Preparing For Tariffs: A Short Guide For Canadian Companies

Donald Trump's threat to impose a 25 per cent tariff on all Canadian goods imported into the United States, citing border security concerns, has sparked widespread concern from Canadians, federal and provincial governments, and economists alike about the implications of this measure for integrated supply chains, Canada's economy and Canadian businesses.

While Canadian governments are taking action to prevent the threatened tariffs from being imposed, from engaging in diplomacy, to implementing strengthened border security measures, there is nonetheless a very real chance that the tariffs are more than a simple threat. If imposed, Canadian officials have indicated that responding measures are likely to include retaliatory tariffs imposed by Canada on goods imported from the United States.

Canada has also demonstrated an increased willingness to utilize tariffs to defend its economic interests in other areas. Canada recently imposed tariffs on certain Chinese goods, including a 100 per cent tariff on all Chinese electric vehicles and a 25 per cent tariff on imports of Chinese steel and aluminum products, and further measures are likely.

In this short guide, we outline six key strategies and proactive steps Canadian companies can take to prepare for these tariffs to mitigate potential impacts, ensure business continuity and minimize financial strain.

1. Assess risks under contracts with vendors and customers

Proactive review of your tariff-related rights and obligations under existing agreements will help with understanding the likely impacts of the tariffs on your organization, and help you prepare to defend your interests in response to requests from vendors and customers regarding tariff responsibilities and potential cost-sharing mechanisms.

Responsibility for tariffs: Examine existing contracts with vendors and customers to determine who bears responsibility for payment of tariffs on the relevant goods. This will help your organization understand the potential financial liabilities associated with the increased tariffs.
Renegotiation of contracts:Do your agreements permit amendments that might allow your organization or a counterparty to seek to renegotiate the agreement to share or shift the tariff burden? If so, is your organization ready to respond to exercise these rights, or respond to requests from counterparties? Consider proactively preparing your negotiating position.

2. Review highest risk supply chains

Based on Canada and US policy priorities, certain regions and goods bear a greater risk of further or increased tariffs (i.e., Chinese-origin goods). Can tariffs be avoided or reduced by importing high-risk inputs, or goods currently sourced from high-risk regions, from alternative sources? Diversifying your supply chain for these inputs can reduce dependency on regions most heavily impacted by tariffs.

3. Inventory and supply chain management

By managing inventory and restructuring supply chains strategically in advance of tariffs being imposed, the impact of tariffs can be mitigated.

Alternative sourcing: Explore whether key goods can be sourced from alternative countries not subject to actual or threatened tariffs. If retaliatory tariffs are imposed by Canada against the United States, for example, explore sourcing equivalent inputs from countries other than the United States to avoid increased costs.
Stockpiling: Determine whether finished goods intended for the US market can be exported to and stockpiled in the US in advance of the tariffs being imposed, to mitigate immediate impacts for customers. Prior to Canadian retaliatory tariffs taking effect, consider stockpiling critical inputs from the United States.

4. Review overall trade compliance

For a given import, the application of the tariffs, and the amount payable in duties as a result, depends on the origin and value of the imported goods, which must be declared at the time of import. When higher tariffs are imposed, it is more critical than ever to ensure origin and valuation are declared accurately, to avoid overpayment of duties and minimize the tariffs' financial impact for your organization. A general review of your organization's trade compliance may help identify areas where overpayment may be occurring, and help your organization avoid incurring further costs as a result of penalties for non-compliance.

Origin of goods: Verify the actual origin of imported and exported products to ensure compliance with applicable trade regulations.
Valuation strategies: Explore strategies to minimize tariffs through accurate valuation. Consider whether valuation can be compliantly reduced through an intervening, intercompany sale at a lower value for duty.

5. Advocacy efforts

As the United States and Canadian governments consider the imposition of tariffs, there will be opportunities for advocacy by potentially impacted organizations on both sides of the border, to proactively have their voices heard and influence policy decisions.

Canadian retaliation targets: Canadian federal and provincial governments are currently considering retaliatory measures against United States tariffs. Through lobbying Canadian governments, Canadian companies can advocate for less costly and more strategic retaliation targets, including by providing details on the practical implications of the proposed retaliatory measures for Canadian businesses.
Industry and cross-border collaboration: Collaboration with other organizations may provide further opportunities to influence policy. Opportunities include engaging with industry associations to present a unified stance, and working with United States customers to encourage them to advocate against the tariffs with their own government. Providing United States customers with data and arguments they can leverage to strengthen their case may increase the impact of those efforts, and potentially help influence policy decisions across the border.

6. Prepare to pursue exclusions and exemptions

While blanket tariffs have been threatened, governments are capable of authorizing exclusions and exemptions from the measures. Such exclusions and exemptions are more common for goods of a critical nature, where supply chain disruptions are likely to have detrimental effects. A review of past tariff exclusions may assist organizations with preparing a strategy for seeking exclusions and exemptions from the currently threatened tariffs, and assist with proactively preparing evidence and arguments to support their case, such as evidence supporting the unique or critical nature of the organization's goods.

Conclusion

By taking these proactive steps, Canadian companies can better navigate the challenges posed by threatened United States tariffs on Canadian goods, retaliatory Canadian tariffs and other tariff measures. For more details on any of these steps, or for assistance in determining how to implement them within your organization, please contact one of the authors. The Gowling WLG International Trade and Customs team is closely monitoring these developments and is ready to assist clients in navigating these changes.

Explore our latest insights on tariffs and US-Canada trade relations:

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.