How will Canadian businesses fare in a year-long trade war?

Billions of dollars of goods from both side of the Canada-US border are now subject to import tariffs and more are on the way, but while politicians trade rhetoric, it’s businesses that ultimately have to adjust operations if they are to survive.

And for Canadian businesses, a resilient tone has been revealed in a new poll of 602 business leaders including nine in ten whose firms export to the US and eight in ten who said the US tariffs would have an impact. All those surveyed were from companies with annual revenues of at least $10 million.

KPMG in Canada found that 86% of respondents are in favour of the retaliatory tariffs announced by Canada, the same share that said this a month earlier, with 83% wanting Canada's countermeasures to be a targeted, dollar-for-dollar retaliatory response.  

More than two thirds of leaders said their business can weather a trade war with the US that lasts more than a year, although 30% said that tariffs lasting beyond one year would result in a “significant” profit loss. Just 3% said a trade war of longer than a year would put them out of business.

"The business community remains unwavering in its commitment to stand up for Canada," said Timothy Prince, the Canadian managing partner for Clients and Markets, KPMG in Canada. "The size of the tariffs and the length of time tariffs remain in place will impact their ability to weather the coming storm. Already the uncertainty is prompting companies to examine every facet of their business to understand their options, with three-quarters already undertaking a strategic review of their operations."

To manage the impact of tariffs, businesses will have to make adjustments including pricing structures, supply chains, and streamlining while seeking new markets, subsidies or tax incentives, and potential exemptions from tariffs.

But unfortunately, there will likely be pain for the Canadian labour market with half of respondents indicating that they are already reducing production and/or laying off employees and 28% will start reducing headcount and production four-to-six months into a tariff war. More than six in ten may consider shifting some production to the US to mitigate the impact of tariffs.

"While shifting operations to the US is one way to mitigate tariffs, the economics must be carefully examined," says Lachlan Wolfers, national leader of KPMG Law in Canada and KPMG's Global Head of Indirect Tax. "There are many factors to consider, including navigating employment and environment regulations, building new supplier and customer relationships, and managing US and Canadian tax complexities. Relocation tends to be the much less common, ultimate response right now, but these decisions should always be made with a longer-term investment horizon."

Government action

The leaders also want Ottawa and provincial governments to help them mitigate the challenges including 85% wanting interprovincial trade barriers eliminated as quickly as possible.

"While they will do what they must to ride this out, they expect governments to take bold action to eliminate interprovincial barriers, build a national energy-agnostic corridor, reduce red tape, and revamp the tax system to improve their ability to compete,” added Prince. “As many as 86 per cent say it's time to diversify energy export markets with increased pipelines and infrastructure in Western and Eastern Canada and reduce our reliance on having to move oil and gas to Eastern Canada through the US."