President Trump's threat to impose 25 % tariffs on imports from Canada has put Canadian businesses on high alert. Canadians are not alone in their concern, as these recent trade-related announcements have caused significant uncertainty and economic anxiety for businesses in the United States and worldwide. Among them are plans to impose 25% tariffs on imports from Mexico, 60% on imports from China, and a 10-20% universal tariff on all imports. It is clear that if these threats were carried out, they would have a significant negative impact on the Canadian economy, resulting in inflation, a contraction of GDP, and massive job loss. In response, the Canadian government is preparing a set of retaliatory measures. While these are essential bargaining tools, they will generate further negative impacts that risk exacerbating the challenging economic environment for business and investment in Canada.
What tariffs on Canadian imports are expected, and when will they come into effect?
Initially, President Trump announced plans to impose 25% tariffs on all imports from Canada and Mexico by way of executive order on his first day in office. Instead, he directed federal agencies to launch an investigation into trade deficits and unfair trade practices involving other countries, and to issue recommendations, which could include imposing tariffs. The reports are due by April 1, 2025. Any sense of relief following this announcement was short-lived, as President Trump, in a recent news conference, later reiterated his intention to impose the 25% tariffs as soon as February 1, 2025.
It remains uncertain whether President Trump will follow through on his threats. The power to impose tariffs lies firstly with Congress, though this power has been delegated to the executive branch through specific legislation. Most legislation providing the authority for imposing tariffs have several procedural requirements in place, which could make it difficult for President Trump to implement tariffs quickly. To impose 25% tariffs on all imports from Canada and Mexico by February 1, 2025, President Trump would likely need to rely on the International Emergency Economic Powers Act (IEEPA) of 1977. This would require declaring a national emergency, which would be unprecedented for enacting tariffs. In 2019, President Trump announced that he would impose up to 25% tariffs on imports from Mexico based on this legal authority, but an agreement was reached with Mexico prior to any such tariffs taking effect. It therefore remains unclear whether a President has the authority to impose tariffs under this Act, and any attempt to do so would likely be subject to legal challenge.
Many observers have downplayed the President's threats as bargaining tools, stating that a blanket 25% tariff is not realistic. Their view is that tariffs targeting specific goods are more likely. It is worth recalling what happened during the President's last term. In 2018, President Trump imposed tariffs of 25% on steel imports and of 10% on aluminum imports. These tariffs were implemented under Section 232 of the Trade Expansion Act of 1962, and were preceded by several months of investigations into national security implications. The tariffs, insofar as Canada and Mexico are concerned, were later lifted in connection with the United States-Mexico-Canada Agreement (USMCA), which implemented specific requirements applicable to steel and aluminum.
What should Canadian businesses do in response to the threat of tariffs?
Although the timing and scope of the threatened tariffs remains uncertain, Canadian businesses should prepare by conducting a detailed review of their supply chain to identify potential risks. They should also monitor developments closely to assess any impacts of any new tariffs.
Existing contracts for the supply of goods should be carefully reviewed to identify any potential financial exposure. By way of example, clauses regarding import taxes or duties should be reviewed to ascertain whether the delivery price includes any additional tariffs that may be imposed. Change of law clauses may also allow for price adjustments or provide for extraordinary termination rights.
In the medium to long term, Canadian businesses should also plan for a more uncertain world trade environment, which may require more scale and agility. Planning for these challenges may also present opportunities for Canadian exporters:
- Establishing production centers in the United States: Duties and taxes could be minimized through a carefully planned cross-border legal and operating structure.
- Pursuing partnerships or acquisitions with other Canadian exporters, which could provide added scale and economic strength.
- Diversifying export markets to reduce reliance on the United States or any particular market.
The federal and several provincial governments have recently announced that stimulus packages may be available to help mitigate short term losses caused by any tariffs. Exporters should explore whether and how they may benefit from these stimulus packages.
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