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Introduction
For decades, the United States has embraced arbitration as a cornerstone of both domestic and international commerce, culminating in a robust federal policy favoring arbitration under the Federal Arbitration Act (“FAA”). Yet arbitration’s expansion has never been uniform—it thrives in private commercial contexts while provoking persistent controversy in employment and consumer disputes.
The Trump administration’s early policy actions have exacerbated this divide. Two initiatives in particular—the administration’s re-imposition of tariffs and trade barriers, and its March 2025 executive order limiting federal agencies’ consent to arbitrate labor-related disputes—have created contradictory impulses in arbitration’s use and perception. Tariffs and trade shocks have pushed businesses toward arbitration as a stable and neutral forum for resolving contract disputes. Meanwhile, federal retreat from labor arbitration has curtailed access to arbitral remedies for government employees and signaled a broader institutional mistrust of arbitration in employment relations.
I. Aggressive Tariff Measures and Contractual Instability
A. The Trade Policy Shock
In early 2025, the Trump administration re-introduced a sweeping array of tariffs on steel, semiconductors, and manufactured goods, citing national-security and economic-sovereignty rationales. These measures revived and intensified the protectionist posture of the first Trump administration, but with broader geographic scope and less exemption flexibility. By early October 2025, average effective tariff rates on certain imports had risen nearly fivefold—from about 2.4% at the start of the year to roughly 11%—while retaliatory measures from key trading partners continue to disrupt global supply chains. The consequences for private contracting have been immediate and ongoing. Businesses face unpredictable costs, delayed shipments, and growing risks that performance may become commercially impracticable. As in prior trade disruptions, many parties are turning to their contracts—particularly force majeure and Material Adverse Effect (“MAE”) clauses—to assess whether the tariff shock justifies suspension or termination of obligations.
B. Force Majeure and MAE Claims
Most courts, including those in New York and Delaware, have historically construed force majeure clauses narrowly. Mere increases in cost or difficulty rarely suffice; the event must render performance impossible or illegal. Tariffs, as government acts, can qualify if the clause explicitly lists “governmental action” or “trade restrictions.” Yet in many agreements, such language is ambiguous or absent. MAE clauses, common in merger and financing contracts, present similar hurdles. U.S. courts—most famously in IBP, Inc. v. Tyson Foods, Inc.—set a high bar for proving an MAE, typically requiring a significant, sustained decline in the target’s business. Tariff shocks, while disruptive, often fail that threshold. As with all contractual provisions, however, the impact of force majeure and MAE clauses ultimately depends on how they are drafted, interpreted, and enforced. In light of these interpretive uncertainties, arbitration is particularly well suited to resolving such disputes—especially in cross-border contexts, where arbitration clauses are now standard in many commercial contracts. Unlike litigation, arbitration offers subject-matter expertise, confidentiality, and procedural flexibility—qualities particularly valuable when addressing novel questions of trade-related impossibility or adverse effect.
C. Arbitration as a Commercial Safety Valve
Arbitration’s appeal in the current trade climate lies in three interlocking advantages. First, arbitration offers neutrality and predictability in a politically charged environment. Domestic companies affected by shifting U.S. trade policies may view state and federal courts as less predictable or more exposed to political influence. A neutral arbitral forum—whether under AAA, JAMS, or international institutional rules—can provide a depoliticized and commercially focused venue. Second, arbitration ensures enforceability and greater finality. Even for disputes between U.S. parties, the Federal Arbitration Act’s narrow standards for vacatur and strong judicial deference to arbitral awards offer a level of certainty often beyond what litigation provides. Third, arbitration allows procedural flexibility that traditional courts rarely afford. Emergency arbitrator provisions, expedited rules, and confidentiality protections enable businesses to resolve high-value disputes quickly and discreetly—particularly important for companies seeking to protect trade relationships or sensitive pricing information.
As a result, arbitration is poised to evolve from a dispute-resolution mechanism into a core instrument of commercial risk management. Contracting practices in 2025 are likely to reflect this shift: broadened force majeure definitions encompassing “tariffs or governmental restrictions,” express references to emergency relief procedures, and increased reliance on arbitration-friendly institutional rules across both domestic and international agreements.
D. Policy Implications: Private Ordering in the Shadow of Public Uncertainty
From a policy perspective, this reliance on arbitration reflects the private sector’s adaptation to public volatility. When government action destabilizes markets, private ordering through arbitration provides predictability. Yet, it also privatizes adjudication of policy-driven disputes. Questions about whether tariffs constitute force majeure, or whether governmental action excuses performance, implicate public regulatory policy—but these questions are increasingly decided in confidential arbitral proceedings.
Trump’s tariff wave thus reinforces a broader theme: when the state acts unpredictably in commerce, arbitration becomes the mechanism through which private actors reclaim control. This dynamic deepens the legitimacy of arbitration in commercial law even as it distances it from public oversight.
