Trump tariffs in Australia could hit MSP margins

The recently imposed tariffs on Australian goods by the Trump administration could have significant implications for managed service providers (MSP), especially for those using US-based software and hardware. However, two clauses within contracts may be the saving grace in any price changes.

In April, President Donald Trump announced the Declaration of Economic Independence, imposing tariffs that aim to address perceived trade imbalances and bolster domestic industries.

University of Queensland professor Shahar Hameiri wrote in an article on the university’s website that the tariff was a “tax on goods or services coming into a country. The cost is generally passed on to the consumer – meaning the imported goods or service become more expensive”.

“The tariffs could therefore have a very serious indirect impact on Australia’s economy,” wrote Professor Hameiri. “Then there is the potential impact on the US dollar, which is going to rise because of these tariffs.

“Given the US dollar’s global role, this will have global implications. Should inflation rise again in the US, leading the Federal Reserve to increase interest rates, global borrowing costs will rise, slowing economic activity.”

What does this mean for MSPs?

The TSP Advisory chief strategy officer James Davis told ARN this will mean prices are going up.

“The Australian dollar is fairly weak against the US dollar, which is another thing impacting SaaS [software-as-a-service],” he said. “All the SaaS products are priced in US dollars, but the tariff side won’t really affect it.

According to Davis, the challenge in this region will be when product prices fluctuate and the Australian dollar weakens.

“[This] is good for our economies in general because we’re export economies in Australia and New Zealand,” he said. “However, this reduces the margins on what we’ve been selling, because we sell everything in Australian dollars.

For example, if a SaaS solution was priced at US$5 and A$10, when the Australian dollar weakens, the margins shrink because the cost is now more than $5 and that impacts a lot.

“Nearly all SaaS businesses are US-based and it’s something that isn’t thought about much, said Davis. “That’s why distributors are so important; because they have more power to buy, they can sell in local currency.

“But those fluctuations are being passed on, even if the distributors are managing it quite well, which they do in the region.”

According to Davis, US vendors and SaaS have had way more price rises than he has ever seen.

“Microsoft does it twice a year and other SaaS companies are following suit at different times,” he said. “[Partners] can’t plan for this stuff very well, and it’s impacting their margins again.”

MTP Services general manager Luke Melonas also believed that if the US dollar weakens, it could potentially be good for service providers.

“Even though the stock market right now is tanking … I think that’s probably temporary and reactionary,” he said,

However, Melonas was optimistic that the industry will survive given organisations survived and thrived during the global finical crisis.

“It was the organisations that had correct operating models that were streamlined, that weren’t bloated and focusing on optimisations,” he said.

Melonas told ARN that organisations that run a “tight ship” and evaluate their cost base and client base will fare better than some during these times.

“If you have those things, as well as ways of work and engagement established and in place, I think you’ve probably got a better chance than organisations that are running paper-based processes,” he said. “I think fortune will favour the optimised.”

For companies that “deal with intangible products like SaaS”, iasset.com CEO Scott Frew said he was “waiting to see how things will unfold”.

“This is just a precedent in trade wars dating back to the ’70s,” he said to ARN. “These changes will certainly affect the tech industry. That said, it seems the focus is mainly on hardware right now.”

“As for us – companies like ours that deal with intangible products like software or SaaS – we’re still figuring out if we’ll be impacted,” he said. “It doesn’t seem like we are at the moment, but we won’t know for sure until we start testing it.”

“For instance, we’re running on Azure with sites all over the world, in different markets and regions. If tariffs affect this, it doesn’t appear so now, but we’re only 24 hours into trying to understand the situation.”

Don’t just rely on force majeure

Ryan Solomons, dispute resolution partner at law firm RedeMont, explained to ARN that IT, like any other service, will see a price increase if it’s affected by the tariffs because the providers will have no choice.

However, for MSPs, it’s worth reviewing contracts to see if a price increase is allowable due to changes in the law.

“If the law has changed, they may be able to adjust pricing with their customers accordingly,” he said. “Many people will be under contracts.”

During COVID organisations frequently relied on force majeure clauses that were implemented into contracts.

In Australia, force majeure isn’t governed by a specific standalone law or recognised by common law, however it is a critical component of many contracts.

Although within these contracts the wording of the clause is crucial, as courts will interpret it strictly based on its language and in the absence of a force majeure clause, the doctrine of frustration – which applies when unforeseen events take place which stop a contract from being completed as originally intended, according to legal research and data analytics vendor LexisNexis – may apply, but its scope is limited.  

When drafted and negotiated properly, force majeure clauses can help mitigate risks and avoid disputes.  

Australian Consumer Law (ACL) protects against unfair terms in contracts, including overly broad force majeure clauses. 

When done right, these clauses can be implemented when a force majeure event is triggered, like government-imposed lockdowns, sanctions or restrictions that prevent contract fulfilment (restrictions on imports and exports).

As well as supply chain disruptions like the closure of key suppliers or transportation disruptions.

Change of law also applies

According to Solomons change of law should be considered instead, as these tariffs are triggered “by virtue of a change of law.”

This could potentially allow individuals to claim a change of law in their contracts, giving them the right to review pricing and in cases where a contract otherwise locks in costs, this could prevent an MSP from passing on the increase.

Change of law refers to a situation where a new law or regulation and or a change to existing law comes into effect making it hard to fulfill contractual obligations.

This includes trade restrictions like the introduction of tariffs, export bans or sanctions that restrict the movement of goods and services between countries.

According to the Australian Consumer Competition Commission, changes to the law on unfair contract terms came into effect on 9 November 2023.

From this date, proposing, using or relying on unfair contract terms in standard form contracts will be banned and penalties for breaches of the law will apply.

Other key changes relate to deciding whether a contract is a standard form contract and the definition of a small business contract.

The changes apply to a standard form contracts made or renewed on or after 9 November 2023 and a term of a contract that is varied or added on or after 9 November 2023.

Where a term of a contract is varied or added on or after 9 November 2023, the changes relevant to deciding whether a contract is a standard form contract apply to the whole contract.

“When I was part of a [legal team] for a construction [project], at that time, supply chain issues were widespread and people were looking at force majeure,” Solomons said.

“Specifically, whether a pandemic counted as an act of God for legal purposes, not from a philosophical perspective.”

This idea was inspired by the Billy Connolly movie The Man Who Sued God, which “presents this idea really well,” explained Solomon.

“Where we landed was that the issue wasn’t the pandemic itself, but rather the regulatory changes brought about by the pandemic, such as border closures,” he said. “These changes in law created the disruption.

“Many contracts included “change of law” clauses that addressed rights if the law changed. I imagine a similar situation could arise with tariffs or any laws that impact contracts, depending on how the contract is drafted.”