Understanding Canada's Reciprocal Surtax

The recent introduction of tariffs by Canada on U.S. goods could have significant ramifications for Canadian importers, particularly those that rely heavily on cross-border trade. A two-phase tariff structure may result in higher costs for many products that Canadian businesses import from the United States. As businesses grapple with these new trade policies, understanding the specifics of the reciprocal surtax and its phased implementation is crucial for navigating the evolving landscape.

What is the surtax being imposed?

The Canadian government is imposing counter-tariffs, also known as a retaliatory surtax, on certain U.S. goods in two phases:

Phase one

The Prime Minister of Canada announced phase 1 counter-tariffs of 25% on U.S. goods worth $30 billion, effective March 4th, 2025. Targeted items in phase 1 include an extensive range of goods from orange juice, peanut butter, wine, appliances, and cosmetics.

Phase two

Another $125 billion in U.S. goods was announced and scheduled for April 2nd, 2025. However, $29.8 billion of U.S. goods within phase 2 were rolled out early and took effect on March 13th, 2025. The remaining goods within phase 2 will be imposed on April 2nd, 2025, following the 30-day consultation period of this much longer list of goods. Phase 2’s early rollout targets primarily steel and aluminum as well as tools, computers and servers, display monitors, water heaters, sport equipment, and cast-iron products.

China's retaliatory tariffs

China has also announced a retaliatory tariff of 100% to take effect March 20th, 2025, on Canadian rapeseed oil, oil cakes and pea imports, and a 25% duty on Canadian aquatic products and pork. This was imposed in response to Canada’s tariffs of 100% on electric vehicles and 25% on steel and aluminum back in October 2024.

Here’s how Canadian importers may be affected

1. Increased costs of goods

Importers will see an immediate rise in the cost of importing U.S. goods due to the 25% tariffs that have been applied. These phase one and two tariffs only apply to goods originating from the U.S., which shall be considered as those goods eligible to be marked as a good of the U.S. in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (CUSMA Countries) Regulations.

Products ranging from everyday items like apparel and footwear to specialized goods like machinery, electronics, and chemicals will be impacted. As a result, businesses that rely on these imports may face higher purchase prices for goods, which could erode profit margins, which could potentially lead to price increases for consumers.

2. Disruption of supply chains

Many businesses, especially those in the manufacturing sector, have integrated supply chains that rely on parts and materials sourced from the United States. These tariffs could disrupt the smooth flow of goods across the border, which can lead to:

Potential of delayed shipments, demand schedule uncertainty and inventory shortages, affecting businesses' ability to meet customer demand.
Increased transportation costs as importers may seek alternative, more expensive shipping routes to avoid additional tariff costs. Volatility in the cross-border truck and forwarding markets is causing price disruption.

3. Complexity in customs procedures

The implementation of new tariffs means Canadian importers will have to deal with additional administrative and regulatory requirements. This includes:

More complex customs procedures, as businesses will need to ensure compliance with the new tariffs and be prepared for possible audits to support such things as origin determination for Canada-U.S.-Mexico agreement (CUSMA).
Additional attention on tariff classification and valuation of imported goods, potentially leading to longer clearance times and potential delays in receiving goods.

4. Impact on small and medium companies

Small and medium-sized companies that rely heavily on importing U.S. goods are especially vulnerable to the new tariffs. These businesses may face:

Difficulty absorbing increased costs, leading to possible reductions in profit margins or, in extreme cases, business closures.
Strain on cash flow, as importers may need to pay higher duties upfront, affecting working capital.

How shippers can strategically respond

In response to the tariffs, some importers may seek ways to mitigate the impact. This could involve:

Diversify supply sources: Importers may look for alternative suppliers in countries to avoid tariff costs. This could lead to a shift in trade patterns as Canadian businesses pivot more toward other countries, like Mexico, or countries in Europe and Asia. Importers may look at countries with whom Canada has existing trade agreements in place. Worth noting is that over the past few decades, Canada has established many free trade agreements. Seeking out new domestic suppliers may also be a viable option to consider.
Negotiate with customers and suppliers: Businesses may attempt to renegotiate pricing with customers or even suppliers to absorb part of the tariff burden. This approach could be challenging especially with suppliers, given the increase in costs.
Innovation in product offerings: In some cases, importers might explore new product lines or pivot their business models to adapt to changing market conditions and minimize the impact of the tariffs.
Assess resources and capabilities of teams who can execute your plans during this period of change. As businesses adapt to the new tariffs, it is crucial to evaluate whether you have the necessary expertise, bandwidth, and resources in place to implement strategic changes effectively.
Confirm your tariff classification: Strategize with your customs broker or service provider and confirm accuracy of your tariff classifications contained in your product database.
Determine approach: Plan out whether proactive or reactive approaches are appropriate. Depending on the variables involved, a wait-and-see approach may be appropriate to minimize disruptions while remaining vigilant.

The long-term outlook

While the immediate effects of the retaliatory tariffs might seem apparent, the long-term impact to traders and the broader economy will depend on how long the tariffs remain in place and how businesses adapt. For some importers, the tariffs may lead to long-term changes in their supply chains and sourcing strategies, potentially leveraging existing trade agreements.

There is a renewed Canadian posture towards self-reliance as it relates to breaking down inter-provincial trade barriers that have hindered in the past. Early developments such as fast-tracking resource mining and energy production and refining are interesting discussions about future investment.

If negotiations between the United States and Canada lead to tariff reductions or eliminations, businesses may see a return to previous levels of trade and lower import costs.

Ultimately, the tariff dispute between Canada and the United States underscores the complexity of international trade and the interconnectedness of both economies. For perspective, over two-thirds of the Canadian economy is reliant on international trade with just under 80% of exports destined for the United States. Canadian importers will need to adapt to the changing landscape, but their ability to do so will determine how they are impacted by the tariff measures.

Discover the impact of Canada's reciprocal surtax on importers and businesses. Learn strategies to navigate new tariffs and maintain trade compliance.