Executives and business leaders are discussing the potential for substantial tariff increases under President-elect Donald Trump's forthcoming administration. As announced on November 25, a 25% tariff may apply to all Canadian and Mexican imports into the U.S. Earlier proposals include a universal tariff of 10% to 20% on all imports, with specific tariffs of at least 60% on Chinese originating goods. While these measures aim to boost U.S. domestic manufacturing and reduce reliance on foreign products, business leaders are looking to future-proof their organizations and maximize opportunities.
As geographical and trade neighbours, the proposed tariffs will have different impacts on the U.S and Canada, with executives in both countries expressing a range of reactions—all agreeing that the impacts will be complex. Canadian business leaders are recognizing the potentially profound implications for Canada's economy due to the high level of uncertainty.
What is at the root of this uncertainty concerning the incoming president’s potential second term approach to trade? We talked to Scott Reid, political analyst and commentator for CTV News, on the issue.
In addition, the recent selection of Howard Lutnick to oversee Trump’s trade and tariffs agenda provides some more direction as to potential plans, as Lutnick has expressed views that tariffs should be used to both influence specific industries and as a negotiating tool.
But when there is concern and uncertainty, resilient business leaders also bring plans of action. In what almost certainly promises to be a high-stakes game, planning and good business practices are still the best path to a royal flush. “Organizations who practice their management muscle through testing and scenario planning, increase their odds of a good outcome.” comments BDO Canada’s Managing Partner for Markets and Industries Mike Abbott. “When it comes to tariffs, organizations should test their own readiness for different scenarios.”
At the end of the day, being proactive, adaptive, and prepared is the best approach. “Uncertain trade policies challenge us to rethink traditional approaches to strategy.” says BDO Canada’s CEO Bruno Suppa. “To thrive in this environment, leaders must prioritize flexibility and innovation, making deliberate choices that safeguard stability while continuing to invest in long-term value creation.” CEOs and business leaders need to start thinking about key challenges—including rising costs for Canadian exports to the U.S., supply chain vulnerabilities, supply chain options, market uncertainty, and competitive pressures.
How increased tariffs can raise costs for Canadian imports and exports—and cut their profits
Increased tariffs on Canadian goods entering the U.S. act like a tax. And like taxes, they raise the price of these goods in the U.S. market, reducing demand since buyers will do what any buyer does—seek a cheaper product. To counter this decreased demand, Canadian exporters must reduce their prices to absorb some of the tariff, cutting into profits.
Additionally, as U.S. companies and manufacturers face higher tariffs on imports from countries like China, the cost of their inputs will inevitably rise. These increased costs will be passed down the supply chain, leading to higher prices for finished goods. This means that not only will American consumers see price hikes on everyday products, but Canadian businesses importing these goods will also face elevated costs. The ripple effect of these tariffs will thus contribute to inflationary pressures, squeezing profit margins and potentially reducing the competitiveness of North American products in the global market.
Higher tariffs often go hand-in-hand with more complex compliance and administrative requirements. This spikes operational costs, as well as triggers delays, which again cuts into profits on the exporter end.
There are certain sectors that are likely to be hit harder, including manufacturing, technology, and retail and consumer business. Many goods, especially in the automotive sector, cross between Canada and the U.S. multiple times over the course of the manufacturing process. Multinational automakers depend on a smooth cross-border assembly line and uncertain trade makes this more challenging.
Finally, this ebb and flow of demand, and price instability, can impact currency exchange rates. This can directly impact export costs.
Importance of assessing dependencies on U.S - Canada trade routes
Back in 2018, Trump placed a 25 % tariff on steel imports and a 10% tariff on aluminum imports. Eventually, Canadian negotiators persuaded the Republican president to give Canada an exemption—an exemption that was granted because of concessions Canada made during the USMCA negotiations. However this time around if the new 25% tariffs are imposed, this will trigger negotiations well before 2026 USMCA renegotiations—likely resulting in the U.S. president applying pressure on Canadian negotiators well before the formal process starts. Add to that recent talk of Canada possibly following the U.S. in isolating Mexico from trade talks—while not confirmed—set the scene for fierce and unpredictable negotiations.
The U.S. is Canada’s largest trading partner and disruptions to access the U.S. market can hammer revenue streams and upend supply chains. While China will likely see the most severe tariffs, it is still uncertain how tariffs might impact Canada this time around. Therefore, now is the time for Canadian business leaders to start understanding their reliance on cross-border logistics. This will allow them to better anticipate potential risks—such as delays from regulatory changes, tariff impacts, or infrastructure bottlenecks—and implement strategies to mitigate them.
Proactive measures help to ensure business continuity, improve agility, and build resilience against the trade disruptions that will likely arise from the proposed tariffs. These measures can include looking at alternate trade routes, mapping supply chains to identify goods and services reliant on cross-border transport, analyzing revenue and customer segments tied to the U.S. market, and reviewing logistics routes prone to bottlenecks. “Businesses that understand their customs costs have a significant competitive advantage over those that are unclear on whether imported goods are classified and valued correctly, if the country of origin is accurate and whether trade agreements have been properly applied. Given these activities generally fall outside the scope of what customs brokers do, businesses have recovered significant dollars by shining a light on this blackhole” comments Brian Morcombe, BDO’s Global Indirect Tax Practice Leader.
How disrupted trade policies can hinder strategic choices
Fluid trade policies can create several obstacles for Canadian CEOs engaged in making strategic choices. To work around these challenges, leaders should adopt more flexible, resilient approaches, such as diversifying supply chains, building financial reserves, and exploring alternative markets. While these measures are not without challenges themselves—from straining resources to making long-term business planning more difficult—they are the best course of action in uncertain times.
Common strategic planning challenges face business leaders across multiple fronts. Trade policy uncertainty poses significant challenges for business leaders across multiple fronts. Securing cost-effective and reliable supply chains becomes increasingly complex due to disruptions, necessitating diversification that is both time-intensive and expensive. Financial planning is further complicated by volatile forecasting, impacting the ability to make timely budgeting and revenue predictions. Strategic investments may potentially be delayed, such as those in infrastructure or R&D, and uncertainty about trade agreements and labor mobility impacts talent acquisition and workforce planning. Additionally, adapting to evolving regulatory requirements can divert resources from planned strategies for growth.
Looking to early January—and how Canada is preparing
In addition to the recently announced 25% tariff on all Canadian imports to the U.S., more is expected in early January on Trump’s trade policy. Business leaders must be prepared for the flurry of negotiations and political tensions that will surely follow. Scott Reid is watching the actions of the federal government.
Overall, Canadian business leaders should be alerted to the potential loss of market share to U.S. companies due to Trump's proposed tariffs, as these tariffs make Canadian products more expensive and less competitive in the U.S. market. Higher costs may push American consumers and businesses to seek U.S.-based alternatives, reducing demand for Canadian goods. Canadian companies trying to absorb the increased costs of exporting to the U.S. will lose their ability to compete.
How we can help your business prepare
Resilience starts with good planning and good business practices and there are several measures Canadian business leaders should be implementing now.
BDO Canada is ready and able to help Canadian business leaders start to map out responses and proactively address these potential challenges now.
A great place to start the conversation is with our Customs and International Trade team.
The information in this publication is current as of November 25, 2024.
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.