What are tariffs? Tips for managing tariff impact on businesses

While tariffs can boost government revenue and protect local jobs, there’s a serious risk of straining international relationships and reducing trade between countries. Ultimately, this impacts the imposing country’s economy, as well as the countries that export to that country. Not to mention, in some instances, trading partners might choose to retaliate with their own tariffs.

For better or for worse, tariffs can cause large fluctuations in government revenue and policy, consumer spending habits, employment rates, and inflation—just to name a few.

Why impose tariffs?

Governments impose tariffs for several reasons, often to protect or support domestic industries. By raising the price of imported goods, tariffs make locally produced products more competitive and attractive to consumers. As domestic sales increase, so can the fortunes of local businesses and the broader economy. 

Using this principle, some tariffs are targeted at specific products to kickstart or protect particular domestic sectors. A tariff on imported steel, for example, can help ramp up domestic steel production.

Governments might also impose tariffs on specific countries or regions for diplomatic leverage. By imposing or threatening tariffs, a country can address trade imbalances or unfair trading practices, influence negotiations and policies, or respond to other foreign actions.

No matter what the case may be, it’s important to remember that tariffs are paid by importers. Importers may choose to accept tighter margins or pass on some of this cost to consumers. So, while they can support domestic industries, they can also have an adverse effect on local businesses and consumers.

Understanding how tariffs work

In a nutshell, tariffs are taxes collected by a government on goods that are imported by individual consumers or businesses. They’re enforced and collected by a government’s customs agency. In Canada, the Canada Border Services Agency (CBSA) handles tariffs. When goods are imported into a country, the agency checks shipping manifests and collects the requisite taxes to be deposited into government bank accounts. 

To find out about specific tariffs that might apply to your business, you can search the Canada Tariff Finder for up-to-date information.

How tariffs can impact Canadian businesses

While they are not inherently harmful and can be beneficial in some situations, tariffs can negatively impact Canada’s economy, policies, and overall standard of living.

For importers:

Businesses that rely on imported goods or raw materials can often face significant challenges due to tariffs. Here’s a breakdown of some of the ways that importers can be impacted:

Increased costs

Tariffs can have a major financial impact on Canadian businesses that import goods, services, or raw materials. They generally result in increased costs across the board, which can substantially affect a business’ bottom line and ability to compete. This forces companies to rethink their strategies and face a hard truth: they may need to shift their pricing strategy to raise the prices of the goods and services they sell to maintain profitability, or shift their overall business strategy. 

As a result, end consumers also usually bear some of the burden and end up facing reduced purchasing power. They might need to cut back on other expenses or dip into their savings to afford the same products. Alternatively, they may choose to buy less from a business or switch to cheaper alternatives, which ultimately impedes both the business and its customers.

Reduced ability to compete in local markets

Rising prices due to tariffs can reduce the competitiveness of Canadian importers. Businesses might end up having to operate at lower margins or even a loss to retain customers or attract new ones. Because of this reduced ability to compete, tariffs can really hurt smaller businesses with fewer resources, increasing the risk of monopolistic or oligopolistic market conditions and ultimately harming the national economy.

Supply chain disruption

Tariffs can also impact Canadian businesses by significantly interfering with supply chains. As the cost of imported goods rises, buyers may start looking for domestic suppliers or suppliers from countries without tariffs imposed, which can lead to shortages of raw materials, shipping delays, and an overall slowdown in operations. In turn, consumers may start seeking temporary alternatives that over time can lead to a lasting decline in market share for affected businesses.

For exporters:

Exporters are affected heavily by retaliatory trade agreements. Here’s a breakdown of some of the ways that exporters can be impacted:

Reduced ability to compete in international markets

Exporters might find themselves priced out of international markets, resulting in reduced sales, market share, and shrinking revenues.

Operational challenges

Exporters may need to change their operational strategies to reduce the impact of tariffs and trade regulations on their business. Exporters may consider changes like relocating production, modifying their product strategy, changing their pricing and contract terms, optimizing logistics or exploring new markets to help reduce the impact.

How to manage the impact of tariffs on your business

Once they’re imposed, there’s not much business owners can do to avoid tariffs, but there are a few ways to mitigate their impact. Here are a few:

Review and update your supply chain

For any business that relies on imported materials, shifting supply chains to domestic or other non-tariffed suppliers can have a positive effect on long-term viability. It’s not always easy to find new suppliers, but doing so can make a big difference in your bottom line. When alternatives aren’t available, even tariffed suppliers may be willing to negotiate more favourable terms.

Diversify your trade practices

The imposition of tariffs can be a powerful catalyst to start exploring new markets. If you’ve been reliant on just one national market and that country starts imposing tariffs, it may be time to diversify and increase trade with other countries. To establish a wider presence, consider attending trade shows and making sales visits to untapped markets. Banks like BMO can also help business owners explore new markets through initiatives like the Trade Expansion Lending Program (TELP).

Adjust prices and cash flow forecasting

Since tariffs can have an immediate effect on profit margins, it also becomes crucial to look at your pricing and expenses. Running cash flow forecasts under different financial scenarios can help clarify the effect of tariffs on money coming in and where you need to make adjustments.

Taking the time to learn more about cash flow planning in times of economic uncertainty and coming up with strategies to address potential disruptions can make a huge difference in your business’s long-term success.

If you don’t have quick access to cash right now, this might be a good time to speak to your bank about lending solutions, or lending programs specifically designed to support international growth.

Communicate with customers 

Communication can greatly ease the burden tariffs place on businesses. Maybe it’s an email campaign letting customers know a price increase is on the horizon, or proactive sales calls to see if they want to place orders before tariffs take effect. Opening communication across channels can also help you develop a better understanding of shifting consumer demand and where your company can adapt.

Seek professional advice

As with any major disruption to your business, the sweeping nature of tariffs can make a call to an expert invaluable. Export Development Canada (EDC) and the Canadian Trade Commissioner Service are great resources to find solutions to tariff-related issues. It is also recommended to meet with your banker, as they can help you access new global markets through certain product offerings or expert guidance.

Supports for affected businesses 

Tariffs can have an impact on business growth and profitability, but the good news is that there are a few ways for your business to get help. Both the Canadian government and banks can provide tariff relief to ease the financial impact.

How the Government of Canada provides tariff relief

The Government of Canada offers a variety of programs designed to help companies work around tariff complications. These include:

• Relief from tariffs: In some cases, companies can request the remission of tariffs, or the refund of tariffs already paid, on certain products or services, such as when those goods cannot be sourced domestically.
  
  
• Tax relief: The Canadian government may also periodically provide tax relief programs that can help reduce a company’s tax burden and free up cash flow.
  
  
• Duty relief: In situations where an imported product is due to be re-exported, duty relief programs allow companies to import commercial goods without paying duties at the border.

How banks can provide support

In addition to government support, banks like BMO can also help business owners explore new markets. For example, BMO’s Trade Expansion Lending Program (TELP), offered in partnership with Export Development Canada, can help your business secure financing as needed to support international expansion.

Managing the uncertainty that tariffs create can be challenging. However, business owners can reduce the impact by seeking professional advice, reviewing supply chains, and finding tariff-specific support from institutions like the Canadian government to help ensure long-term success.