On Friday, January 31, President Donald Trump confirmed tariffs on Mexico, Canada and China to start that weekend, implementing a 25% blanket tariff on Canadian goods coming across the border, except for oil, which will be taxed at 10%. Business owners across the country cancelled their weekend plans and scrambled to figure out next steps for their business. Accountants had a very busy four days to discuss the impact and solution with clients, only for Trump to reverse course and call a 30 day pause on the tariff after a discussion with Trudeau on Monday, February 3. While the entire nation breathed a sigh of relief, it became clear that Canadian business owners came to the realization that they need to adjust to a new normal – at least for the next four years.
Despite the current 30-day standstill, many Canadian businesses are still seeking permanent solutions to the potential of tariffs. The realization has come that the United States has elected a President who is unpredictable and will wave the threat of tariffs to get what he wants at any time. There are two major ways that small businesses are impacted. First, businesses that sell products into the US will see their prices artificially raised by 25% thus decreasing demand for their products. The Canadian entrepreneur will need to run some financial scenario analysis to determine whether to lower their prices to soften the blow, thus eroding their gross profit margin or roll the dice and see if US customers continue to buy their products at a higher price.
Small businesses that import raw materials or finished goods from the US are also impacted by the retaliatory tariffs set by Canada as their variable costs go up by 25%. Again, Canadian entrepreneurs in this position need to run some cashflow forecasts to determine whether to pass this cost on to their customers thus raising prices or lower their prices, again eroding their gross profit margins. Both scenarios are extremely disruptive to Canadian businesses.
Assuming that tariffs will remain a lingering threat for the next four years, small businesses have decided to take action and are considering the following options: 1) Partner with US companies to sell and purchase goods through the US entity to avoid tariffs, while paying a commission or administration fee to their partner, 2) Open an affiliate company or subsidiary in the US to buy and sell goods to avoid tariffs, 3) Moving their entire business to the US; many Canadian business owners with the majority of their sales in the US have been looking into this option since the announcement of the increase in capital gains since April 2024. Despite the 30-day pause on tariffs, it is likely many Canadian business owners will move ahead with their plans.
The threat of tariffs alone is likely to further weaken a Canadian economy that is already struggling. Every solution creates distractions for entrepreneurs from their core business, have a real cost that will impact their profits and will be disruptive to their sales. However, many business owners have decided that these costs do not outweigh the cost of continued uncertainty that can potentially put them out of business.
If Trump’s intention was to create chaos and generate more business activity in the US, he has already won. The continued threat of tariffs alone is causing Canadian companies to react and move business south of the border. It is clear that we have entered an era where diplomacy has been thrown out the window. President Trump is treating the United States like a giant private corporation with clout. He realizes that the United States has the largest consumption market in the world and is implementing a pay-to-play policy, which is not uncommon for major corporations like Costco or Amazon. Whether his strategy will pay off for the United States remains to be seen, but we can be certain the impact on Canadian small businesses is devastating.ke it through, COVID has actually provided businesses the opportunity to take a deep breath and implement long overdue processes that have constantly been shelved in favour of sales and marketing initiatives. These businesses will certainly come out stronger on the other side.
