By Michael Zobin
The overwhelming majority of Canadians with business interests in the U.S. woke up on Nov. 6th with a degree of trepidation in the air. Their neighbors to the south had made their voices and concerns heard and returned Donald Trump and his brand of strong-man economics back to the White House.
For those whose livelihoods are directly tied to the free flow of goods across the Can-Am border, the prospect of a second Trump administration is understandable cause for concern. Many remember the 25% tariffs the president-elect imposed on Canadian aluminum and steel on the grounds of national security, and the lengthy period of uncertainty around the fate of free trade between Canada and the U.S. with the negotiation of the North American Free Trade Agreement (now the United States Mexico Canada Agreement or USMCA).
So, what can Canadians and, more specifically, Canadian businesses engaged in trade with the U.S. expect from a second Trump term? And what, if anything, can they do to mitigate the impact?
More tariffs
The Trump administration is widely anticipated to impose universal tariffs of between 10% and 20% on all imports. The tariffs are designed to reduce the U.S. deficit and subsidize future tax cuts, and there’s no indication at this point that Canada would be exempt. For Canadian businesses with U.S. customers – be they B2B or B2C – that means an immediate drop in competitiveness coupled with a broader hit to overall economic performance.
TD Economics estimates a 10% tariff would lead to a 5% reduction in export activity to the U.S. by 2027. Assuming Canada retaliates with tariffs in kind (as it did during the steel and aluminum trade conflict in 2017), TD estimates import volumes from the U.S. would also decline and drive up costs for Canadian business who rely on those imports. Those costs would almost certainly lead to price increases for consumers who are still reeling from a period of high inflation.
While a recession is an unlikely outcome, there is little question there will be economic fallout given that more than 75% of Canada’s exports are tied to the U.S. with the automotive, chemicals, energy, manufacturing and forestry sectors particularly exposed.
But what about that free trade deal?
There are hopes that the fine print of the USMCA would prohibit the implementation of universal tariffs on Canadian exports to the U.S.; that Washington wouldn’t risk ruffling feathers with its two largest (and closest) trade partners by starting a trade war with them.
One of the considerations Canada has working against it is that the first Trump administration tended to target tariffs at countries with which it carried an outsized bilateral trade deficit. Overall trade between the two countries has surged 46% since the USMCA took effect in 2020. However, along with that, the U.S. trade deficit with Canada has also ballooned, from $13.8 billion in 2020 to $64.2 billion in 2023. Much of that increase can be attributed to the tariffs Washington levied against goods coming in from China, which prompted some U.S. companies to nearshore production closer to home, in Canada and Mexico.
But it’s anyone’s guess as to whether such fine details will make an impression on trade policymakers in Washington come 2025. The more likely scenario is that the Trump administration will use the deficit and any practices it deems to be unfair to U.S. interests (e.g., Canada’s supply-managed dairy sector) as bargaining chips when the USMCA comes up for review in 2026.
The X factor in those negotiations will be whether or not Canada will have a new government by that point. With an election mandated for no later than October 2025 and polls showing voters favoring the Conservative party to replace the incumbent Liberals (with whom the Trump administration has pre-existing discord), the USMCA review may play out differently.
Buy (more) American?
One of the key tenets of Trump’s trade policy in his first term was a preference toward U.S.-made goods and services, particularly in the context of federally financed projects. This left many Canadian companies at a disadvantage (although there were instances where they were able to overcome the regulations). The Biden administration maintained these policies, prompting Canada’s federal government to provide outsized subsidies to companies looking to set up shop in Canada versus the U.S. This is particularly true in the green sector where the government has provided subsidies to support electric vehicle manufacturing. Canada’s Parliamentary Budget Office (PBO) estimates total federal government support to be as much as $34.1 billion and provincial government support $21.1 billion.
While a Trump 2.0 administration is anticipated to scrap the Biden administration’s Inflation Reduction Act (IRA) in which Buy America clauses are embedded, there’s good reason to believe the new administration will create its own comparable clauses to achieve the same goals. As such, there may be more Canadian federal subsidy for foreign businesses looking to invest in Canada, but much of that will depend on which party is in power in Ottawa come October 2025.
Diversification (that old chestnut)
Those with good memories will recall that during those nail-biting days of NAFTA renegotiation, Canada’s federal government was touting the virtues of trade diversification. “Let’s not put all our eggs in the American basket” was the message from Ottawa. Canadian businesses need to wean themselves off of their dependency on their southern neighbor, said policymakers. And then set off to make trade easier by signing onto the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) that included 10 other Pacific-rim countries (with the United Kingdom’s accession being ratified by six members and the balance, including Canada, projected to ratify before the end of 2025). The Comprehensive Economic and Trade Agreement (CETA) with the European Union was promoted as a reliable alternative to U.S. trade. And rumblings of a free-trade-like relationship with countries in Southeast Asia were promoted as a future pathway to economic liberation from the U.S.
Once NAFTA had been renegotiated into the USMCA and the governments of all three countries were able to sell it to their constituencies as the next best thing, the focus on diversification quickly waned. With the threat of universal tariffs, reciprocal tariffs and another USMCA review on the horizon, look out for a refreshed marketing effort on trade diversification.
What should Canadian importers and exporters be considering?
Keep a close eye: Most commercial decision makers know tariffs are a possibility, the key will be watching how they are applied – universally or surgically. The president-elect is known for using tariffs as a bargaining tool to gain concessions. The outcome is often less dire than originally anticipated.
Don’t panic: The implementation of tariffs – particularly if they’re universally applied – does not necessarily mean a loss of business. In many cases, U.S. buyers have become conditioned to tariffs. Consider that imports from China – the vast majority of which are tariffed at 25% — continue to flow steadily into the U.S. with $426 billion in goods brought in during 2024.
Create supply chain redundancies: Redundancy may not sound very efficient, but smart supply chains have multiple suppliers for the same product or component so that businesses can scale production as needed and pivot should one supplier be unavailable to scale as necessary. If you rely solely on a U.S. supplier, look for a comparable one elsewhere so you have a Plan B.
Consider tariff engineering: Where tariffs are not universally applied, there may opportunities for you to lower your duty outlay by importing products in a different state so that they are classified differently under customs rules.
Look farther afield: There is something to the government’s diversification message. It may be easy to sell to or buy from the U.S. because of its close proximity, but advancement in trade policy and transportation can make trade with countries around the world far simpler than in the past. Don’t rule out those growing middle classes in China, India and elsewhere.
Michael Zobin is a Canada-based director of global trade consulting at Livingston International. He works with clients to help them minimize risk and implement new processes for achieving higher levels of Customs and supply chain compliance. His expertise includes supply-chain optimization; alignment with Free Trade Agreement regulatory requirements; duty deferral and drawbacks; and Customs valuation.