Tariff takeaways: Lessons learned from a trade crisis

May 28, 2019

The tariffs that have disrupted Canadian supply chains since June 2018 are now a thing of the past. With Canada and the U.S. agreeing to lift their reciprocal trade measures, Canadian importers and exporters can breathe a sigh of relief.

However, before breathing too deeply, Canadian business leaders should take stock. The crisis of 2018-19 has ended — its reverberations have not. Now is the time to assess the damage and apply lessons learned in a brighter trade climate.

What did Canada and the U.S. agree to?

The headline item is that the two countries lifted their tariffs: The U.S. removed its 25% tariff on steel imports and its 10% tariff on aluminum. Canada removed its 25% duty on steel imports, 10% duty on aluminum, and 10% duty on miscellaneous items.

The U.S. had implemented its aluminum and steel tariffs as part of an 'America First' trade approach favoured by U.S. President Donald Trump. The U.S. also levied the tariffs on other countries" goods. Canada had been exempted as NAFTA negotiations ramped up. When those talks stalled, the U.S. brought in the tariffs on Canadian goods.

Canada responded with its own tariffs on U.S. goods — with the hope of prompting the U.S. to drop its tariffs. Canada"s tariffs mirrored the U.S. measures but added duties on some goods that were neither aluminum nor steel. Canada wanted to match the total value of the tariffs. Since the U.S. imports more aluminum and steel from Canada than vice versa, Ottawa needed to supplement the tariffs with a 10% duty on miscellaneous items.

How will Canadian businesses benefit?

Business leaders affected by the tariffs will improve profitability and peace of mind by eliminating tariffs from their cost structure and agenda. Many industries will benefit — and not just manufacturing.

Here are a few examples:

  • Construction. Canadian builders were incurring additional duties on items such as wire, rebar, and plywood — all key materials for concrete forming.
  • Aerospace. The Canadian aerospace industry depends on the U.S. for the high-grade aluminum it uses. Canadian mills could not supply the aluminum. As a result, they were forced to use U.S. suppliers, were burdened with the additional 10%, and in many cases could not pass it on to their customers. While many aerospace businesses have filed for remission of the tariffs from the Canadian government, the process takes a long time.
  • Boat retailers. Both boat retailers and their customers were impacted by the 10% tariff on boats. Retailers added it to the price — and had already seen a slowing of sales for the 2019 season.

What did Canada give up to reach this deal?

Canada compromised on several points to end the tariffs. The deal may increase the ability of the U.S. to influence Canada"s trade relationships with other countries. However, negotiators have yet to finalize the details. Time will determine the extent of these compromises. What we know as of now:

  • Reviving tariffs. The agreement provides for the reinstatement of tariffs on aluminum and steel if imports surge beyond “historic volumes of trade.” If either country takes this step, the other may respond — but only with a tariff in the same sector.
  • Anti-dumping. The two countries will work to prevent imports of steel and aluminum sold at a lower-than-market, or "dumped," price.
  • Foreign aluminum and steel. The two countries will collaborate to prevent the import of steel or aluminum originating in a foreign country.

Will this deal push countries to finalize the new NAFTA?

The agreement on tariffs could ease the arrival of NAFTA 2.0 — certainly on the Canadian side. Canada, the U.S., and Mexico have signed the U.S.-Canada-Mexico Agreement (USMCA), known officially in Canada as the Canada-U.S.-Mexico Agreement, or CUSMA. But they have not ratified the deal. For Canada, the main sticking point has been the U.S. tariffs on aluminum and steel.

Lifting the tariffs removes a Canadian barrier to the USMCA"s passage, but American barriers remain. In the U.S., Democrats and Republications will need to agree on the USMCA"s terms. Any updates will then need to receive approval from Canadian and Mexican trade officials.

How can businesses respond to the tariff deal?

Importers can take immediate action to improve their bottom line as they move on from a troubling but temporary increase in tariffs:

  • Duty remission. Explore the Canadian duty remission program, which in many cases refunds steel and aluminum tariffs paid since July 1, 2018.
  • Duty drawback. Find out about the duty drawback program, which refunds tariffs paid on steel and aluminum when they were ultimately exported from Canada.
  • Tariff classification reviews. Continue to review tariff classifications in the event a misclassification of product resulted in overpayment of duties.
  • Valuation reviews. Ensure you value imports at their lowest possible value based on standard customs valuations practices.

What can businesses learn from the 2018-19 tariff war?

The Canada-U.S. tariffs present an opportunity for Canadian businesses — and a lesson learned.

Many Canadian businesses were caught off-guard. The NAFTA era and its border peace have allowed many business leaders to relax. As a result, they overlooked key protocols around import-export. As the tariffs fade from view, business leaders cannot afford to fall into old patterns. Open borders may indeed represent our future, but trade policy can be difficult to predict. They need to be prepared for any future new tariffs — to educate themselves and institute processes.

Along with preparing themselves for possible new tariffs, Canadian businesses need to watch the status quo — which in its own way keeps changing. That means limiting their ongoing exposure from enforcement by the Canadian Border Services Agency (CBSA). Earlier this year, the CBSA released its trade compliance verification priorities for the year. Items range from footwear to bedding to batteries. The message for businesses: the hotly debated tariffs of 2018-19 represent just part of the tariffs picture. Business leaders should continue to expect a spotlight on their activities.

All of this requires a methodical approach: reviewing customs processes, understanding supply chains, and requesting help when needed from experienced customs professionals.

To learn more about managing the tax issues your business faces in the U.S., see our 2019 U.S. expansion guide

To request a refund of tariffs paid or implement customs processes in your business, contact us or reach out to:

Brian Morcombe
Partner, Indirect Tax

Charmaine Goddeeris
Senior Manager, Certified Customs Specialist (CCS)

The information in this publication is current as of May 28, 2019.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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