U.S. Tariffs: Challenges, Opportunities, and Business Insights

April 10, 2024

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By Atul Oka, Senior Director of Strategy and Business Development, DUKE Heights BIA

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Looking Ahead

In our last few newsletter articles, we looked back at the possible impetus and impact of U.S. tariffs on Canadian exports, as well as some of the strategies and supports available to businesses to help mitigate some of the fallout.

While the tariff situation remains fluid, and has both broadened and deepened internationally, there are some clues to what we can expect from a macroeconomic point of view. This article will therefore attempt to provide a glimpse into what the short to medium term may look like.

What we know

1. The steel, aluminium and auto sectors will be negatively impacted. This may result in the implementation cost rationalisation strategies including, limiting capital expenditure and reducing headcount. Both upstream and downstream activities will also expect to be impacted and take similar action. Due to various global factors, the Canadian steel industry will face greater challenges and find it harder to weather long lasting tariffs.
2. The pace of investment by SMEs, according to Business Development Canada (BDC), shows signs of deceleration. The hesitancy of businesses to invest reflects the uncertainty faced by Canadian business leaders and will have a direct impact on overall GDP growth.
3. The Conference Board of Canada’s Index of consumer confidence fell 32% from January to March this year. Debit and Credit card data from major Canadian Banks indicate a slowdown in consumer spending.
4. S. tariffs on almost all international trading partners will have a measurable impact on global trade and economic activity.
5. A non-trivial number of countries have/ are planning to implement counter tariffs further affecting global trade.

What we can reasonably presume

1. The escalation of U.S. tariffs on China and China’s retaliatory actions against the U.S. will result in a significant impact on both economies. While some indications have been made that the tariffs are flexible and the U.S. administration is open to negotiation, should these actions remain in place:
   • The inflation rate in the U.S. will move higher while growth is expected to slow. Odds of a recession and potential stagflation have substantially increased.
   • Though the U.S. remains the worlds main consumer market, global trade relationships have already started to change. New trade blocks and relationships could develop to counter/mitigate the loss of trade to the U.S.
   • China may take a variety of steps to insulate and prop up economic activity including greater subsidies, quantitative easing, rate cuts and possibly redirecting (dumping) products into other large economies. This may result in a flood of Chinese goods into Europe and Canada, as well as potential anti dumping duties by these nations against China.
   • S. unemployment may rise, and consumer spending fall. In addition, the U.S. federal reserve has taken a data driven approach, and both rate cuts and/or quantitative easing could be delayed, resulting in a possible lag in supporting action for the U.S. consumer.
   • Supply chain disruptions, delays and rerouting will further push up inflation and could result in some shortages.
2. The U.S. is a major revenue driver for many Canadian businesses however according to a survey by the Toronto Board of Trade, many businesses are concerned but remain cautiously optimistic about adapting.
3. The same survey indicates that most businesses do not plan immediate employee cuts, however broad, long-lasting tariffs will result in substantial job losses.

What we can expect

1. Most Canadian firms can withstand the impact of tariffs if they are short term and not permanent. The U.S. administration seems willing to negotiate, and a potential deal could be struck. While some tariffs may remain, these actions by the U.S. administration have tended to be utilised as a negotiating tactic.
2. Volatility and uncertainty remain high. Business will delay any long-lasting decisions if possible until clarity can be achieved.
3. The Bank of Canada has some capacity to soften the impact of economic shock by continuing rate cuts but while tolerant to some degree on transitory inflation, will keep a keen eye on the longer-term inflation outlook.
4. More federal support can be expected post elections irrespective of outcome, should such support be necessary as all parties are aligned in supporting Canadian businesses and citizens during economic shocks.

In summary, the recent actions of the U.S. administration on tariffs have the potential to inflict a level of self harm to the U.S. economy. The appetite to absorb pain by U.S. politicians and/or citizens may be limited, especially if tariffs remain as broad and deep as currently announced. It is conceivable therefore that a negotiated solution could be achieved in the near term.

Whatever the outcome of negotiations, Canadian businesses have learnt a costly but valuable lesson in our dependence on the U.S. market.