Impact of Trump Administration 2.0 on Canada-U.S. Supply Chains

This article examines the likely effects of the Trump Administration’s proposed tariffs on cross-border trade and supply chains, while also reflecting on any implications for government contractors selling into the Canadian market. This is the first in a series of analyses we’ll provide on the Trump Administration’s new policies and their expected impacts in 2025.

The Canadian and U.S. economies are highly interconnected, but that relationship is currently being tested amid the ongoing threat of a trade war. U.S. President Donald Trump has threatened to impose a 25% tariff on all imported goods from Canada on February 1, and Canada’s position so far has been to threaten retaliatory tariffs. Canada and the U.S. trade everything from cars to lumber to chocolate, and a trade war would raise prices for both Canadian and American consumers. It would also raise the cost of doing business as a government contractor in both countries.

Understanding the Proposed U.S. Tariff on Canadian Goods

So far, Trump’s tariff threats have been just that – threats. No official policies have been released and the president’s initial pledge to implement tariffs on day one in office has been delayed to February 1. This has led some economists and investors to believe Trump is bluffing, while others insist that he won’t back down from a core campaign promise and lose credibility. However, as of Tuesday, January 28, the White House has doubled down on its plans to go through with the tariff if Canada does not help tackle the dual issue of fentanyl trafficking and illegal immigration into the U.S.

Should the U.S. impose a 25% tariff on Canadian imported goods, the effects would be felt in both countries but particularly in Canada, which relies far more heavily on trade with the U.S. than the other way around. According to a recent analysis from the Peterson Institute, the tariff would slow growth and accelerate inflation in both countries. The analysis further estimates that while U.S. GDP would be about $200 billion lower, Canada would lose around $100 billion off of a much smaller economy. Prices would rise for American consumers, discouraging them from buying Canadian goods and possibly plunging Canada into a recession.

Because the Canadian and U.S. economies are highly interdependent, the real economic damage could be much worse than the Peterson Institute’s estimates suggest. Intermediate goods, which can cross the border multiple times before final assembly, underscore the potential harm and explain the motives behind Trump’s proposed tariff. For example, the components of an average car built in North America cross the border about seven to nine times before assembly, according to CBC News economic reporter Peter Armstrong. Imposing tariffs at each stage of fabrication would be costly to manufacturers, and trying to unwind the current automotive supply chain in a way that doesn’t hurt American consumers a herculean task. It is being estimated that the average cost of a car purchased in the U.S. would increase by about $3,000.

To avoid facing 25% higher production costs – and possibly facing them multiple times – automotive companies would have to completely rethink their supply chains, and could be motivated to move their production entirely into the U.S. This is the key to understanding Trump’s motives—he would deliver on his campaign promise to create more U.S. manufacturing jobs and bring more money into the U.S. Treasury to enact his agenda.

Canadian Response to the U.S.

Canada’s economy is highly dependent on trade with the U.S., leaving its leaders with few options as they navigate this situation. Approximately 75% of Canadian exports are sent to the U.S., while Canada accounts for a smaller 17% of U.S. exports. This has left Canada in a position where it needs to do everything it can to avoid the tariff or reduce the percentage should it be imposed.

Canadian Prime Minister Justin Trudeau is considering all possible options, including retaliatory “dollar-for-dollar” matching tariffs and an embargo on energy exports to the U.S. The “dollar-for-dollar” approach worked during the first Trump Administration to force the U.S. to backtrack on tariffs it imposed on Canadian aluminum and steel. However, there is a lack of consensus between Trudeau and provincial leaders when it comes to Canada’s response. Alberta Premier Danielle Smith strongly opposes using energy as a bargaining chip, since most Canadian crude oil exports originate from Alberta oil sands. Ontario Premier Doug Ford, who oversees the largest provincial economy, has emerged as the de facto spokesman for Canada in dealing with the tariff threat. Ford has called an early provincial election that he hopes will provide him with a new mandate to take on Trump for the next four years. Making the situation even more tenuous is the fact that Trudeau is on his way out and a federal election to appoint a new Prime Minister is imminent.

As of January 28, Canada is still committed to responding with countermeasures if the U.S. imposes its 25% tariff on February 1. While the “dollar-for-dollar” approach was successful in the past, any retaliatory tariffs would raise prices for Canadian consumers and further derail the economy, since Canada’s domestic supply chains likely cannot produce alternatives to all the goods it imports from the U.S., forcing Canadians to continue purchasing now pricier U.S. goods.

Impacts on Government Spending and Contracting

The Trump Administration has linked the proposed tariff to border security and a trade deficit with Canada, though the deficit is driven primarily by U.S. energy demands. To address the former reason, the Government of Canada announced a $1.3 billion CAD program to strengthen the border and disrupt illegal cross-border activity. Funding will go towards deploying new drones, helicopters and surveillance towers; purchasing advanced technology such as x-rays, mobile x-rays and hand-held chemical analyzers; and boosting public safety personnel and intelligence resources. Despite this investment being announced in December 2024, Trump is still pushing Canada to do more to secure the border, and there may be additional Canadian investment in this area as a result.

When it comes to government contracting, the 25% U.S. tariff and an ensuing trade war would significantly impact contractors as the cost of doing business rises and supply chains are disrupted. Suppliers can prepare for a sudden hike in tariffs by boosting inventory levels, adding price adjustment clauses and caps to contracts, and establishing relationships with local manufacturers. While these methods are not foolproof, supply chain diversification is a common strategy employed by suppliers when facing sudden shifts in the market.

It won’t be possible to completely avoid fallout and as prices rise, longstanding relationships between suppliers and government buyers may be disrupted as the latter are driven to rethink their sourcing strategies and make rapid shifts to new suppliers. Canadian governments could also retaliate by choosing not to do business with U.S. suppliers, though, as previously mentioned, Canada’s domestic supply chains may not make this a viable option.

Check back into GovWin IQ for updates on this developing situation.

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The Federal Market Analysis (FMA) team is providing updates and analysis on key Trump Administration actions impacting government contractors. Learn more about their insights through the following links:

Summary: First Look: Trump Administration 2.0

Webinars:

• Navigating the New Administration: Impacts & Opportunities Part 1
• Administration Transition 2025: Impacts and Implications for Government Contractors

Articles:

• First 100 Days: Week in Review (Jan 20-24, 2025)
• Part 2: The New Administration Takes Immediate Executive Action on Federal Technology
• Trump Executive Orders on Immigration and Border Security
• What the Hiring Freeze means for Federal Contractors
• The New Administration Takes Immediate Executive Action on Federal Technology
• The Potential Impact of Executive Actions on Select Environmental and Cybersecurity Initiatives