Challenges Abound in Rerouting Supply Chains Amid Tariffs: It’s Not as Simple as Flipping a Switch

The idea that Canadian companies can easily switch supply chains in response to American tariffs is unrealistic, according to experts.

With 25 percent tariffs imposed on some Canadian goods and the potential for more tariffs, businesses in Canada are exploring other options for sourcing materials and selling products.

However, companies entrenched in tightly integrated supply chains due to years of trade agreements and industry specialization may face obstacles related to transportation costs, labor expenses, resource availability, manufacturing capacity, and market saturation.

“There are numerous industries that cannot simply change overnight,” said Ulrich Paschen, an instructor at Kwantlen Polytechnic University’s Melville School of Business.

The automotive sector exemplifies the challenges many firms encounter. Canada exports approximately 1.5 million fully assembled vehicles to the U.S. annually, accounting for eight to 10 percent of American vehicle consumption. Canadian auto exports are predominantly to the U.S., as stated by the Canadian Chamber of Commerce.

American automakers are also unlikely to sever ties with their Canadian partners. Terminating contracts with Canadian suppliers would incur significant breakage fees per U.S. factory. Many components cross the border multiple times before final assembly.

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Canada and the U.S. have established a deeply integrated trading relationship over many years, according to Pascal Chan, vice-president of strategic policy and supply chains at the chamber.

“It’s not a simple task to disentangle this intricate trading relationship,” he stated.

Canadian auto suppliers contemplating a move to the U.S. would face significant deterrents such as closure costs, higher labor expenses, and lengthy delays to establish their operations in America.

Sectors like automotive, lumber, and steel could encounter substantial hurdles in finding new markets, as noted by Paschen.

He mentioned the limited number of companies capable of manufacturing certain components, particularly in the automotive industry.

For forestry companies, the challenge lies in the low value per volume of lumber exports compared to other commodities.

“Shifting goods from Canada directly to the United States makes more economic sense than shipping them halfway across the world due to transport costs,” Paschen explained.

Regarding steel and aluminum, President Donald Trump imposed tariffs on imports from all countries, including Canada. Canada retaliated with tariffs on U.S. goods. The intricate supply chain makes it difficult to redirect these commodities to other markets.

The geographical and population differences between Canada and the U.S. pose challenges for companies seeking to expand their domestic market beyond the U.S.

Businesses are unlikely to make significant alterations to their supply chains unless they foresee long-lasting tariffs, Paschen added.