Trump’s New Tariffs: Impact On Canada-USA Trade and Freight 

How Will Trump’s Proposed Tariffs Affect Cross-Border Trade Between Canada and the USA?

The recent announcement by President-elect Donald Trump to impose a 25% tariff on all imports from Canada and Mexico has raised significant concerns among Canadian business leaders and policymakers. If implemented, this policy, aimed at curbing illegal immigration and drug trafficking, will have profound implications for Canada-U.S. trade, particularly affecting exports and the freight industry.

Impact on Canada-U.S. Exports

The United States is Canada’s largest trading partner, with exports totaling approximately $614.3 billion CAD in 2022. Key Canadian exports to the U.S. include oil, natural gas, vehicles, machinery, and agricultural products. The proposed 25% tariff would make these Canadian goods more expensive in the U.S. market, potentially reducing demand and adversely affecting Canadian exporters.

For instance, the Canadian oil industry, which supplies about 60% of U.S. crude oil imports, could face significant challenges. Natural Resources Minister Jonathan Wilkinson emphasized the interdependence of the U.S. and Canadian energy markets, noting that such tariffs could be counterproductive and lead to increased fuel prices in the U.S.

Effects on the Freight Industry

The freight industry serves as the backbone of Canada-U.S. trade, facilitating the movement of goods across the border. The imposition of tariffs is expected to disrupt this flow in several ways, such as Increased Costs of Canadian goods entering the U.S., which would lead to higher shipping expenses. These additional costs are likely to be passed on to consumers or, in some cases, absorbed by businesses, impacting profitability.

Companies that currently rely on imports might need to look for local alternatives to mitigate the impact of these newly imposed tariffs. This may be a good thing for local economies, although it may pose issues for goods that aren’t easily attainable in the U.S., which could lead to new issues and, likely, delays. Stricter customs regulations and enforcement measures may further emphasize these issues.

What Canadian Businesses Can Do

Canadian businesses, small and large, can adopt strategies to navigate the uncertain trade waters they’re about to find themselves in.

You can engage in comprehensive scenario planning to allow your business to anticipate various outcomes and develop contingency plans. Mike Abbott, Managing Partner for Markets and Industries at BDO Canada, suggests that organizations should test their readiness for different scenarios to increase their odds of a favorable outcome.

You can start exploring alternative markets beyond the U.S. to reduce dependency on a single trade partner and spread risk. Ideally, with our nearshoring directory, you can turn to local distributors and manufacturers to help your business grow more sustainably. 

Advocacy and Diplomacy: Engaging with government officials and industry associations to advocate for favorable trade policies and to stay informed about policy developments is also crucial.

Brexit Case Study

When the UK officially left the European Union in 2020, one of the most immediate impacts was the imposition of tariffs, customs duties, and trade barriers that had previously been nonexistent within the EU’s single market. 

This dramatic shift forced the UK to pay import and export fees on goods traded with EU member countries. Luckily, in 2021 they entered into an agreement that allowed them to have 0% additional fees when importing/exporting goods to or from the EU. With the proposed 25% tariff under President-elect Donald Trump, the United States could face similar economic challenges to that of the UK before the 2021 agreement, especially in terms of trade with Canada and Mexico. Here are some of the parallels.

Impact on Costs and Consumer Prices

Following Brexit, UK businesses and consumers faced increased costs due to the new tariffs and customs procedures. Goods that previously moved freely across borders now faced additional fees, which had to be absorbed by businesses or, more commonly, passed on to consumers. As a result, prices for various goods increased, particularly for imported products from the EU.

The effects of Brexit can still be felt since, despite the EU being the UK’s largest trading partner, the imports and exports of goods are still lower than pre-Brexit levels.

Potential Impact of Trump’s Tariffs on the U.S.:

Similarly, the imposition of a 25% tariff on Canadian and Mexican imports could lead to higher costs for American businesses and consumers. Products that the U.S. regularly imports from Canada, such as cars, lumber, oil, and agricultural goods, could easily become more expensive, potentially leading to increased consumer prices in the U.S. market. Situations such as these often lead consumers to look for alternatives we discussed earlier.

Inflationary Pressures: Just like in the UK, higher import costs could add to inflationary pressures. When tariffs increase the cost of goods, businesses often have little choice but to pass these increases onto consumers. This can reduce overall consumer spending power and impact economic growth.

Disruptions

Brexit’s Impact on Supply Chains

Before Brexit, UK businesses benefited from seamless access to European supply chains. The introduction of tariffs and customs checks disrupted these integrated supply chains, resulting in significant delays. Many UK businesses had to change their sourcing strategies, leading to an increased focus on stockpiling goods to avoid interruptions—a costly and inefficient approach.

