US president-elect Donald Trump announced plans Monday to impose 25% on all products from Canada
Following US president-elect Donald Trump’s announcement that he plans to impose tariffs on Canada, Mexico, and China, cross-border trade experts say the move will likely increase inflationary pressures and hamper predictability for Canadian businesses and consumers.
“Many US and Canadian businesses have fully integrated supply chains, in important and strategic sectors for both countries such as automotives, defence and technology,” says Wendy Wagner, a partner at Gowling WLG who specializes in international trade, cybersecurity, and data protection. “If a US manufacturer relies on Canadian parts and components for its manufacturing activities, it is not as easy as flipping a switch and readily changing to purchase those parts and components from a US-based supplier.”
She adds, “Imposition of tariffs on either side of the border would be expected to exert more inflationary pressure on the economies in a time when businesses and consumers are already struggling from rising costs.”
Christine Bonaguide, a cross-border corporate and M&A partner with Hodgson Russ, shared similar concerns, warning Canadian businesses to “prepare for a more volatile and expensive trade environment under the new US administration.”
In posts on social media platform Truth Social on Monday, Trump announced he would levy a 25 percent tariff on all products from Canada and Mexico. This move would violate the terms of the United States-Mexico-Canada Agreement, the successor to the North American Free Trade Agreement he signed as US president in 2020.
Trump said the tariffs would be in place until immigrants and drugs, especially fentanyl, stopped coming across the US border. In a separate post, he said he would impose an additional 10 percent tariff on all goods from China to stop the shipping of illegal drugs to the US.
Following the announcements, the Canadian dollar dipped to its lowest level since May 2020, falling below 71 cents US on Monday evening. The same night, Prime Minister Justin Trudeau reportedly spoke to the president-elect about trade and border security. Mexican president Claudia Sheinbaum meanwhile hinted at retaliatory tariffs on Tuesday, warning that tariffs would increase inflation and result in job losses in both the US and Mexico.
Trump’s announcement could simply be a short-term scare tactic, says Wagner, who described the tariffs as a potential “means for the Trump administration to exert pressure on Canada to extract concessions in the trading relationship,” particularly concerning trade irritants like dairy, softwood lumber, and the digital services tax.
Bonaguide noted that Trump “has a wide variety of initiatives where he wants to roll back what's been happening during the Biden administration,” like those related to climate change or foreign policy.
“His foreign policy, I think, is going to change significantly from the Biden administration’s foreign policy, so trade or trade agreements can be one way to pressure and to influence countries to follow along on those other initiatives,” Bonaguide says.
“Just broadly speaking, these kinds of tactics are viewed as tools – not only to improve the US economy but also to move the needle on other types of priorities for the Trump administration,” she adds.
But Monday’s announcement could also indicate a more long-term stance on cross-border trade. While the rationale behind imposing substantial tariffs on foreign goods is to protect domestic jobs, particularly in manufacturing, and incentivize consumers to buy locally, supply chains may face challenges adjusting to the change.
Wagner noted that many US manufacturers working with Canadian suppliers have contractual obligations to buy a certain amount of goods from the suppliers or incur the costs of import tariffs. These manufacturers could also have trouble finding domestic suppliers that produce the same components – especially if they are customized – for their products.
A long-term move towards substantial tariffs invokes a return to so-called “beggar-thy-neighbour” policies that many considered “a precipitating factor that led to the Great Depression in the 1930s,” Wagner says. These policies looked to tariffs and import quotas to shift demand from foreign goods to domestic products.
While the intent is to address domestic unemployment and economic depression, Wagner says the policies are now “considered to have a negative impact on both domestic and global economies and to decrease overall productivity, competitiveness, and economic growth.”
Although the potential tariffs on Canada and Mexico would violate the terms of the USMCA, which is up for renewal in 2026, Canada may have little recourse. In 2018, Canada levied retaliatory tariffs on steel, aluminum, and other products from the US after the Trump administration introduced tariffs on certain Canada-made steel and aluminum products.
Retaliatory tariffs will be on the table when Trump takes office, but Wagner says the move would likely hurt Canadian businesses and consumers by making it harder for them to access US products or components for manufacturing.
Based on the trade developments during the first Trump administration, when Trump upended what was previously considered a stable trading relationship with Canada by seeking renegotiation of NAFTA and introducing tariffs on Canadian steel and aluminum, the future of cross-border trade relations may be hard to predict.
Bonaguide says she expects that “the first 100 days of the new administration are going to be busy and intense.
“They're going to be looking at making significant changes to a lot of areas of the US economy, including with respect to things like immigration,” Bonaguide adds. “Those linkages that Canadian companies, that Canadian governments have in the US – it's important to strengthen those ties and to engage in those discussions so as to minimize the disruption that might be occurring due to the trade policies that looked to be coming under the new Trump administration.”
She says Canadian businesses need to review their supply chains. Noting recent discourse around the possibility of moving away from the US and Canada’s decades-long trilateral agreement with Mexico in favour of a bilateral agreement between the first two countries, Bonaguide questioned how such an agreement could impact Canadian companies that have supply lines or operations in Mexico.
Businesses with supply chains in China also need to start reviewing their options, Bonaguide says.
“To be nimble, Canadian businesses should be looking at their supply chains and formulating plans for redundancies if needed, or changes,” Bonaguide says.
“That’s not just supply chain in terms of vendors or manufacturers… but intercompany,” she adds. “A large proportion of the cross-border trade for the US and Canada is intercompany – Canadian companies with operations in the US or vice versa. So even intercompany supply chain and intercompany transactions should be looked at.”
