Tariffs and supply chains: Expert insights on cross-border disruptions

Canada’s heavy reliance on U.S. demand for its goods is at the heart of the expected disruption to Canadian supply chains caused by U.S. tariffs, says a McMaster expert.

“Canada’s reliance on the U.S. as its most important trading partner has increased in recent years, with the value of exports from Canada to the U.S. increasing from $306 billion in 2018 to $410 billion in 2023,” says Behrouz Bakhtiari, assistant professor of Operations Management at the DeGroote School of Business.

As demand for Canadian goods diminishes, the impact is felt across the entire supply chain on both sides of the border, with some industries seeing significant and potentially long-term hardship.

For others, tariffs could present an opportunity to open new markets and increase resilience in navigating uncertain economic times.

Bakhtiari takes a close look at supply chain issues and the implications of tariffs.

How will these tariffs impact cross-border supply chains?

According to a report published by Scotiabank Economics in January, the U.S. is the destination for approximately 77 per cent of Canadian goods traded. No other single destination amounts to more than 5 per cent of Canada’s export values.

An immediate consequence of U.S. tariffs on Canada is a significant reduction in demand from U.S. buyers for Canadian goods. This lower demand is expected to increase the prices of work-in-progress and raw materials, thereby raising operating costs for all segments of the supply chain.

Even if firms could quickly replace U.S. buyers with new ones, transportation costs are almost certainly going to increase, adding to the cost of finished goods.

For most industries, finding new markets is almost impossible to do in the short term, and very difficult in the long term. Higher costs, along with lower production, can lead to job losses, a lower quality of service, higher transportation costs and lost market share domestically and globally for Canadian firms.

When more tariffs go into effect on April 2, the impact will be felt immediately across the cross-border supply chains.

Depending on the industry, firms on both sides of the border will feel the pain. However, due to the trade imbalance and the disparity in market size, I expect the Canadian businesses to feel the impact significantly more.

While Canada’s counter-tariffs may be a justified political instrument, they will make it even harder for both Canadian and U.S. partners to operate effectively.

Are there specific industries that will be more affected by these tariffs than others? Which ones and why?

Canada should brace for an impact affecting almost all its exports. While it’s difficult to find any businesses north of the border unaffected by U.S. tariffs on Canadian goods, sectors that export a large portion of their production to U.S. customers will be hit particularly hard.

This includes machinery and equipment manufacturing (including automotive and auto parts), metals and minerals and softwood lumber.

Given the relatively lower tariffs on Canadian energy, the impact on this sector is expected to be less severe compared to metals. Nearly all of Canada’s steel and aluminum products are sold in the U.S., with 99 per cent of steel and 90 per cent of aluminum exports going there. Tariffs will disrupt the flow of these materials across the border.

Do you see any long-term impacts here? Is this a disruption of the magnitude COVID was?

The long-term impact of U.S. tariffs on Canadian supply chains largely depends on how long the tariffs remain in place. If demand from U.S. buyers diminishes and the tariffs remain in place for an extended period, many Canadian industries may be able to seek new markets.

Canada’s agricultural products such as wheat and canola have strong global demand and can find new buyers. Even an industry like softwood lumber could find new markets in places like China, where robust construction activity generates demand for the product.

For these industries, the longer the tariffs are in place, the more time they have to reshape their global supply chain and adapt to the new environment. Consequently, partnerships with the U.S. may never return to pre-tariff levels.

For some industries, replacing the U.S. is nearly impossible. These industries typically sell almost exclusively to the U.S. and face significant transportation costs, making intercontinental shipping very costly. There may also be additional barriers, such as long-standing exclusive partnerships which can affect production and reliability.

For these industries, the impact will be deep but short-lived; Once the tariffs are lifted, trade volumes are expected to rebound to pre-tariff levels, provided U.S. buyers are willing to return to previous purchasing patterns.

This effect was observed after President Trump slapped 25 per cent tariffs on Canadian steel during his first term. Tariffs were in place for almost a year. During that time, exports from Canada fell approximately 38 per cent but were able to rebound fairly quickly after tariffs were lifted.

Canadian steel manufacturers are unlikely to find buyers elsewhere in the world. China is the biggest producer of steel globally and its scale and proximity to buyers outside of North America puts it in a much better position than Canada to offer competitive prices.

For many industries severely impacted by U.S. tariffs, the disruption may be comparable to that caused by the pandemic. For example, in March Canadian auto parts manufacturers saw their stocks plunge to levels we haven’t seen since the early days of the pandemic.

The impact on cross-border supply chains for most Canadian industries traditionally exporting to the U.S. will be deep and long-lasting. It is difficult to remain optimistic about the well-being of Canadian businesses under these tariffs. Relief cannot come soon enough.