When U.S. President Donald Trump imposed tariffs on Canadian steel and aluminum in June, executives in those industries recoiled at the potential fallout, and warned of pending job and revenue losses. Economists promptly cautioned that the ripple effect wouldn’t be contained to those two sectors. Indeed, entire supply chains could face widespread disruption as the deleterious impact of tariffs become a daily business reality in this country.
Already, owners of small and medium-sized businesses in Ontario are beginning to feel the impact of the burgeoning global trade war.
At this point the U.S. and China have each traded $34 billion in tariffs, while the Trudeau government has added import levies on $16.6 billion in U.S. steel, aluminum and consumer products. The trouble with trade wars is they tend to escalate as all sides take retaliatory measures to provide domestic political cover and—often futilely—defend their trade positions. This one is shaping up to be a text book trade conflict with no end in sight unless the Americans suddenly stand down.
For Canadian firms that import or export materials or products—whether finished or not—across the border, this is very bad news. Even if a manufacturer doesn’t have a direct connection to the aluminum industry, for example, but uses steel or aluminum products in its production processes, the tariffs will have a significant bottom-line impact. Trump is now threatening massive import duties of up to 25 per cent on Canadian-made automobiles if NAFTA renegotiation talks don’t go his way. Whether the U.S. administration will take that drastic step remains to be seen, but recent history shows that this president is both unpredictable and determined to reinforce his America-first bona fides.
Prices are already beginning to increase across industries, CEOs and sales people are being forced to have awkward conversations with clients as they raise prices and we’re hearing rumours of organizations pondering layoffs as they adjust to the new Trumpian trade reality. With NAFTA’s fate in doubt and more tariffs looming, the outlook seems bleak for Canadian companies that do business South of the Border, or rely on U.S.-made inputs.
Preparation is the key to surviving any trade war. That’s why it’s imperative that your executive team takes the time to forecast and plan. With that in mind, here are four steps you need to take now:
Understand your risk exposure—Because the scope of import and export tariffs can be wide ranging, it’s important to sit down with your team to fully analyze everything from your supply chain to client list to determine your degree of risk exposure. If, for example, you import steel from the U.S. and then export a finished product back across the border, you face tariffs at multiple points in the supply chain. This puts your firm at a disadvantage to a competitor that uses all Canadian materials in the products they export to the U.S. Is there a possibility of acquiring that steel in Canada? Will your U.S. customers tolerate higher prices or will they look for domestic suppliers to mitigate tariff-related financial risk? If you lose U.S. customers, how will that impact your company’s short- and long-term financial health? These are only some of the questions you should be asking as you gird for the worst-case scenario: even more tariffs in the weeks and months ahead.
Analyze your balance sheet—Understanding the state of your organization’s balance sheet is an important consideration for any business owner or manager at the best of times. Now, it’s absolutely essential. Work closely with your Chartered Professional Accountant to analyze your organization’s unique financial circumstances. Building cash reserves and keeping a close eye on cash flow will be important when customers and suppliers will surely feel the squeeze as tariff realities take hold. Be sure to carefully monitor receivables and stay in close contact with clients to get a sense of their financial standing. If it looks like they might be in financial trouble, try to extend payment terms or at least secure partial payment. At the same time, it may also be time to stretch your own payables to the maximum allowable contract terms to help maintain a strong cash reserve. Finding new sources of credit and—if the tariff impact on your organization is particularly significant—even renegotiating costly leases can help keep your business afloat in these precarious times.
Be proactive and plan—Can you boost inventory now to ride out the tariff shock? Do you need to consider proactively increasing prices to build cash in anticipation of further cost hikes as tariffs take effect? Do you need to maintain current staff levels, or would a leaner operation produce the same high-quality work at a lower price? These are all relevant questions to ask. The important point to note is that your team should be looking at best- and worst-case scenarios while trying to ‘game’ out how this trade war could unfold for your business and industry.
Think long term—Most Canadian companies that focus on building a robust export strategy look south first before casting their net overseas. That’s a perfectly rational approach—or at least it has been until recently. The U.S. is our largest trading partner and geographic neighbour with a congruent economic and political system (recent differences aside). But this could be the perfect opportunity to begin cultivating trade relationships outside of North America. While there are countless strategies your executive team could pursue, resources such as Export Development Canada and the Canadian Trade Commissioner Service can be indispensable support tools to begin researching overseas markets, understanding whether there is potential demand for your products and services, then acquiring contacts in those markets to assist with everything from building a local sales team to marketing to new clients.
It’s important to look at the challenges thrust upon your organization by the current trade war as an opportunity to diversify trading partnerships and even grow your business. Just remember that finding success in a more difficult business environment takes a strategic approach and a commitment to swift action. While this may all blow over, we could be living in a difficult trade environment for years to come.
Don’t put your business at risk while you wait for Ottawa and Washington to kiss and make up.
Marshall Egelnick, Managing Partner