The Canada-United States trade relationship remains a cornerstone of the Canadian economy, with recent data highlighting its critical importance. In 2023, Canada exported $592.7 billion worth of goods to the United States, accounting for approximately 78% of Canada’s total merchandise exports. On the import side, Canada purchased $484.0 billion worth of goods from the United States in the same year.[1]

This deep economic integration underscores the vulnerability of Canadian businesses to potential shifts in US trade policy.

Potential implications of US tariffs

The prospect of a 25% tariff on Canadian imports to the US, as proposed by President-elect Donald Trump, could have far-reaching consequences for Canadian businesses and the broader economy:

Economic contraction: Experts predict that such tariffs could lead to a significant contraction in Canada’s GDP, potentially pushing the country into a recession by 2025.
Job losses: The manufacturing sector, which accounts for a substantial portion of Canada’s exports to the US, could face severe impacts. Estimates suggest that up to 1.5 million jobs could be at risk across various sectors.
Supply chain disruptions: Many Canadian businesses rely on integrated supply chains with the US. The proposed tariffs could disrupt these established networks, leading to increased operational costs and reduced efficiency.

Impact on Canadian lenders

Banks and private lenders in Canada may also face challenges if these tariffs are implemented:

Increased credit risk: As Canadian businesses face higher costs and potential revenue losses due to tariffs, lenders may experience an increased risk of loan defaults. This could be particularly pronounced in industries heavily reliant on cross-border trade, such as the automotive sector, energy, chemical manufacturing, and forestry products.
Reduced lending activity: The economic uncertainty created by tariffs could lead to a more cautious approach to lending. Financial institutions may tighten their lending criteria, potentially slowing down business growth and expansion. This could result in a decrease in new loan originations and a more conservative stance on existing credit lines.
Sector-specific challenges: Lenders with significant exposure to industries most affected by tariffs may face unique challenges. For instance, those with large portfolios in the automotive or manufacturing sectors might need to reassess their risk models and potentially increase their loan loss provisions.
Pressure on asset quality: The potential economic contraction resulting from tariffs could lead to a broader deterioration in asset quality across lenders’ portfolios. This might necessitate increased monitoring and potentially more frequent stress testing of loan books.
Currency risk: The value of the Canadian dollar may fluctuate in response to trade tensions, which could impact international transactions and loan agreements denominated in foreign currencies.
Demand for restructuring services: As businesses face financial distress, there may be an increased demand for restructuring services from lenders. This could present both challenges and opportunities for financial institutions with expertise in this area.
Regulatory scrutiny: Regulators may increase their oversight of financial institutions to ensure they are adequately prepared for potential economic shocks resulting from trade disputes.

Preparing for uncertainty

While the situation remains fluid, there are steps that businesses and lenders can take to mitigate potential risks:

Conduct risk assessments: Thoroughly evaluate supply chains and financial exposures to identify vulnerabilities.
Build cash reserves: Companies should aim to build sufficient cash reserves to weather potential disruptions.
Review contracts: Examine existing agreements to identify any clauses related to tariffs or trade disputes.
Diversify markets: Consider exploring new markets to reduce dependence on US trade.
Stay informed: Keep abreast of developments and potential government responses to the tariff threats.

Canada’s potential response

Canada has a history of imposing retaliatory tariffs in response to US trade actions. In 2018, when the US imposed tariffs on Canadian steel and aluminum, Canada swiftly retaliated with “dollar-for-dollar” tariffs on a diverse array of US goods. The Canadian government is already examining possible retaliatory tariffs on specific US items, should President-elect Trump follow through on his threat. This retaliation could potentially lead to further trade tensions and economic uncertainty.

Conclusion

The potential implementation of US tariffs presents significant challenges for Canadian businesses and lenders. Understanding the evolving trade landscape and engaging experienced legal and financial counsel is crucial for navigating this uncertainty and mitigating risks. While the future remains uncertain, proactive planning and strategic decision-making can help Canadian businesses and lenders weather the potential storm and emerge resilient in the face of changing trade dynamics.

[1] Statistics Canada. (2024, May 9). Canadian international merchandise trade: Annual review 2023. The Daily.