FAQs: What Canadian exporters need to know about the impact of potential U.S. tariffs

As the global trade landscape evolves, Canadian exporters face new challenges, including the potential implementation of U.S. tariffs. At Export Development Canada (EDC), we understand the concerns of Canadian businesses and are committed to providing the support and information needed to navigate these uncertainties.

Understanding potential U.S. tariffs and their impact on Canadian exporters

With a new U.S. administration threatening to impose a 25% tariff on all products entering the United States from Canada and Mexico, the repercussions will be felt on all sides. These new tariffs would disrupt trade flows, increase costs and impact the competitiveness of Canadian goods in the U.S. market. If implemented, the Canadian government has stated it will defend its interests and take actions that prioritize the well-being of Canadians and the Canadian economy. 

Why this matters to Canadian exporters

It’s not just businesses that trade directly with the U.S. that could be affected. Companies that supply exporters, as well as those involved in complex supply chains, may also feel the impact. Proposed tariffs could also influence the import of goods from China or Mexico that transit through the U.S., adding another layer of complexity.

To help Canadian exporters better understand these issues and their potential impacts on the Canadian economy, we’ve compiled a list of our customers’ and prospects’ most frequently asked questions. This article aims to provide clarity and guidance for companies to help them stay informed.

1. What are tariffs?

Tariffs are taxes that governments impose on goods coming from another country. Similar to a sales tax, tariffs are paid on imported items and can affect both the cost of goods you import and the price competitiveness of your exports. Unlike import duties determined by the U.S. Harmonized Tariff Schedule (HTS), tariffs aren’t based on specific product factors, like country of origin, product purpose, weight or value. They’re often used to protect domestic industries from foreign competition.

2. As a Canadian exporter, what do I need to know about potential U.S. tariffs?

The new U.S. administration has threatened a 25% tariff on all products entering the U.S. from Canada and Mexico. While he stopped short of imposing new tariffs on his first day in office, the Canadian government is preparing for all scenarios and has stated that it’s ready to defend Canada’s economic interests if required. Tariffs could impact not only businesses trading directly with the United States, but also those supplying companies that export to the U.S. and affect imports from China or Mexico that transit through the U.S., but are destined for other markets. This could lead to increased costs and logistical challenges for Canadian businesses relying on these transiting goods.

In the past, Canada has faced similar challenges and managed them successfully. In the last Trump administration, Canada resolved the U.S. Section 232 tariffs on steel and aluminum, which ranged from 10% to 25%. Currently, there are tariffs on Canadian softwood lumber, which were implemented in 2018. It’s important to note that under the Canada-United States-Mexico Agreement (CUSMA), certain tariffs were eliminated, providing some relief to Canadian exporters. 

For more information, the Government of Canada has online resources, including International Trade and Investment and the Canada Border Services Agency drawback program. Additionally, the U.S. Customs and Border Protection’s importing and exporting site provides relevant information for exporters. 

3. Why do governments use tariffs?

• Revenue generation: Tariffs provide income for the government.
• Protection of domestic industries: Tariffs make imported goods more expensive, helping local businesses compete.
• Diplomatic tools: Tariffs can be used to influence non-economic matters such as human rights or treaty violations.

4. How might tariffs impact my business?

• Increased costs: Tariffs can increase the cost of goods you import, affecting your production costs, pricing and profit margins.
• Reduced competitiveness: For exporters, tariffs can make your products more expensive in foreign markets, reducing your competitiveness.
   

5. How do I know if I’ll have to pay tariffs?

Canadian exporters can use tools, like the Canada Tariff Finder and the Canadian Chamber of Commerce Business Data Lab’s Canada-U.S. Trade Tracker, to get information on tariffs for specific products and countries. Understanding the rules of origin and the Harmonized System (HS) classification is also crucial in determining if tariffs apply to your goods. Typically, the importer of record pays the tariff. But the increased cost could be borne by either the supplier or the buyer, depending on the contractual provisions.

6. How is this situation causing uncertainty in Canada-U.S. trade?

In 2023, trade between Canada and the U.S. exceeded $1.3 trillion, with $3.5 billion worth of goods and services crossing the Canada-U.S. border every day. Since 2015, bilateral trade has increased by more than $400 billion, thanks to mutual efforts to deepen this relationship. 

The potential imposition of tariffs is creating significant uncertainty for companies on both sides of the border. Businesses are unsure about future costs and market conditions, which complicates planning and investment decisions. This uncertainty can disrupt supply chains, affect pricing strategies and lead to a cautious approach to cross-border trade activities.

