When it comes to trade, Canada and the U.S. have a tight relationship. Our neighbour to the south is our biggest trade partner, and we’re theirs – in fact, Canada and the U.S. have the most “comprehensive trading relationship in the whole world”. Hundreds and thousands of goods cross our borders every day, and any changes in trade policies could significantly affect businesses on both sides. One of the biggest changes threatening our trade relationship as of late? Tariffs.
With a new president elected in the U.S., talks of tariffs are sparking concern for Canadian businesses. Tariffs in the U.S. aren’t something we’ve had to worry too much about in the past, as we've had a solid trade agreement ensuring stable economic relations. Potential policy shifts under the new president could put key industries at risk, forcing Canadian businesses to brace for enormous change.
Before diving in, it's important to clarify: what exactly are tariffs, why are they being considered, and what do they mean for Canadian businesses? These are just a few of the pressing questions that business owners across the country are facing as the possibility of tariffs draws nearer.
In this blog, we’ll break down how tariffs work and explore the possible impacts for businesses in Canada. Understanding these factors is crucial for businesses that rely on cross-border trade.
What are tariffs? Why do they exist?
Tariffs are taxes imposed by the government on imported goods or services. They’re usually put in place to make foreign products more expensive, protecting home-grown manufacturers. Tariffs are paid by the company that imports the goods and are typically passed down to consumers through higher prices.
For example, if Canada were to put tariffs on smartphones from China, it would increase prices for these smartphones in the Canadian market, encouraging Canadians to buy local alternatives. The tariff aims to protect Canadian smartphone manufacturers by making foreign phones less affordable, giving local companies a competitive edge.
Tariffs also serve the purpose of increasing government revenue, as it’s usually the government that collects and keeps tariffs.
What do tariffs mean for Canadian businesses?
In 2020, Canada, the U.S., and Mexico entered into the United States-Mexico-Canada Agreement (USMCA) that allowed for balanced, reciprocal trade among all three countries. However, the new U.S. president has suggested imposing tariffs on imported goods from Canada which goes against this agreement. And it wouldn’t be a small tariff either – it’d be a hefty 25% one.
The Canadian Federation of Independent Business (CFIB) has put out a report stating that 82% of businesses would be affected by tariffs in some way – here are a few ways we might see this impact unfold.
Lower sales and revenue
As mentioned, tariffs set on Canadian imports are usually passed down from the importing company through increased costs at the consumer level. So, tariffs would essentially increase the cost of Canadian goods, making them unaffordable and less competitive when compared to domestic products or products from countries with lower or no tariffs. As a result, Canadian businesses may see a decline in sales and revenue as consumers opt not to buy their products.
Job losses
Industries that rely heavily on exports to the U.S., such as manufacturing, agriculture, and natural resources, could experience production slowdowns, layoffs, or even closures as demand declines. A loss of jobs in these sectors could ripple through the broader Canadian economy, affecting consumer spending and local businesses.
Reduced market access
Reduced market access means Canadian businesses may lose customers, struggle to expand in the U.S. market, or even be forced to exit it altogether due to the higher costs and competitive disadvantages caused by tariffs.
Supply chain disruptions
Many Canadian businesses operate within integrated North American supply chains, where raw materials and components cross the border multiple times before becoming a finished product. Tariffs can disrupt these supply chains by increasing costs, leading to inefficiencies and delays. Businesses may need to restructure operations or find new suppliers which can be time-consuming and costly.
Retaliatory tariffs from Canada
In response to U.S. tariffs, Canada may impose retaliatory tariffs on goods from the U.S. These counter-tariffs are often targeted at industries that are significant in the U.S., putting pressure on the U.S. government to reconsider their tariff decisions. This can escalate trade tensions and further disrupt industries that rely on cross-border trade. It could also make products from the U.S. more expensive – Canadian consumers may see higher prices on everyday items such as food and household goods.
Currency fluctuations
Trade restrictions can influence currency exchange rates. If tariffs weaken demand for Canadian exports, the Canadian dollar, already weak against the U.S. dollar, may decline even more.
What’s next?
If the U.S. moves forward with tariffs on our goods, Canadian businesses will need to navigate a period of economic uncertainty. They may have to adjust their strategies, whether by absorbing costs, seeking new markets, or restructuring their supply chains. Meanwhile, the Canadian government will likely respond with a combination of diplomatic efforts, potential retaliatory tariffs, and financial support for affected industries.
Ultimately, tariffs on Canadian goods entering the U.S. would create a chain reaction that affects businesses, workers, consumers, and the broader Canadian economy. While some companies may adapt, others could struggle and face declining revenues, job losses, or even closure.
For businesses that rely on cross-border trade, staying informed, adapting quickly, and seeking government or industry support will be key to weathering the impact of tariffs. Whether through policy changes or market shifts, the next steps in this trade dispute will shape the future of Canada-U.S. economic relations for years to come.
