Talking tariffs: How can Canada weather the impending economic storm?

When Donald Trump announced the U.S. would impose tariffs on all goods from Canada, Mexico and China, it sent Canadian companies reeling — and spurred a patriotism-fueled “Buy Canadian” movement. Those broad-based tariffs were temporarily put on hold, but soon after, Trump promised tariffs on imported aluminum and steel. So what can Canadian companies do to weather the economic storm? And will buying Canadian really help? In this Q&A, UBC Sauder School of Businesses Lecturer Samuel Roscoe, who researches geopolitical disruptions and supply chain risk, takes a deep dive into this issue and shares his expert insights.
 

As you watch Trump threaten tariffs on Canadian goods, what are your concerns? 

The biggest issue for me is the way Trump is threatening the tariffs, introducing the tariffs, removing the tariffs, and then threatening new tariffs. That creates uncertainty — and businesses hate uncertainty. It becomes very difficult for them to make financial decisions on where to invest, where to set up production facilities, which suppliers to use and where to source from. When he announced the steel and aluminum tariffs, companies were given less than a month to revamp their supply chains, which is literally impossible.
 

Which sectors will be hit hardest?

Seventy per cent of Canada’s exports and 50 per cent of our imports are with the United States. A 25 per cent across the board tariff on Canadian goods would actually hit American importing firms the hardest first, as they have to pay the cost of the tariff to the U.S. government. Very quickly however, American firms will start cancelling contracts with Canadian suppliers, as we no longer have the advantage of the low Canadian Dollar, as this has been offset by the 25 per cent tariff.  

American companies will look for alternative suppliers outside of Canada, first to American companies, and then other countries around the world if there is not enough domestic capacity. While the energy sector is likely to face a lower tariff (around 10 per cent) there will still be a significant impact on Canadian exporters of crude and refined petroleum, particularly in Alberta. Steel and aluminum will be the next industries to take a financial hit with the ripple effects felt across the supply chain.

Companies importing Canadian aluminum and steel will be paying the tariffs and absorbing those costs; the issue for Canadian companies is when the retaliatory tariffs come in and they’re importing goods from the United States. Then they could be paying tariffs both ways. 
 

What do you mean by paying both ways?

A good example is craft brewing in B.C., which employs about 4,000 people across the province. Those companies use aluminum cans, and because Canadian companies are mostly raw material extractors and processors, the aluminum would be smelted in Canada, then shipped down to the U.S. and turned into cans. Then the cans are reimported into Canada to be used by brewing companies. So they could get hit with a 25 per cent tariff both ways if Canada retaliates — and that’s just craft brewing. If you look at the automotive supply chain, parts and components can cross the border seven or eight times. So the integrated supply chains we have will totally fall apart.
 

What will this mean for Canadian businesses?

If we look at steel and aluminum, the tariffs are likely coming in mid-March. Those companies will lose contracts, and then they’ll have to ramp down production and lay off workers — and something like 70 per cent of aluminum is exported from Canada into the United States. So in the short term, it will mean absorbing those costs and passing them on to the consumer. If the tariffs become embedded, companies will start looking for alternative markets. 
 

What are some of the broader ripple effects?

If you tax steel and aluminum, it will have a major impact on the construction sector in Canada and the U.S. — so the costs of building houses and the costs of housing in general will increase. And then you have a knock-on effect in the automotive industry, and their costs will also increase, which will be passed along to consumers very quickly. And then construction equipment and other types of heavy machinery will be hit. So the ripple effects start with steel and aluminum, but then they go all the way across the value chain.
 

This isn’t the first time Trump has implemented tariffs on Canadian aluminum and steel. 

That’s right. In 2018 he made tariff announcements, and steel exports into the U.S. fell by 38 per cent. By May of 2019, steel exports were at their lowest point that they had been in 10 years. Aluminum exports were on average 19 per cent lower per month in 2018, and they fell by over 50 per cent overall. 
 

Did American manufacturers benefit?

