Tariff war traps businesses ‘between a rock and a hard place’

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Expect to pay more for everything from new cars to your weekly grocery shop as the tariff war between Canada and the United States squeezes some businesses at both ends, economists warn.

So far U.S. President Donald Trump has put tariffs on steel and aluminum imports and threatened more to come on April 2. In retaliation, Canada has slapped duties on about $60 billion worth of U.S. goods and threatened them on another $100 billion.

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Trump’s tariffs will have the biggest impact on the economy, said Florence Jean-Jacobs, principal economist at Desjardins Group, but there will also be negative repercussions from Canada’s counter tariffs and a weaker Canadian dollar for businesses who import materials from the United States.

“Some industries are caught between a rock and a hard place, risking a drop in U.S. demand for their products and an increase in their supply costs if substitutes are not easily found,” she wrote in her report.

The hardest hit sectors will be food manufacturing, machinery, plastics, chemical, automobiles, aerospace, wholesale trade and livestock and crop production.

Take, for example, a food manufacturer in Canada who exports to the United States. They would have to pay more to import grains, fruits and other raw materials from the U.S. to make their product because of Canadian tariffs, only to see sales fall south of the border because U.S. tariffs make them more expensive.

Even sectors that are considered resilient to Trump’s direct tariffs such as construction, retail and food services will face higher costs because of Canada’s retaliatory duties and a weak Canadian dollar.

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Canada’s construction industry will pay more for products it buys from the U.S. that range from heating and air conditioning equipment to furniture and cabinets to electrical and plumbing fixtures.

Auto wholesalers and dealers will pay more for cars imported from the U.S. as will retailers of clothing, food and beverages, pharmaceuticals and medical suppliers, said the Desjardins report.

“We can therefore expect consumers to pay higher prices for cars and parts imported from the United States and for food purchases that are hard to replace with Canadian or overseas products at equivalent cost,” said Jean-Jacobs.

The low loonie could also raise the price of gas, especially in eastern Canada where refineries are not set up to handle Western Canada’s heavy oil and rely on imports from the United States.

The squeeze at both ends could lead to liquidity challenges for some companies, said the economist.

“They will have to choose between reducing their profits or increasing their selling prices, which will weaken their power to retain and attract customers already burned by the record-high inflation that followed the pandemic.”

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The challenge will be especially difficult for low-margin businesses.

“Car dealerships and grocery stores, in particular, have some of the lowest margins among non-financial industries in Canada. Since Canada’s counter-tariffs particularly target food and automobiles, these businesses could face significant challenges,” she said.

Jean-Jacobs said government support in reducing Canada’s internal trade barriers, increasing productivity and exploring alternative markets will all help, “but companies will need to be proactive and invest to build their resilience against what’s shaping up to be four years of uncertainty and volatility.”

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How much do Trump’s 25 per-cent tariffs on steel and aluminum imports matter to Canada? These sectors are highly dependent on the U.S. market, but in the big picture make up only 6 per cent of Canada’s total merchandise exports.

The regional impact, however, is significant, in particular to Ontario and Quebec, said TD Economics’ Maria Solovieva. Ontario produces most of the steel exports to the U.S. and Quebec the aluminum.

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Quebec isn’t just the biggest aluminum producer in Canada, it’s the biggest on the continent and ranks fourth in the world behind China, India, and Russia.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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