U.S. President Donald Trump’s tariffs on Canada could hit Canada as early as Tuesday, with economists warning that a trade war could plunge the country into a recession.
Industry voices have called on Ottawa to shift away from its reliance on the United States, but that is easier said than done. While some industries have deeply linked supply chains with their counterparts in the U.S., others could pivot more easily.
The U.S. is the destination for 77 per cent of all of Canada’s goods. No other country accounts for more than five per cent of Canada’s export share.
While Canada is also the largest export destination for U.S. goods (18 per cent), the reliance is not quite the same.
Jean Simard, CEO of the Aluminum Association of Canada, said Trump’s threat of tariffs is a wake-up call for Canada.
“Canada has to reinvent, re-engineer itself. We have to keep all the options on the table. Luckily, we have free trade agreements with all G7 countries,” Simard said, speaking to Global News from the U.K., where he was meeting with trading partners from around the world.
Currently, the United States accounts for over 90 per cent of Canada’s aluminum exports.
Simard said for Canadian metal producers, pivoting away won’t be easy.
Earlier this month, Trump signed a pair of presidential proclamations that will impose 25 per cent tariffs on foreign steel and aluminum on March 12, with no exceptions or exemptions. If he chooses to move forward with a broad 25 per cent tariff on Canada, they would stack on top of his metal tariffs.
This means Canadian steel and aluminum would potentially be tariffed at 50 per cent.
“The day you start to do this, it means that you’ve also decided to move away from an existing market, which is the U.S. one. You don’t decide that just on a whim,” Simard said.
However, he said there is a high demand for Canadian metals in Europe, due to their relatively low-carbon production.
“We’re seaborne. We can ship using the St. Lawrence Seaway. We have access to the ocean. And this is a market (Europe) that wants our metal because it’s low carbon.”
Simard said Europe will be the easiest market to pivot to.
“The good thing is that our producers all have links to the European market already. Two of them produce in the Scandinavian countries, so they already have a market access,” he noted.
He said while Canada could start shipping to Europe relatively quickly, a truly diversified supply chain would take two to three years to build.
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“You can ship next week or the week after if there’s a ship availability. But to say that you are diversified — that’s a different thing,” he said.
Canada’s energy export sector is almost entirely dependent on the U.S.
While Trump’s tariff proposal on Canada has a lower rate of 10 per cent for Canadian oil and gas, any levy would hurt the industry significantly.
The U.S. received approximately 97 per cent of Canada’s crude oil exports, with the remaining three per cent going to other destinations, including the Netherlands, United Kingdom, Germany, Spain, France, Norway, Italy and Hong Kong.
Moshe Lander, economist at Concordia University, said, “The one area where you could say that there’s a potential market is in oil and gas, particularly in gas. The cost of LNG terminals and then regasification terminals have come down substantially.”
Lander said Europe could be a place for Canadian oil and gas to pivot, given that Europe wants to reduce its reliance on Russian energy.
Despite sanctions on Moscow and three years of Russian President Vladimir Putin’s invasion of Ukraine, the European Union’s energy imports from Russia have remained largely unchanged. Last year, the EU imported C$32.88 billion (EUR 21.9 billion) in Russian energy.
However, Lander said a challenge for Canadian oil would be to get Alberta’s crude oil to the ports. In 2017, TransCanada cancelled the Energy East Pipeline, which would send oil from Alberta to Quebec.
Lander said Canada would have to improve infrastructure significantly to be able to pivot to other markets.
“The issue then is can we do this with tariff threats looming? No, not in the next week or not in the next five weeks,” he said.
A recent report by the Royal Bank of Canada said nearly 60 per cent of Canada’s food exports end up in the U.S. and account for 20 per cent of all American food imports.
The report said Canada’s competitors in the agri-foods sector, like Brazil and Australia, have done a much better job of diversifying their markets.
By diversifying food exports, Canada could boost them by 30 per cent and add $44 billion to total exports by 2035, the report said.
The RBC report said Canada already has market access in some key markets where it can push its advantage. For example, it points out Japan as a major market for Alberta beef. Canada is now the second largest exporter of meat to Japan, just behind the United States.
Trade between Canada and the EU is also expected to pick up. The report expects EU tariffs on Canadian fish and seafood to be fully phased out over the next five years, a situation Canada could take advantage of. In addition to strengthening existing markets, Canada can also push into newer markets.
In particular, the report singles out Southeast Asia and South Asia as markets where consumers will have more money to spend in the next few years.
“India is one of the clearest opportunities — a market of 1.5 billion people whose economy and standard of living are growing rapidly. This market will increasingly be an opportunity for Canada’s agri-food processing industries, especially plant-based proteins driven by Canada’s production of legumes — peas, lentils, and soybeans,” RBC economist Lisa Ashton said in the report.
The report said Canada should follow the examples of other major food exporters. A free trade agreement between Australia, New Zealand and the Association of Southeast Asian Nations (ASEAN) eliminated tariffs on 99 per cent of New Zealand exports to Indonesia, Malaysia, the Philippines and Vietnam.
Canadians produce more food than the country needs, making the country a net exporter of agriculture and agri-food products by $32 billion in 2023.
The report added that Canada has an opportunity to sell in countries like Japan, China and Mexico, which are projected to have food trade deficits over the next decade.
If there is one sector that is going to find it extremely difficult to pivot to other partners, it is Canada’s auto sector.
The automobile manufacturing sector and its supply chain in Canada and the United States have been deeply integrated since the 1960s.
Lander said the Canadian auto industry will find signing deals with major European or Asian trade car companies difficult.
“Why would we even sell European cars to Europeans? They have so many options for production facilities in Central and Eastern Europe where they’re going to be able to make those European cars with their own integrated network,” he said.
Lander added, “There’s no way that they would look to Canada saying, ‘Hey, how about you make our VW for us and then ship them back across the ocean?’”
However, some experts argue that a silver lining for Canada could come in the form of manufacturing batteries for electric vehicles.
Brian Kingston, president and CEO of the Canadian Vehicle Manufacturers Association, said, “China controls about 80 per cent of the inputs that go into advance batteries. The only other source that you have in the Western Hemisphere is Canada. Canada has the full suite of minerals required to build next-generation electric vehicle batteries.”
He said even the U.S. will need Canada’s resources if it wants to beat China in the global EV-race.
Lander added that Canada’s advantage in having rare earth minerals needed for battery production will be used most effectively in partnership with the U.S.
“The rare earths are going to be valuable to somebody, but they’re probably more valuable within an integrated North American market than they are to Europeans and Asians,” he said.
Trump’s tariffs are coming. Which Canadian industries can pivot quickly?
