How SMEs (directly impacted or not) can respond to the escalating Canada-U.S. trade war
On Saturday, Canada’s business owners awoke to a new trade crisis, one that has the potential to ensnare more businesses than previous north-south trade disputes. The Trump administration’s threats to impose 50 per cent tariffs on more than $20 billion of Canadian goods, or approximately 5 per cent of our exports to the U.S., had taken effect. The Canada-U.S. trade war, long simmering but not boiling over, suddenly took on an unpredictable—and potentially economically dangerous—new life.
In his remarks explaining Ottawa’s decision to walk away from negotiations that reportedly included increasingly untenable U.S. demands—from restrictions on the future trade agreements into which Canada could enter to culturally-sensitive French language concessions—Prime Minister Mark Carney described Canada as being ‘attacked’ and ‘at war.’ He promised dollar-for-dollar tariffs in retaliation.
Not surprisingly, alarm bells quickly rang across our small- to medium-sized business community. A recent Canadian Federation of Independent Business survey already found anxieties to be running high among SME owners. According to the study:
“Two in five surveyed Canadian exporters to the U.S. report selling products affected by the proposed 50% U.S. tariffs on some CUSMA compliant goods. Among those affected, over three-quarters (77%) expect their revenues to drop if new tariffs take effect … more than one in three (35%) expect revenues to fall by at least 50%.”
While many entrepreneurs may have applauded the government’s decision to walk away from a bad deal, the more pressing question becomes: What next? For businesses that export to the U.S., and even for those that don’t have direct U.S. tariff exposure, the risks abound. A moment of national pride in standing up to trade bullying will quickly give way to the practical necessities of running businesses and maintaining profitability. Importantly, the Prime Minister failed to outline exactly what the Americans had demanded and the proposals that were rejected by the Canadian negotiating team. Greater transparency would have allowed our business community to better understand exactly why we walked away from the bargaining table and whether that was a sound decision. Given the disproportionate nature of our trade relationship—with more than 72 per cent of Canadian exports going to the U.S.—diversification to other markets is simply not an option for many companies. Expect to see an even more pronounced cross-border migration as businesses from trade-reliant regions such as Southern Ontario attempt to bypass this new tariff regime.
Carney made clear that the federal government will this week table a support package for businesses impacted by the new slate of U.S. tariffs. The KRP LLP team will be providing a full overview of those measures.
But there are other steps that businesses can take in the meantime to help shore up their finances, or at least better understand their exposure. Because even if Ottawa’s support programs prove to be both substantial and sufficiently accessible, they may not be delivered fast enough to help every business that’s forced to grapple with bottom-line-breaking U.S. tariffs. As has always been the case (and as noted above), the process of disentangling our deeply integrated North American supply chains will be neither easy nor efficient. In some cases, it’s only possible with significant sectoral disruption. Reconfiguring supply chains and finding alternative markets will continue to increase production costs across many industries.
The first step, as always, is to keep calm. Canada’s retaliatory tariffs aren’t scheduled to take effect until September 8th, 2026. Talks could resume within that timeframe and a climbdown could occur. The Americans could suspend their new 50 per cent tariffs—or escalate, as Trump threatened when he said auto tariffs would spike to 50 per cent (from 25 per cent) on January 1st, 2027. At this point, predicting how the trade war plays out is difficult. That’s why a prudent approach is to map your organization’s direct and indirect tariff exposure. Identify not only the tariffs you may pay directly, but also the suppliers, customers, products and industries in your supply chain that could pass tariff-related costs to your company or could even face risks to their ongoing viability. A company that makes steel or aluminum, for example, is directly exposed to U.S. tariffs, but so, too, is one that sells goods containing steel, aluminum or copper components where the full good is tariffed.
Bring your leadership team together to analyze potential exposures by customer and create a scorecard to determine the ones that could either face major risks to ongoing operations, or that may have to increase prices or reduce demand for your products or services as a result of U.S. tariffs. Those that score higher (e.g., are more likely to be impacted by the Canada-U.S. trade war) may need some level of accommodation for the period that the tariffs are in place, such as more forgiving credit or payment terms. The Ontario government is reportedly girding for two years of trade turmoil, so it’s best to take a medium-term approach to planning.
Next, be prepared to stress test your company’s cash flow, while protecting liquidity. A business can survive a temporary decline in profitability more easily than a cash-flow crisis. Owners can work with their accounting firm to stress-test cash flow, review working-capital requirements and determine how much liquidity they would need under different tariff scenarios. Implementing cost-cutting measures, optimizing revenue sources or mitigating exposure to affected industries can also help boost your organization’s access to free cash flow. And be proactive. Model scenarios involving everything from higher input costs and declining sales to tighter working capital to determine how tariffs could impact your annual profitability.
This is also an opportunity for a detailed review of margins, pricing and supplier or customer contracts. The obvious reaction would be to hike prices. While many SMEs are already being forced to pass on tariff-related costs to their customers, taking the time to calculate the exact direct or indirect effects of tariffs on your gross margins across affected product categories will help your team determine which costs can be reasonably passed along to customers, along with increases that may need to be absorbed, if possible. In many cases, renegotiated pricing or new payment terms in supplier or customer contracts could help mitigate these cost pressures. Automatic price-adjustment clauses are another tool to help protect your organization’s margins from any future tariff hikes.
Lastly, as the federal government rolls out extended tariff relief and financing programs—building on initiatives such as BDC lending measures and the Regional Tariff Response Initiative—be open to leveraging these tools. Don’t assume they’re only available to large exporters or companies directly impacted by tariffs. Given the level of alarm stemming from this new spate of trade levies, Ottawa is likely to provide even more generous support than in recent years. Work with your CPA to determine your eligibility for any financing or tariff relief that may be on offer, while weighing the potential financial impact of government grant or lending terms.
All signs are pointing to protracted trade tensions between Canada and the U.S. Canada’s economy is already facing challenges, but even stormier waters are ahead. We’ll experience significant disruption if this situation escalates. This is an ideal opportunity for the federal government to implement a much-needed tax policy overhaul to enhance our competitiveness, position Canada as a lucrative investment destination and a country serious about economic growth and prosperity. Will Ottawa embrace this potential for business-friendly reforms, or squander it in the name of cautious incrementalism?
In the meantime, by taking action now, your organization can help address some of these trade-related challenges and emerge from this period of turmoil with a stronger, more resilient balance sheet.
Armando Iannuzzi, Co-Managing Partner
For more information on strategies to manage tariff-related pressures on your business, contact a member of our team.
