U.S. President Donald Trump waves as he walks across the South Lawn at the White House in Washington, on March 28.Evelyn Hockstein/Reuters
Fraser Johnson is the Leenders Supply Chain Management Association Chair at the Ivey Business School at Western University in London, Ont.
On Thursday, Prime Minister Mark Carney announced countertariffs in the escalating trade war with the United States, after American duties against Canadian vehicles came into effect. Mr. Carney’s retaliation comes on top of existing measures. Canada has already imposed tariffs on $60-billion worth of U.S. goods in retaliation to other tariffs, with an additional hit list of more than 4,000 goods valued at $155-billion.
Such retaliation is ill-advised. We may, in fact, draw some solace from the fact that Mr. Carney did not go further on Thursday. He imposed 25-per-cent tariffs on U.S.-made cars not compliant with the United States-Mexico-Canada Agreement but stopped short of broader measures.
Responding with countertariffs will raise prices for consumers and punish Canadian businesses that are already struggling with the effects of U.S. President Donald Trump’s tariff policy. And it’s unnecessary. For the same reason that Canada shouldn’t apply countertariffs, U.S. tariffs are ill-conceived and unsustainable. The fact that Canada, despite facing a range of tariffs, was spared from Mr. Trump’s blustering “reciprocal tariffs” announced Wednesday confirms this. My prediction is the U.S. will eventually need to remove the tariffs.
Most supply chains rely on regional trade for a number of practical reasons, including minimizing transportation costs and shortening lead times. Therefore, it is not surprising that Canada and Mexico are America’s largest trading partners. And that is unlikely to change. Consequently, there are several reasons why I believe the U.S. will need to re-evaluate its tariff strategy.
First, North American car companies have invested billions of dollars creating efficient supply chains capable of producing affordable products. Each year, American consumers purchase between 15 and 17 million vehicles, choosing from an extensive range of models, each offering a wide selection of features. Tariffs create supply-chain inefficiencies and constraints that have the effect of limiting consumer choices and increasing costs.
Mr. Trump’s statement that “people are going to buy American-made cars” is not realistic. There is no such thing as an American-made car. Vehicles consist of thousands of components, sourced globally. Furthermore, the U.S. automobile industry does not have the capacity to produce the variety of vehicles, and their components, demanded by American consumers.
Ford Motor F-N chief executive officer Jim Farley warned that tariffs would “blow a hole” in the U.S. auto industry. Tariffs will increase vehicle prices in the U.S. by US$5,000 to US$10,000 and limit the number of models and features available – in short, less selection and higher prices. Increasing car assembly and component manufacturing capacity in the U.S. will require billions of dollars in capital investments – money automakers and their suppliers cannot afford to spend as they transition to new, electric-vehicle technologies.
The United States has similar dependencies elsewhere. Canada’s largest export category to the U.S. is oil and gas, with Canadian oil accounting for more than 60 per cent of U.S. crude imports in 2024, supported by a complex pipeline system developed over decades to service refiners on the U.S. Gulf Coast and in the Midwest.
These operators have configured their plants to process heavy Western Canadian Select (WCS) crude, which typically sells at a discount of 15 per cent or more to West Texas Intermediate (WTI) crude. The existing pipeline network has effectively hard-wired the supply of WCS to U.S. refiners. Reconfiguring refineries to handle other grades of crude from alternative sources would be costly and take time. The net effect of the tariffs will be higher gasoline prices in the Midwest.
Lessons from the steel and aluminum tariffs imposed during Mr. Trump’s first term further demonstrate why responding with countertariffs is unnecessary. In 2018, with much fanfare, the U.S. imposed tariffs of 25 per cent on steel and 10 per cent on aluminum – sound familiar? This policy had the effect of damaging the bottom lines of U.S. manufacturers, increasing the prices of consumer products such as cars and appliances and killing jobs in the manufacturing sector. Twelve months later, the tariffs were removed, largely as a result of pressure from U.S. businesses.
Retaliatory tariffs may be emotionally satisfying to Canadians and politicians who feel jilted by their closest ally and largest trading partner. The fear is that the U.S. can no longer be trusted. Businesses hate uncertainty. It makes it more difficult to allocate scarce capital to expand production or increase productivity.
Pundits have highlighted opportunities to diversify the Canadian economy by focusing on emerging digital technologies or perhaps artificial intelligence. Exploring new markets for our natural resources, such as oil and gas, potash and lumber, have also been flagged as avenues to pursue. While worthy ideas, major pivots will take decades, with considerable economic and social costs. Like it or not, geographic proximity and the sheer size of the U.S. market mean Canada will continue to rely on its economic relationship with the U.S.
However, the reverse is also true. It is unrealistic to expect that tariffs can be used to unscramble integrated North American supply chains. There are no winners in a trade war, only losers. Clearly, the U.S. has the advantage in this situation, and there is nothing to be gained by antagonizing Mr. Trump. A more effective strategy is to “play the long game,” which favours Canada.