Prepare your Canadian Business for the proposed U.S. Tariffs – Creating a Winning Trade Strategy

Recent developments regarding new tariff threats by the US are causing growing concern among Canadian businesses. The situation is escalating quickly since it directly influences business cost increases, procurement and supply chain challenges, potential sales losses , lawsuits and even the risk of company closures. The evolving international trade environment presents very challenging scenarios with the introduction of new tariffs. However, not many potential solutions nor clear strategies to protect businesses are offered from Canada or other governments yet.

This article highlights actionable strategies that Canadian and international businesses can implement immediately. While some companies are beginning to take steps, many remain uncertain about the specific changes the new US administration may introduce and the exact outcomes of the proposed tariffs. Regardless of these uncertainties, the strategies outlined here can deliver tangible business benefits.

The situation is particularly concerning for the Canadian economy, which is heavily reliant on exports to the US. With significant exposure and a high concentration of sales in the US market. The Canadian high dependency on US trade has always been a major concern. In 2023, Canada exported about 74% of its total exports to the United States only, approximately $439.6 billion worth of goods, according to Economics Trade. See table below for the major Canadian industries exposed to these exports. 

Almost every Canadian sector will face some level of economic impact. Although we often see general news about the impact on the tariffs threats, not very often we come across with sources offering clear, actionable short-term strategies that Canadian businesses should be adopting now to position them better, to maneuver the current challenges, mitigate risk and position themselves for long-term success. 

The number of scenarios for Canadian businesses and manufacturers vary significantly. In order to develop an effective strategy, it is essential to gain a deeper understanding of each specific business and international transactions. That said, this article highlights several key strategies aimed at reducing tariffs on exports to the U.S.

In my opinion, the first step to look for tariffs starts with understanding customs duties, classification codes and properly applying the Rules of Origin along with different strategies you can use with materials and products originating from overseas. Preparing a sourcing plan and approach you can follow when building your products, considering finished goods main components and processes. 

Duty Mitigation strategies for New Tariffs: 

1. The first step involves thoroughly reviewing and breaking down the main components of your products. Utilize your Bill of Materials (BOM) for key finished goods to evaluate costs, HS tariff codes or classifications, and the country of origin for each component. This includes requesting certificates of origin from your suppliers.
2. Next, assess the implications of a tariff code (HS number) shift, which could result from transforming or modifying goods before export. Determine if slight adjustments to your local processes or materials could lead to a tariff shift, enabling you to create a new tariff rate—potentially one with lower or no duties.
3. Additionally, analyze the current classification or tariff code for goods in their existing state, without any transformations. Depending on factors like material, use, or application, some goods may qualify for multiple classifications. Identify all possible HS codes for each item, and compare their respective tariff rates. In some cases, exporting goods to the U.S. under a different, more favorable tariff code can reduce costs significantly.
4. Identify and detail the materials and components sourced from outside the U.S., and evaluate cost scenarios for potentially sourcing U.S.-origin goods in the future. Under the Rules of Origin, tariffs can often be eliminated when the primary components and the overall value of the goods are predominantly U.S.-sourced.
5. Review current duty valuations and explore alternatives. Familiarize yourself with the necessary calculations for the Rules of Origin, including methods like Regional Value Content (Net Cost and Transaction Value calculations) and the Tariff Shift method.
6. Reassess your marketing and sales strategy by targeting and developing new regions with which Canada has existing free-trade agreements, such as Europe, Asia and other Latin-American countries. There are two recent examples of key trade agreements signed in less than 10 years and opening free trade barriers: The Canada-European Union Comprehensive Economic and Trade Agreement (CETA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These markets are essential not just to reduce dependency in one single country like the US, but also to diversify trade partnership, amplify opportunities with alternative suppliers, and identify potential manufacturing facilities to mitigate the tariff impact. 
7. Strengthen your sourcing and negotiation strategy with local and international suppliers. Seek new partnerships in the U.S. and abroad, and explore collaborative opportunities with suppliers and customers. These could include sourcing for new suppliers, setting up strategic operations, introducing new processes, or establishing production, warehousing, or assembly facilities closer to key markets.
8. Engage in government consultations, understand requirements and prepare paperwork for exclusion and exemption request processes, such as making electronic Ruling requests.
9. Where feasible, expedite orders or move additional inventory across borders before tariffs are implemented. However, while this may provide short-term relief, it won’t address the issue in the long term. Establishing a sustainable process to optimize outcomes over time is more effective.
10. Lastly, minimize the impact on duties to be paid by participating in duty relief programs, such as the duty drawback program. Determine if you are eligible to recover a portion of the duties, fees, and taxes paid on imported goods that are subsequently exported.

A 25% tariff could shrink Canada’s GDP by 2-3%, affecting an estimated 2.4 million Canadian jobs tied to US exports. Industries such as oil and gas, manufacturing, automotive, and agriculture are particularly vulnerable. 

This threat pushes businesses to diversify their supply chains, enhance visibility, identify and develop alternative suppliers, update contracts and explore new selling markets beyond the US. Proactive planning along with risk management becomes crucial to develop duty mitigation strategies, and maintain business operations profitable. 

Regardless of the threatening US measures, if you are importing or exporting with the US, it is crucial to develop a robust assessment and international strategy, supported with a detailed plan to remain competitive, and gain market opportunities. 

For detailed guidance in creating and implementing an international strategy specific to your business, step-by-step assistance in determining how to implement them within your organization, please contact us at Leanco Consulting Inc. We are closely monitoring these developments and are ready to assist clients in navigating these changes.