Canadian businesses not prepared for tariffs #CanadaFinance

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Some Canadian companies are contemplating moving their operations to the United States as a long-term solution to get around Donald Trump‘s tariff threats and protect the viability of their businesses, according to a new survey by PricewaterhouseCoopers LLP Canada.

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Its survey of 283 Canadian businesses also said they aren’t so sure about their long-term prospects, with 58 per cent saying they thought their business would be viable 10 years from now, down from 63 per cent in November, while 19 per cent indicated they would move some or all of their production to the U.S. to protect the future of their operations.

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The relocation figure raises “concerns for the Canadian economy,” PwC said in the report, which added that figure rises to 37 per cent in the industrial manufacturing and automotive sectors, while 42 per cent in those sectors said they expected their businesses to be viable 10 years from now and 24 per cent “put their business’ viability at two year or less.”

Overall, 15 per cent said their businesses would only remain viable for the next two years.

“That’s something to keep an eye on. We need those businesses to survive and be resilient,” Nochane Rousseau, national managing partner of clients and markets at PwC, said, noting they are the ones who are likely facing the most pressure from tariffs currently.

“Those companies are taking short-term action,” including adjusting supply chains and speaking with customers about who is going to absorb the tariff, with “some exporters deciding they will to protect market share,” he said.

Also, a little more than half of companies said they would look for new markets and 30 per cent said they would consider pursuing mergers and acquisitions and other partnerships in the longer term.

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Economists and politicians have both feared that U.S. tariffs will force companies to relocate their operations to avoid the levies, but tariff uncertainty has shaken the business climate ever since Trump was inaugurated.

Certainly, the mood among CEOs has shifted.

“When we asked about economic growth, 42 per cent of CEOs expected growth (in an earlier survey); 97 per cent believe economic growth is going to decline,” Rousseau said.

The Bank of Canada in its January Monetary Policy Report said “the threat of tariffs is already affecting financial markets and business decisions.”

The report modelled various tariff scenarios where the U.S. imposes 25 per cent tariffs and Canada responds in kind, and said that, in the baseline scenario, this country’s gross domestic product (GDP) would decline 2.5 percentage points in the first year and 1.5 percentage points in the second year.

“Over time, the decline in business investment significantly reduces potential GDP in Canada, leading to a permanent decline in GDP,” the Bank of Canada said in the report.

A huge majority of Canadian businesses are exposed to tariffs and an almost equal share is complaining of the resulting uncertainty and inability to plan, PwC said.

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Its survey, conducted March 4 to 10, said 78 per cent of respondents indicated they were “moderately” exposed to the effects of tariffs, while 31 per cent reported “high exposure.” Given that exposure, just under three-quarters of businesses said tariff uncertainty was making it hard for them to plan.

Businesses have found themselves exposed in other ways, PwC said.

For example, 69 per cent said they have experienced increased costs and disruptions to their supply chains, 41 per cent complained of reduced competitiveness and demand and about a quarter indicated they had lost market share in the U.S.

PwC’s findings are echoed in a report from the Canadian Chamber of Commerce that said supply chains are “re-emerging as a top business obstacle” after gaining prominence during the pandemic. The share of companies expecting to raise prices is also on the rise.

“This reversal is likely driven by new tariff measures, which are raising cost pressures for businesses and could feed into consumer prices in the months ahead,” the chamber’s Business Data Lab said.

Furthermore, business optimism is “eroding” and consumer demand is weakening.

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In the face of all this uncertainty, it’s not surprising that 66 per cent of businesses surveyed by PwC said they were only “somewhat” prepared for tariffs.

But 16 per cent said they were very prepared, which Rousseau thinks is good, given that businesses are trying to adjust in real time to shifting trade winds.

To try to keep up, about half of the businesses said they were switching suppliers to ones less affected by tariffs, 48 per cent said they were changing pricing, 39 per cent said they were considering putting off “key investments,” including mergers and acquisitions in the shorter term, and 20 per cent said they would cut production capacity or their workforce.

“The question mark is what the government will do in terms of support for the companies,” Rousseau said.

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