US President Donald Trump has reiterated his threat to impose 25% tariffs on Canadian imports, suggesting the levies may take effect as soon as February 1. According to experts, the move would have a widespread impact on Canadian exporters and likely prompt a scramble for working capital.

On his first day in office, following his inauguration as the 47th president of the United States, Trump refrained from immediately imposing tariffs on Mexico and Canada, despite earlier promises to do so.   

But while signing a raft of executive orders at the White House, he suggested import levies may soon be introduced unless both nations crack down on illegal immigration and drug trafficking.

“We are thinking in terms of 25% on Mexico and Canada… they are allowing vast numbers of people to come in and fentanyl to come in… I think [they will be enacted] February 1,” he told reporters.

For now, experts say it is unclear if Trump will follow through on his threats, suggesting the tariff warnings may be a negotiating tactic to pressure Canada and Mexico into policy concessions.

“This appears to be tariffs as a tool,” says Ted Murphy, a partner within law firm’s Sidley’s global arbitration, trade and advocacy practice. “Is this long-term? Not necessarily. We think this is likely Trump using tariffs for leverage.”

If the 25% tariffs are imposed, analysts predict the impact would be severe as roughly 75% of Canadian exports are destined for the US.

David Dienesch, chief executive of Allianz Trade Canada, says the effects would be felt “right across the board”.

“Automotive and lumber are big exporting sectors. Lumber is already paying stiff duties with the US, so this is a double whammy. Metals, steel, aluminium, critical minerals, energy, potash, all of these [will be affected].”

“Scotiabank has indicated the Canadian economy could shrink by 2.7% and unemployment could rise 2%,” he tells GTR.

“The Ontario government did a study, and they’re expecting that the impact could be between 450,000 and 500,000 job losses. Quebec just announced 100,000 in potential job losses, a lot of which would be in manufacturing.”

Canada has been lobbying the Trump administration in a bid to prevent tariffs, pledging C$1.3bn (US$900m) in fresh security measures along the country’s nearly 9,000km-long border with the US.

But should diplomatic efforts fail, Canada has intimated it would likely impose retaliatory levies on US imports.

Outgoing Canadian Prime Minister Justin Trudeau met with provincial and territorial premiers last week, noting: “Nothing is off the table.”

However, analysts caution that a full-scale trade war would disproportionately harm Canada.

“The economic impact will be felt more on the Canadian side,” Murphy tells GTR. “Canada cannot go toe-to-toe with the United States in a drawn-out trade war… I don’t think anybody necessarily wins in a trade war, but Canada will bear the brunt… the US is just a much bigger country.”

 

Squeezed cash flows?

The proposed US tariffs could trigger widespread cash flow and profitability issues for Canadian importers and exporters, analysts say.

Dienesch tells GTR that Allianz Trade will be closely assessing the response of Canadian businesses to identify credit risks.

“What are their relationships with their banks, are they pumping up their operating lines…? Are they shortening their payment cycles by collecting receivables early and extending payables, where possible?”

Supply chain finance (SCF) is a relatively nascent product in Canada, as compared to Europe, Dienesch says. Instead, banking relationships are largely weighted towards lines of credit.

But with Canadian banks becoming “more involved” in the segment, he suggests SCF could be a valuable tool for cash-strapped firms.

He likewise anticipates greater interest in trade credit insurance. “All predictions are for a slowing economy, so that means more demand for insurers…. There will be slower payments, more bankruptcies.”

For now, however, trade credit insurance remains underutilised in Canada, particularly when compared to European markets.

“Less than 5% of Canadian companies use trade credit insurance. They have not explored it enough and I don’t think there are enough government programmes in place to help us support that.”

He argues that Canada’s export credit agency, Export Development Canada, is impeding the activity of commercial insurers.

“[It] has roughly a 50% market share. They compete directly with the private sector, and while they do good things, they also squeeze out the trade credit insurance portion of the business…. We’re competing against the government,” he says.

 

Tariffs overnight?

If Trump decides to impose tariffs on Canada, he could do so quickly and face limited legal obstacles.

“The question is, which statute will he use?” Murphy says.

“If he used section 232 or 301 investigations like he did with China previously, these statutes come with required process and take a lot of time. There are other statutes, such as the International Emergency Economic Powers Act… which just requires a presidential determination, say, of a national emergency.”

Murphy notes it is “certainly conceivable” that he could declare the arrival of migrants or fentanyl at the border as a national emergency and, in effect, impose tariffs on Canada almost overnight.

There might be a slight lag due to “software programming issues” at the US border, but “it could be done by February 1”.