntly illustrate the fracture lines now spreading through even the most dependable alliances - a cautionary tale for contract drafters worldwide.
Tariff Volatility: Contractual Fragility Exposed
In this climate, the weaknesses of traditional defense procurement contracts become glaringly apparent. Fixed-price agreements assumed cost stability; force majeure provisions presumed shocks would be natural disasters, not policy swings. Neither holds up when steel, electronics, or critical components suddenly become subject to massive levies.
Moreover, these tariffs intersect with broader economic pain. According to reports, the new measures are being passed on to consumers - households face thousands in added costs, and businesses from coffee shops to manufacturers are reeling . International supply chains are buckling; imports may soon decline significantly.
Court challenges are already traversing the U.S. legal system. The Court of International Trade has ruled that “Liberation Day” tariffs exceed executive authority under the IEEPA, issuing a permanent injunction . Legislative pushback is underway too: the Trade Review Act of 2025 would impose Congressional oversight on any new tariffs beyond 60 days.
These developments emphasize that tariff shock is not a temporary aberration; it is baked into the system. Contracts must be built to endure - structurally and strategically.
Rethinking Change in Law - and Force Majeure
The old reliance on broad force majeure clauses is no longer tenable. Courts have repeatedly rejected tariff changes as unforeseeable, particularly when tied to government policy - not nature or accident. Change in Law clauses must now explicitly account for tariff and trade shifts, with built-in mechanisms for equitable adjustment.
Highlighted Provision: Change in Law - Tariffs and Trade Restrictions
“If, after the Effective Date of this Agreement, any tariff, duty, trade restriction, or export control law enacted, modified, or repealed materially impacts the Supplier’s cost or performance ability, the Parties will negotiate in good faith within 30 days to revise Price, Delivery, or other terms. If unresolved, the dispute may be referred to expedited arbitration under Article X.”
Embedding such a clause ensures that policy shocks trigger contractual adaptation - not breakdown.
Embracing Hybrid Pricing Models for Stability and Flexibility
Fixed pricing became unworkable the moment even a portion of a supply chain crossed into tariff exposure. A smarter model combines stable base pricing with adjustment mechanisms tied to indices - like tariff rates on key inputs, commodity pricing, or predefined cost multipliers.
Highlighted Provision: Tariff Adjustment Formula
“The Contract Price shall adjust based on tariffs imposed or removed on Critical Inputs (as defined in Schedule X), with impact proportionally passed through, subject to independent cost verification and applied quarterly.”
This structure anchors budget expectations but maintains fairness and cost transparency across sudden shocks.
Integrating Currency Volatility Mechanisms
Tariff storms often ripple into currency markets - a dual blow for cross-border procurement. Contracts must now include currency adjustment or obligatory hedging measures to protect both parties.
A clause might mandate hedges for FX exposure above a designated threshold or allow price adjustments tied to agreed benchmarks such as the local currency vs. USD exchange rate.
Diversified Sourcing: A Strategic Imperative
Allies recognize that overreliance on any one supplier or jurisdiction - particularly those vulnerable to U.S. pressure - is unsustainable. European countries are ramping up indigenous procurement; Asia-Pacific partners are scrutinizing projects like AUKUS for open-ended U.S. dependencies .
Highlighted Provision: Supply Chain Diversification
“The Supplier shall not source more than X% of Critical Inputs from any single High-Risk Jurisdiction (defined in Schedule Y). Annual certification of diversification compliance and material sourcing shifts must be submitted.”
This forces transparency, reduces choke point risk, and aligns industrial strategy with supply chain resilience.
Expedited Dispute Resolution in a Geopolitical Flashpoint
Protracted arbitration drags timelines and hurts national readiness. Defense contracts must lean toward rapid dispute resolution, with arbitration panels knowledgeable in trade and defense law, and strict deadlines for award issuance.
Highlighted Provision: Expedited Arbitration for Trade Disputes
“Disputes regarding tariffs or Change in Law provisions will be settled via expedited arbitration under [Institution] Rules, with a panel including experts in international trade and defense procurement. Decisions rendered within 60 days of panel constitution.”
Such a structure safeguards continuity amid strategic shocks.
Comparative Case Studies: Contracts Under Siege
- India: The 50% tariff sparked diplomatic crises and stalled defense dialogues - underscoring how tariff policy can upend procurement politics.
- Canada & Mexico: Broad 25 - 35% tariffs and retaliations disrupted North American supply chains, rolling through defense and automotive sectors.
- EU: Despite a “defensive” tariff deal, European procurement is shifting inward, supported by a €150 billion rearmament fund.
- South Korea: A deal to reduce tariffs in exchange for large U.S. investment illustrates the transactional leverage imposed by tariff policy.
- Court Safeguards: The invalidation of “Liberation Day” tariffs via the IEEPA challenge shows the legal limits of executive overreach.
No longer can defense contracts be static risk-transfer documents. They must act as dynamic frameworks - encoding geopolitical risk management, adaptive pricing, sourcing strategies, rapid dispute handling, and transparency layers.
Key structural imperatives include:
- Geopolitical Due Diligence: Supplier awareness of tariff exposure and jurisdictional risk must be contractual.
- Digital Twins & Supply Chain Mapping: Requiring real-time mapping of second- and third-tier suppliers enables early disruption detection.
- Scenario-Driven Triggers: Contracts should anticipate tariff shock scenarios - embedding triggers for renegotiation or price recalibration.
- Balanced Risk-Sharing: Neither side should bear the brunt alone. Fair cost distribution maintains trust and industrial continuity.
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At Lex Partners Advocates LLP, we help policymakers, businesses, and institutions navigate the shifting terrain of U.S. tariffs, defense markets, and global trade realignments.
Our strength lies in turning complexity into clarity - and uncertainty into resilience.
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