The Real Impact of Trump’s 25% Tariff on Canada and Mexico: How Small Businesses Can Survive

Donald Trump just threatened a 25% tariff on all goods coming into the United States from Canada and Mexico. As he puts it, “the word tariff to me is the most beautiful word in the entire dictionary.” Trump announced that implementing this tariff would be a day-one priority after his inauguration. This move would raise the prices of a wide range of goods, including food, medicine, cars, oil, lumber, and concrete.

While Trump’s statement is a mix of policy and posturing, it’s crucial to understand the real impacts of such a tariff and how small businesses can protect themselves. In this blog post, we’ll explore the consequences of Trump’s proposed tariff on Canada and Mexico and provide actionable steps for small businesses to navigate these challenges.

1. Devastating Consequences for Canada

Impact on Trade: Canada’s trade relationship with the United States is immense, with roughly 67-70% of its total trade conducted with its southern neighbor. A 25% tariff on goods entering the United States from Canada would effectively act as a 25% tax on these goods. This would lead to significant price increases for consumers and reduced demand for Canadian exports.

Economic Fallout: Canada exported almost $600 billion worth of goods to the United States last year, accounting for more than three-quarters of all Canadian exports. With the U.S. being Canada’s largest trading partner, the economic fallout from such a tariff could be severe. Canada’s trade relationship with the U.S. represents about two-thirds of the country’s GDP.

Top Exports Affected: The top five exports from Canada to the U.S. include energy (mainly crude oil), cars, and car parts. The auto industry, in particular, would face significant challenges due to the interconnected nature of automotive supply chains.

Actionable Steps for Canadian Businesses:

• Diversify Export Markets: Explore new international markets to reduce dependency on the U.S.
• Strengthen Domestic Demand: Focus on increasing domestic demand for products to offset potential losses in the U.S. market.
• Invest in Innovation: Innovate and improve product offerings to remain competitive despite higher tariffs.

2. Increased Costs for American Consumers

Higher Prices: A 25% tariff on goods from Canada and Mexico would lead to higher prices for a wide range of products in the United States. This includes food, medicine, cars, oil, lumber, and concrete. For example, a car that previously cost $40,000 could now cost $50,000 due to the added tariff.

Supply and Demand Dynamics: The basic rule of supply and demand suggests that if prices go up, producers may want to produce more of the affected goods. However, higher prices can also reduce demand, leading to potential job losses as businesses adjust to lower production levels.

Impact on Daily Life: American consumers would face higher costs for essential goods. According to the U.S. government, in 2022, about half of all fresh fruit and almost 90% of vegetables imported into the U.S. came from Canada and Mexico. These goods could become 25% more expensive overnight.

Actionable Steps for American Consumers:

• Budget Adjustment: Adjust household budgets to account for potential price increases in essential goods.
• Local Sourcing: Support local producers and businesses to reduce reliance on imported goods.
• Advocacy: Engage in advocacy efforts to influence trade policies that protect consumers.

3. Impact on the Automotive Industry

Complex Supply Chains: The automotive industry is a prime example of the complexities introduced by tariffs. Cars are not built entirely in one country; different parts are manufactured in various locations. For instance, the engine might be built in one place, the transmission in another, and assembly might occur in a third location. These components often cross national borders multiple times before becoming a finished car.

Tariff Costs: A 25% tariff would charge a tax every time these components cross the border. The average car might cross the border seven or eight times during production. This would lead to significant cost increases for manufacturers and, ultimately, for consumers.

Reevaluating Supply Chains: Manufacturers with plants on both sides of the Canada-U.S. border would need to completely rethink their supply chains. Facing 25% higher costs, some manufacturers might consider relocating their entire supply chains to the U.S. to avoid tariffs.

Actionable Steps for Automotive Businesses:

• Supply Chain Optimization: Analyze and optimize supply chains to minimize cross-border transactions.
• Negotiation with Suppliers: Negotiate with suppliers to share tariff costs or find cost-saving opportunities.
• Innovation and Efficiency: Invest in innovative technologies and efficient production methods to reduce overall costs.

4. Trade Wars and Retaliation

Trade War Dynamics: The unfortunate side effect of tariffs is that they often lead to trade wars. When one country imposes tariffs, the affected countries may retaliate with their own tariffs. This tit-for-tat escalation can have severe economic consequences.

Historical Context: During Trump’s previous presidency, tariffs led to retaliation from Canada. For example, the U.S. imposed a tax on steel and aluminum, prompting Canada to retaliate with tariffs on American products like ketchup, oranges, and whiskey.

Impact on Small Businesses: Small businesses are particularly vulnerable to the effects of trade wars. Higher costs for imported materials and retaliatory tariffs on exports can squeeze profit margins and create uncertainty.

Actionable Steps for Small Businesses:

• Risk Management: Develop risk management strategies to mitigate the impact of trade wars.
• Cost Reduction: Implement cost-saving measures to absorb tariff-related expenses.
• Government Support: Seek government support and incentives to offset the negative impacts of tariffs.

5. Economic Uncertainty and Strategic Negotiation

Policy vs. Posturing: There’s often a fine line between actual policy and political posturing. Trump’s tariff threats may be part of a strategic negotiation tactic rather than a definitive policy.

Unpredictability: Trump’s approach to trade negotiations has been characterized by unpredictability. He has often used threats as leverage to extract concessions from other countries.

Back-Channel Negotiations: Even before Trump’s inauguration, there could be months of back-channel negotiations. The final policy outcome may differ significantly from the initial threats.

Actionable Steps for Businesses:

• Stay Informed: Keep abreast of trade policy developments and potential changes.
• Engage in Advocacy: Participate in industry advocacy efforts to influence trade policy decisions.
• Flexibility and Adaptability: Maintain flexibility in business strategies to adapt to changing trade policies.

Conclusion

The proposed 25% tariff on goods from Canada and Mexico would have far-reaching impacts on both countries’ economies and everyday life for American consumers. From increased costs for imported goods to the complexities faced by the automotive industry, the consequences are significant. For small businesses, navigating these challenges requires strategic planning, innovation, and adaptability.

By understanding the potential impacts and taking proactive measures, small businesses can survive and thrive despite the uncertainties of trade policies. Whether it’s diversifying markets, optimizing supply chains, or engaging in advocacy efforts, there are steps that businesses can take to protect themselves and continue to grow.

As the global trade landscape evolves, staying informed and adaptable will be key to success. Embrace these strategies, and you’ll be well-prepared to face whatever challenges lie ahead.