Background:
(Updated on March 10, 2025)
On the issue of recently announced U.S. tariffs, it is well understood that there is currently a high degree of interdependence between the U.S. and Canadian economies.
For example:
The U.S. imports a lot of electronics, machinery and equipment, chemicals and plastics, consumer and other products to Canada. It also imports a huge amount of energy in the form of oil, gas and coal. Roughly 30% of goods imported from Canada is energy, with machinery and equipment at 21%, metals and minerals at 10%, and chemicals and plastics at 10%. Canada is the top origin of import for 24 U.S. states. Top annual importers from Canada are: Illinois ($58B), Michigan ($41B), Texas ($35B) and Ohio ($18B).
The U.S. exports a lot of electronics, machinery and equipment, chemicals and plastics, consumer and other products to Canada. Canada is the top export market for 34 U.S. states. Top U.S. exporters to Canada are (in USD): Texas ($34B), Michigan ($22B), Ohio ($19B), and Illinois ($18B).
Here’s a link to some interesting Scotiabank charts. These help to illustrate the levels of interdependency between the U.S. and Canadian economies. Other major Canadian banks have similar online offerings.
The Implications of Tariffs:
The U.S. recently introduced 25% tariffs on most goods imported from Canada and a 10% tariff on energy imports. What are the implications to U.S. importers and Canadian exporters?
U.S. imposed tariffs (also referred to as “taxes” or “duties”) are paid by the U.S. importer to the U.S. Government. This means that the cost of Canadian imports—raw materials including energy, components used in further U.S. manufacturing or assembly, and finished goods acquired for resale in the U.S.—could suddenly be 25% higher.
U.S. importers will be compelled to increase their prices in the U.S. Many firms will be less likely to continue importing Canadian goods, without some form of pricing concession from the Canadian exporter as an offset to the government-imposed tariff. Pricing concessions provided will reduce the profitability of the Canadian exporter, so they may not be sufficiently offered. The end result is that many U.S. importers will seek to replace the Canadian imported goods with goods produced locally in the U.S., since those goods would not be subject to U.S. import tariffs. U.S. importers will also seek to obtain goods from other countries whose goods have not been tariffed by the U.S. government.
Canadian exporters will also seek to replace their U.S. export sales, by selling more goods locally to Canadian customers, and also by exporting more goods to other countries where tariffs are either lower or are not being imposed.
The Canadian Government announced on February 4, 2025, that it intends to levy its own 25% tariffs on U.S. goods imported into Canada. What are the implications to Canadian importers and U.S. exporters?
This retaliatory countermeasure is targeted at an initial $30B CDN ($20.6B USD) of imported goods. The list, which was updated on March 4, 2025, includes products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and certain pulp and paper products.
On March 4, 2025, the Canadian government added another $155B CDN of goods to its tariff list of products imported from the U.S. into Canada. This second round of tariffed items includes products such as electric vehicles, fruits and vegetables, beef, pork, dairy, electronics, steel, aluminum, trucks, and buses.
The same logic applied by U.S. importers above will likely be applied in reverse by Canadian importers of U.S. products in response to Canadian-imposed tariffs. Many Canadian importers will seek to replace the U.S. imported goods with goods produced locally in Canada (or elsewhere) since those goods would not be subject to Canadian import tariffs.
U.S. exporters will also seek to replace their Canadian export sales, by selling more goods locally to U.S. customers, and also by exporting more goods to other countries where tariffs are either lower or are not being imposed.
Replacing imported goods with locally-produced goods, on both sides of the border, will take time. Here are some key considerations.
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- Both Canadian and U.S. businesses will need to adapt in order to help reduce their respective country’s reliance on imports.
- Some imported manufacturing inputs (e.g. raw materials and energy) are not easily replaceable, especially in the U.S.
- Businesses on both sides of the border will need to identify and develop new opportunities and products, retool their production lines, update their workforces, adjust their marketing plans, and secure suitable business financing. Such financing will need to include timely and innovative financial support from all levels of government. (See March 7 federal government announcement below.)
- Some Canadian businesses may choose to modify, scale down or close their existing Canadian export facilities.
- Some Canadian businesses may choose to open new Canadian facilities to support Canadian domestic sales.
- Some Canadian businesses may choose to open new U.S. facilities to support U.S. domestic sales.
- Some U.S. businesses may choose to modify, scale down or close their existing U.S. export facilities.
- Some U.S. businesses may choose to open new U.S. facilities to support U.S. domestic sales.
- Some U.S. businesses may choose to open new Canadian facilities to support Canadian domestic sales.
It’s clear that a trade war involving tariffs results in a lot of disruption and adjustment, which will take time to sort out.
In the meantime, many economists are predicting that the citizens of Canada and the U.S. will both suffer financially almost immediately, through increased prices and job losses from layoffs or even shutdowns. The potential for high inflation and recession is certainly a major concern for everyone.
Update to this blog post on March 10, 2025
On March 7, 2025, the Canadian government announced various new programs to support Canadian businesses impacted by tariffs. These programs include:
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- Trade Impact Program (Export Development Canada) – $5 Billion over two years to help Canadian exporters reach new markets and to help navigate economic challenges.
- Business Development Bank of Canada – $500 Million in favourably priced loans.
- Farm Credit Canada – $1 Billion in new financing for the agriculture and food industry.
- EI Work-Sharing Program – expanded EI benefits to impacted workers.
Additional information about these programs and others is available here.
KT Partners LLP:
Despite the difficulties mentioned above, there are opportunities for firms that are willing and able to adapt to the changing circumstances. That’s where we can help.
At KT Partners LLP, we do a lot of cross-border work.
That means that we understand many of these issues as well as the business environments on both sides of the border.
We can help your business identify and implement effective strategies to deal with the impacts of tariffs and other cross-border taxes.
We can help you adapt.
Just give us a call. We’re always ready to help!
(Below is a CBC News video that explains more about the issues relating to tariffs.)