Counter-tariffs to put some Canadian industries ‘between a rock and a hard place’: Desjardins #CanadaFinance

Some Canadian industries will be “caught between a rock and a hard place” in the trade war with the U.S., a Desjardins economist says, as American tariffs and Canadian countermeasures hit both their demand and supply.

During a speech last Sunday, now-prime-minister Mark Carney declared that Canadian retaliation “will have maximum impact in the U.S. and minimum impact here in Canada.” But Desjardins Group principal economist Florence Jean-Jacobs’ analysis suggests the harm will be pronounced in some sectors.

“Some industries are caught between a rock and a hard place, risking a drop in U.S. demand for their products and an increase in their supply costs if substitutes are not easily found,” Jean-Jacobs wrote — with some vulnerable to a perfect storm of tariffs, counter-tariffs and a potential depreciation of the Canadian dollar.

U.S. tariffs, which will put pressure on Canadian companies that export south of the border, will have “the biggest impact on the Canadian economy,” Jean-Jacobs says. But for Canadian companies that source some or all of their products from the U.S., counter-tariffs could have a “significant” impact on operating costs.

“While companies may be able to avoid the full cost of the tariffs,” Jean-Jacobs wrote, “we can still expect to see lower profit margins, higher prices for consumers, or both.”

Companies that source some or all inputs from the U.S. and also export finished goods back across the border may be at particular risk of liquidity challenges, she notes — a group that includes “machinery manufacturers, agri-food processors, wholesalers, livestock producers, and automotive, aerospace, plastic and chemical product manufacturers.”

The construction, retail and food service sectors, which are seen as somewhat insulated from U.S. tariffs, are vulnerable to the first $30 billion round of counter-tariffs already in place, Jean-Jacobs notes, because these industries typically source a considerable amount of material from the United States.

A $125 billion second round of counter-tariffs, set to begin on April 2, would expose a wider range of Canadian businesses, with motor vehicles among the long list of inclusions. (The federal government is holding a 21-day consultation period on these tariffs, so businesses may lobby for exclusions that could change the composition of those retaliatory measures.)

“Counter-tariffs and currency depreciation will likely drive up the cost of things like dining out or buying a new car,” Jean-Jacobs wrote. “This could threaten the viability of many businesses, especially those that were already weakened by the pandemic. And the profit margins of other companies are likely to come under pressure due to the double hit of lower demand and higher costs.”