Sectors such as the automotive industry were hit particularly hard. Since car parts often move across borders multiple times during production, the introduction of customs duties added both time and cost to the production process, significantly affecting manufacturing efficiency.

Potential U.S. Supply Chain Disruptions Due to Tariffs

The introduction of tariffs on Canadian and Mexican imports could lead to similar disruptions in supply chains that depend on cross-border trade. The North American supply chain is highly integrated, particularly in industries like automotive, agriculture, and manufacturing. For example, a car manufactured in North America may contain parts sourced from both Canada and Mexico, with components crossing borders multiple times before final assembly.

The introduction of tariffs means that these components would become subject to additional fees each time they cross the border, which would ultimately increase production costs and could force manufacturers to rethink their supply chains, delay production timelines, and even consider stockpiling.

One of the consequences the UK has faced is a slow, but very steady decline in the value of the UK Pound. With potential inflation and businesses moving their operations across the border to avoid the tariffs, it is possible that the US Dollar might face similar challenges.

Trade Barriers and Market Reactions

The UK’s Struggle with Market Access

Following Brexit, UK businesses temporarily lost easy access to the EU’s single market. For many sectors, this meant facing new barriers to selling their goods in Europe, leading to a decline in exports and creating challenges for companies that were highly dependent on the EU as their primary trading partner. Exports to the EU declined sharply, and some companies even relocated parts of their operations to EU countries to regain easier market access. Trade has been on an uptick in recent years, but it’s still lower than pre-2020.

Potential Barriers for U.S. Companies

The new tariffs under Trump’s proposed policies could result in Canadian and Mexican retaliatory tariffs. This would make U.S. goods more expensive in Canada and Mexico, potentially reducing their competitiveness in these markets and leading to a decline in U.S. exports.

To avoid tariffs, some U.S. businesses might consider relocating production facilities. For instance, manufacturers that rely heavily on Canadian raw materials or components may move operations to Canada or Mexico to bypass the added costs associated with importing to the U.S. This could ultimately impact U.S. employment and economic growth, similar to the relocation trends seen in the UK post-Brexit, although it is too early to say at this time.

Investment Decisions

Brexit-Induced Uncertainty

The uncertainty around Brexit led to decreased investment and delayed business decisions. Many companies, at the time, were unsure of what regulations, tariffs, and costs they would face, making them hesitant to expand or invest in new projects. The prolonged uncertainty took a toll on business confidence in the UK, affecting sectors ranging from manufacturing to housing, to financial services. 

Potential Impact of Tariff Uncertainty in the U.S.

The uncertainty surrounding Trump’s tariff policies could create a similar effect in the U.S. Businesses that depend on cross-border trade might delay major investments or expansion plans until they have a clearer understanding of how tariffs will impact costs and profitability. This could lead to reduced capital expenditure, slower economic growth, and a potential decline in employment opportunities.

Government Response and Trade Negotiations

The UK’s Negotiation Challenges

After Brexit, the UK faced significant challenges in renegotiating trade agreements, both with the EU and with countries worldwide. Establishing new deals took time, and in the interim, businesses were left to navigate a less-than-favorable business environment. The lack of free trade agreements put UK businesses at a disadvantage in comparison to when they were part of the EU.

Future Negotiations for the U.S.

The tariffs proposed by Trump are likely to lead to renegotiations of existing trade agreements between the U.S., Canada, and Mexico. During renegotiations, the lack of clarity on tariffs and market access could create a challenging environment for both American and Canadian businesses, similar to what was experienced by UK businesses during Brexit.

Conclusion

The proposed tariffs by President-elect Donald Trump present significant challenges to the logistics and freight sectors, which only serves to emphasize the vulnerability of cross-border trade. Both Canadian and U.S. businesses are now in unsteady waters with possible increased costs, supply chain complexities, and regulatory challenges looming in the future.

Improving business sustainability, diversification and profitability will remain critically important. By registering with Freightera shipping marketplace, you can hugely diversify and expand your logistics  solutions and instantly access our extremely competitive shipping rates from 100s of carriers in Canada, USA and cross-border. Stay vigilant and plan ahead. Freightera platform will continue offering you lower-cost shipping without compromising on quality of service. Our prices come with Rate Defense against unfair carrier charges. Our representatives will be happy to help you with optimizing your current shipping processes or expansion into other regions or modes of transportation. 

And again, there will be more opportunities for near-shoring and localization.