II. Executive Orders and the Federal Retrenchment from Labor Arbitration
A. The March 2025 Executive Order
On March 27, 2025, President Trump issued Executive Order No. 14,251, “Exclusions from Federal Labor-Management Relations Programs.” The order invoked statutory authority under 5 U.S.C. § 7103(b)(1) to exclude various agencies and subdivisions from the coverage of the Federal Service Labor-Management Relations Statute (“FSLMRS”). It directed agencies to dissolve labor-management forums and reassess participation in grievance arbitration procedures. Following the order, the Office of Personnel Management issued guidance instructing agencies to suspend or terminate ongoing grievance arbitrations where bargaining units were excluded. Although the administration justified the measure as a national-security necessity, its practical effect has been to significantly curtail arbitration’s role as the principal mechanism for resolving employee grievances.
B. Disruption and Litigation
The executive order triggered immediate disruption. Agencies with active collective-bargaining agreements (“CBAs”) faced uncertainty about whether pending grievances could proceed. Unions, including the American Federation of Government Employees, filed suits arguing that the executive order exceeded statutory authority and unlawfully abrogated binding arbitration provisions.
Early district court rulings were mixed: some courts, such as the U.S. District Court for the Northern District of California, issued temporary restraining orders preserving existing arbitrations, while others, including the U.S. District Court for the Western District of Texas, deferred to agency interpretations. However, even in cases where district courts had granted TROs, the government’s appeals led higher courts to intervene. For example, the Ninth Circuit Court of Appeals issued an administrative stay of Judge Donato’s preliminary injunction following the Trump administration’s emergency motion to pause enforcement while the appeals process proceeded.
C. Erosion of Federal Labor Protections
Beyond the litigation, the order undermines decades of established reliance on arbitration as a tool for maintaining workplace stability within the federal sector. For many employees, arbitration under CBAs has served as the only meaningful forum for contesting disciplinary or employment decisions short of the Merit Systems Protection Board.
By removing or severely limiting this avenue, the executive order diminishes procedural protections that employees once relied upon to ensure fairness and accountability in agency decision-making. Over time, these effects could have systemic consequences, including increased turnover, strained labor-management relations, and greater reliance on costly litigation to resolve disputes that arbitration once efficiently handled.
D. Policy Implications: The Retreat from Public-Sector Arbitration
From a policy perspective, the executive order signals a renewed politicization of public-sector dispute resolution. Arbitration, long valued for its efficiency and role in maintaining workplace stability, is now constrained in certain federal agencies under the banner of national security. This change reflects a reassessment of the balance between labor-management collaboration and executive control.
Notably, while arbitration remains prevalent in commercial contexts—where it continues to function as a privately driven mechanism for resolving contractual disputes—its role in federal labor relations has been sharply curtailed. This divergence reflects the administration’s selective approach to arbitration: allowing it to operate largely undisturbed in the private sector while limiting its use in the public sphere to reinforce managerial discretion and reduce employee procedural protections.
Conclusion
The U.S. in 2025 stands at a crossroads in its approach to arbitration. The Trump administration’s policies have revealed arbitration’s dual character: indispensable for private commerce yet dispensable for public employment. The same executive power that destabilizes contracts through tariffs inadvertently strengthens arbitration’s role in global commerce, while its use of that power to dismantle federal labor arbitration weakens procedural protections for government workers.
This paradox is more than a curiosity: it is a policy problem. A coherent national arbitration policy cannot simultaneously exalt arbitration’s virtues in commerce and condemn them in labor. If arbitration is to remain a cornerstone of the American legal order, its legitimacy must rest on consistency, transparency, and fairness across both markets and government.
The future of arbitration in the U.S. may depend less on ideology than on integration: reconciling the private efficiencies of arbitration with the public values of accountability. Until that reconciliation occurs, the Trump 2.0 era will stand as a case study in how political choices—tariffs on one hand, executive orders on the other—can reshape not only the economy, but the very architecture of dispute resolution itself.
Suggested Citation: Yejoo Moon, Arbitration at a Crossroads: Commercial Reliance and Federal Retrenchment, Cornell J.L. & Pub. Pol’y, The Issue Spotter (Nov. 5, 2025), https://publications.lawschool.cornell.edu/jlpp/2025/11/05/arbitration-at-a-crossroads-commercial-reliance-and-federal-retrenchment/.
About the Author
Yejoo Moon is a second-year law student at Cornell Law School. She earned her MA in International Relations from the University of St Andrews and also studied Political Science at the University of California, San Diego. At Cornell, she serves as an associate for the Journal of Law and Public Policy and is a student attorney in the Gender Justice Clinic. Outside of law school, she enjoys hiking, painting, and going grocery shopping.