7. What’s the Government of Canada doing to prepare for potential tariffs?

Prime Minister Justin Trudeau launched the Council on Canada-U.S. Relations to bring together leaders in business, policy and innovation. Canada remains committed to high-level engagement through Team Canada, ensuring co-ordinated efforts with provincial and territorial governments, businesses and partners. Canada will steadfastly defend its interests and take actions that prioritize the well-being of Canadians and our economy. The government has emphasized it will support industries and regions most affected by the tariffs, ensuring a united response.

8. What sectors are most likely to be affected by potential tariffs?

The tariffs could impact several sectors and lead to increased prices for Canadian and American consumers. According to EDC Economics, it could also lead to a disruption in Canada’s economy and affect trade volumes, the value of the Canadian dollar and total Canadian employment. It could also impact our highly integrated supply chains that exist between Canada, Mexico and the United States. The following sectors could be impacted:

• Automotive: The automotive sector is highly integrated with the U.S. market, relying on cross-border supply chains for parts and components. Tariffs would increase production costs and disrupt the flow of goods, impacting both manufacturers and consumers.
• Construction: The construction industry depends on a steady supply of materials and equipment from Canada. Tariffs could raise the cost of these imports, leading to higher project costs and potential delays.
• Manufacturing: Manufacturing sectors, including machinery, electronics, and consumer goods, are deeply connected to the U.S. market. Tariffs could increase the cost of raw materials and components, affecting production efficiency and pricing.
• Critical minerals: The critical minerals sector is vital to produce clean energy technologies and various high-tech applications. Tariffs on these minerals could disrupt supply chains and increase costs for industries reliant on these materials. Canada, with its rich deposits of cobalt, lithium, nickel, uranium and rare earth elements, plays a crucial role in the global supply of critical minerals. Tariffs could impact the competitiveness of Canadian exports and potentially lead to supply shortages in the U.S. market.
• Agriculture and agri-food: Canada’s agri-food sector, including grains, meat, dairy products, potash and fertilizer, is highly integrated with the U.S. market. Tariffs could raise the cost of these goods, affecting both Canadian producers and American consumers. The increased costs could lead to higher prices for food products and disrupt the supply chain, impacting the profitability of Canadian farmers and exporters.

9. Do I need to perform any registrations with a foreign government if a tariff is implemented?

This depends on the specific regulations of the foreign government. It’s advisable to consult with legal and trade experts to ensure compliance with any new requirements.

10. Can an exporter circumvent tariffs?

Circumventing tariffs through illegal means can lead to severe penalties. Exploring legal avenues such as renegotiating contracts or shifting supply chains might help mitigate the impact. Augmenting your existing production in the United States or other markets may also prove helpful. Canada has 15 free trade agreements (FTAs) with 51 countries, which reduce or eliminate tariffs, providing Canadian companies with preferential access to global markets. These agreements, including the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), can help simplify operations abroad and offer better predictability and protection in international markets, including the Indo-Pacific. Leveraging FTAs with countries in Europe, the Indo-Pacific, or elsewhere in the Americas can provide meaningful new opportunities for growth and diversification.

Despite these benefits, FTAs don’t eliminate all tariffs on all goods. Even with preferential market access, your products or services may be subject to duties. Another strategic tool worth exploring to give your company a competitive edge is through mergers and acquisitions—by buying another company or combining operations.
 

11. What are the rules of origin?

Rules of origin are the criteria used to determine the national source of a product. They’re important for applying tariffs, quotas and trade statistics. Rules of origin are negotiated as part of every free trade agreement (FTA). When no FTAs are in place, the World Trade Organization’s (WTO) rules apply.  Create a free MyEDC account to read more about rules of origin or ask a question of your own.    

12. What happens to my outstanding contracts if the U.S. imposes a 25% tariff?

If prices were already negotiated in an active contract, it might be difficult for the exporter to pass on the increased costs without renegotiation. According to the International Chamber of Commerce (ICC), under the delivered duty paid (DDP) terms, the price must include all costs such as transportation, brokerage, duties, taxes and tariffs, which affect the landed cost. For goods repudiated at the border due to the buyer refusing to arrange tariff payment, please reach out to EDC. Please refer to our article on Incoterms for additional information. 

13. How can I protect my business from potential U.S. tariffs?

Companies should explore tariff mitigation strategies and stay informed about trade policy changes. EDC offers various financial and knowledge solutions to help manage risks and support your business. In addition to identifying and capitalizing on opportunities in the U.S., companies can also work with EDC to explore other suitable markets.