There’s a study out of Princeton, and the researchers found that about 1,000 jobs in the U.S. were gained, but the sectors that use steel and aluminum — like construction and automotive — didn't hire additional workers because they had to absorb those costs. The researchers estimated that about 75,000 people weren’t hired as a result of the tariffs.
 

With the impending steel and aluminum tariffs, will Canadian companies be forced to shoulder some of the costs?

A lot of Canadian businesses will have to either absorb some of the tariff costs — so if the tariff is 20 per cent you might absorb 10 per cent and pass on 10 per cent to the American importer — or lose contracts. It’s a catch-22 because they have very slim profit margins, between one and five per cent in some sectors, so if they have to absorb 10 per cent that means layoffs and reductions in production. So they're really up against the wall in terms of taking on these costs or losing contracts.
 

What happens if more broad-based tariffs come in?

Then you have even more extreme price increases. For consumers, one of the big ones would be fruits and vegetables, because the United States supplies something like 67 per cent of our vegetables and 36 per cent of our fruit. So it's a significant amount, and those prices would immediately go up if retaliatory tariffs were put in place. 
 

Some say these tariff threats might just be bluster, or negotiating chips. But are they having an impact even before they’re actually brought into force?

Businesses hate uncertainty, so many businesses are saying “We're not going to wait for these tariffs to come in. We're going to use worst-case scenario planning.” If their U.S. imports or exports might go up 25 per cent, they might stop hiring people, or taking on new production capacity, or starting a new product line. And that stalls growth because you get this wait-and-see approach, where companies want to see what happens before they make financial investments and risk losing their shirts. Then the economy flattens or you get negative GDP growth.
 

How are Canadians responding?

I think a lot of Canadians feel we've been betrayed somehow, that we’ve been let down, because we always looked to the United States as our ally, as our partner, as our protector. Now we're being told we're going to become the 51st state, and we'll have to pay to do business with the United States. So a lot of Canadians are asking, “What happened? Why are you breaking up with us?”
 

The tariff threats have triggered a whole “Buy Canadian” movement. What do you think of that trend?

People are definitely talking about it. I’ve heard people say, “I don't want to go to the States now. I'm going to travel somewhere else like Mexico or South America, or in Canada.” And people are looking at other “Buy Canadian” options. I think it’s useful, and it will help small- and medium-sized businesses, but I don't think it will solve the problem because we are a small market. But the big winners will be the mom-and-pop shops that are making artisanal products, or who are sourcing locally and selling locally. 
 

What else can consumers do to buffer themselves?

Consumer’s need an awareness of what I call the “Canadian Supply Chain,” meaning that if you plan to buy Canadian it is important to know that “Assembled in Canada” or “Packaged in Canada” does not necessarily mean the resources used to make the product are from Canada or that the manufacturing actually occurred in Canada. Consumers should look out for labels such as “Made in Canada,” which means the majority of the product and its inputs originated in Canada. What consumers should be asking retailers is “does your product have a Canadian Supply Chain?,” and this will mean that the raw materials, manufacturing, packaging and distribution are happening here in Canada. 
 

What can businesses do?

There are five key strategies. First is the diversification of the upstream supply chain and downstream markets — and by that I mean looking for alternative suppliers outside the United States, and also alternative markets outside the United States to sell your products into. The Canadian economy also has limited resources and can't afford protectionist measures: it can't put billions of dollars into reshoring semiconductors, for instance, or protecting its key markets like the United States is doing. So Canadian companies have to diversify their suppliers as well as the markets.

Another strategy is coordinated work between policy makers, business leaders, trade associations and academics on supply chain resilience initiatives — and that means mapping the supply chains of our critical and strategic industries as well as understanding where all of our suppliers are, where we are getting our products from and whom are we selling to. Then you can begin to look at how you diversify your supply chain. 
 

Right, so collaboration among experts is key. What are the next strategies you recommend?

Strategy three is the reduction or removal of interprovincial trade barriers. There's a lot of enthusiasm for this — finally — and it's coming from the federal government. There’s a real push to align or get rid of these barriers, especially around things like trucking — where you have different restrictions on vehicle types and sizes which push up transportation costs — and limits on alcohol sales. You also have other regulatory trade barriers in terms of health and safety measures, and qualified individuals such as doctors moving between provinces. These are, in my opinion, unnecessary — and if we really want the Buy Canadian movement to work, you have to take those barriers away. 
 

So more flow east-to-west in place of north-south. What are the next strategies?

Strategy four is moving up the value chain. This is especially important for Canadian industries that are very resource-heavy like raw material extraction and processing. How do we move to turning steel and aluminum into usable products for construction, for craft brewing, for automotive parts and forestry? We need to get them to move up the value chain and actually start producing goods for sale to other markets like Europe, China and India, because the transportation costs are lower and they can be absorbed within the profit margins of the higher value goods.
 

That sounds complex. How long would that take?

It’s a significant upfront cost because you have to develop the production facilities to do that, so I would say anywhere between two to four years. But I don't think Canadian businesses have a choice anymore. We're at a point where we have to be realistic. We could just wait for four years for Donald Trump to get out of power, but the reality is the Biden administration kept a lot of tariffs in place too. We have to realize this is the state of things: the U.S. is becoming very protectionist, and Canadian businesses have to move up the value chain to become more competitive globally.
 

That has been talked about for decades; maybe we’ll finally see it happen. What is your last strategy?

The fifth strategy is regionalization and vertical integration of global supply chains. COVID totally destabilized how goods are moved around the world, and companies went from making everything in big production facilities in places like China or Vietnam — which then got shut down — to more regionalized supply chains. So you might have one facility in Canada that ships into the U.S. and Mexico, one in Europe for the European market, one in India for the Indian market, and so on. That way when you have a tariff, or when you get a big geopolitical disruption such as COVID or conflict, you're able to move production volumes between those facilities, be more reactive to demand, and avoid those extra costs from tariffs or the risks of shutdown.
 

Wouldn’t building out all of those extra centres be expensive?

It’s very expensive, but what’s changed since COVID is that supply chains have become a competitive weapon and a way of managing risk. So if we can be closer to our major markets, and if we can be more flexible in terms of how we move production volumes around, then we can win business and market share. So instead of looking at how much it’s going to cost, companies are asking, “How much profit can we gain by being more responsible to demand and more able to mitigate risks?” 

Companies are also looking at more vertical integration — so owning more stages of the supply chain rather than outsourcing everything to third-party companies in India and China. Tesla is a really good example of this, because they’re actually buying lithium mines and making their own batteries and components in their own facilities. That’s been another big change in industry, where companies are bringing more aspects of the supply chain back in-house. 
 

What should Canadian governments be doing?

An interesting case study is what China has done. China has faced steel and aluminum tariffs from the United States since 2018, as well as tariffs on other types of products — and what the Chinese government has done is actively diversified. They've been very active in promoting Chinese businesses to other markets, and they’ve started moving steel and aluminum to places like South Korea and India and Singapore. Chinese companies have also been setting up shell companies in Mexico and then shipping products from Mexico. So the Canadian government needs to support Canadian businesses in looking for external markets, in international trade agreements, and in partnerships with the EU, the UK, South America and Southeast Asian countries, and then actively promoting those businesses to increase trade. The European Union is the second largest consumer market after the United States, so that is a very attractive market, and a lot of products that are similar to those sold in Canada are also consumed in Europe. So that’s definitely one opportunity. 
 

Any final thoughts for businesses and consumers?

It would be nice to say “just hold on to your seats and hope for it all to end.” But the reality is we need a much better-coordinated approach between policy makers, business leaders, trade associations and academics in terms of coming up with a clear strategy for building supply chain resilience. And until that happens, it's going to be a bit piecemeal. Companies are going to be running around trying to figure this out, but they can't diversify or rechange their supply chains unless they have the support of policymakers — and that involves sitting down and working together to really figure out how to do this.