Preparing your business for higher tariffs

Customs fees in Canada

25% tariffs on steel and aluminum, tariffs on Canadian products, threats of further retaliation… The Trump administration is getting tough with protectionist measures that could disrupt the Canadian economy. For SMEs dependent on cross-border trade, the impact of these trade tensions could be considerable: higher costs, reduced margins, growing uncertainty. Although governments are promising support to affected industries, every company needs to anticipate and adapt. What strategies can be put in place to mitigate risks and protect profitability? Here are some practical tips for navigating this new reality.

1. Examine your contracts and supply chain

The new tariffs will have a direct impact on the supply chain, resulting in increased costs for manufacturers and importers. The first thing to do is to review supply and sales contracts in detail, in order to identify:

• Price adjustment clauses in the event of cost increases.
• Provisions allowing termination due to tariff changes.
• Possible exemptions or adjustments to the terms of the contract.

It is also advisable to carry out a detailed assessment of responsibilities concerning the payment of customs duties. This clarification will enable a better understanding of financial obligations and the preparation of appropriate negotiation strategies with trading partners. Companies should also anticipate their trading partners’ requests concerning the sharing of additional costs, and prepare appropriate responses.

2. Analyze your financial situation under several scenarios

Faced with uncertainty, companies need to anticipate different financial scenarios, taking several variables into account:

• Effective rate increases and direct impact on production costs.
• Possible reduction in export volumes due to lower demand in the United States.
• Rising costs of raw materials and other inputs.

At this stage, a sensitivity analysis is essential, as it enables the company to identify the factors that have a direct impact on its profitability, and to be better prepared to react in the event of fluctuations. The first step is to calculate the break-even point by dividing fixed costs by gross margin. The next step is to identify the critical factors specific to the company’s activities – generally sales and gross margin, but also other variables such as raw material prices or exchange rates, depending on the sector.

It’s important then to project different scenarios by varying these factors, and analyze their impact on profitability and cash flow. For example, what will be the effect of a 10% drop in sales or a 5% rise in raw material costs? This will enable you to anticipate the potential consequences of these variations and prepare strategies to deal with them. Finally, it is important to include the impact of variations on liquidity, to ensure that the company has the necessary funds to absorb changes without jeopardizing its financial stability.

3. Diversify supply chains

Diversification of supply sources becomes a strategy to consider in order to reduce dependence on at-risk markets. Companies need to actively explore sourcing opportunities in countries unaffected by tariffs. This involves a thorough assessment of potential suppliers, their reliability and their ability to meet the required quality standards.

Particular attention should be paid to inter-provincial sourcing opportunities, especially in the current context of an emerging desire to simplify trade between Canadian provinces. Companies can also consider a strategic warehousing strategy, building up stocks of raw materials or finished goods before the new tariffs come into effect. Although this approach requires a significant initial investment, it can help mitigate the immediate impact of tariff increases.

4. Optimize cost structure

Cost optimization becomes strategic in the face of the threat of tariffs. Companies need to undertake a line-by-line examination of their expenses to identify savings opportunities. This involves a thorough analysis of operational efficiency, starting with fundamental questions about raw material costs, fixed overheads and product modification possibilities to reduce production costs.

Productivity is an essential lever in this optimization process. Companies need to examine their current processes to eliminate waste and improve efficiency, in particular by ensuring that they take full advantage of technological investments already made. Adopting new technologies, such as automation and artificial intelligence, can also help reduce operating costs. Investing in productivity, even in uncertain times, can be essential to maintaining competitiveness.

5. Develop an adaptive pricing strategy

Revising pricing strategy requires a nuanced and flexible approach. Although the simplest solution is to pass on the cost of tariffs to customers, this approach is not always viable in a competitive market. Companies therefore need to develop a more sophisticated pricing policy, based on a thorough understanding of what their customers are willing to pay and what the competition charges.

The introduction of tiered pricing can help meet the needs of different customer segments. Companies may also consider adding value-added services to justify higher prices. The burden of tariffs can be spread strategically across the product range, raising prices on higher-margin products or in less price-sensitive markets to offset the impact on more vulnerable segments. This option requires constant monitoring of market reactions and the ability to adapt quickly to changes in customer behavior.

6. Turning challenges into new business opportunities

Trade tensions undeniably represent a challenge, but they also offer an opportunity to rethink traditional business models and explore new avenues for growth. Agility and adaptability are key to maintaining competitiveness. There are several possible approaches:

Consolidating skills

Market penetration is a particularly attractive strategic avenue for companies. The aim of this approach is to increase the company’s presence among the customers it currently serves, relying exclusively on its product range. Several concrete measures can be envisaged in this context:

• Strengthen relationships with existing customers by identifying their unmet needs and finding ways to sell more to them;
• Increase marketing efforts through more targeted advertising campaigns on social networks;
• Offer limited-time promotions and discounts to encourage purchases;
• Improve customer service by training teams and gathering customer feedback;
• Improve product availability by ensuring that popular items are always in stock.

Exploring new horizons

This involves introducing existing products to new markets. Developing markets in new Canadian cities, provinces or regions could be one of the quickest ways to replace the loss of revenue due to tariffs. Companies can also explore new countries where their products are not subject to the same tariffs, thanks in particular to the free trade agreements Canada has with the European Union and several Asia-Pacific countries. Market research is essential to a successful entry strategy. It is advisable to explore several potential markets before focusing on two or three to study in greater depth.

Another approach is to target new, untapped customer segments, such as different age groups or income levels. Another approach is to look at the possibility of forming strategic partnerships with local distributors or sales agents with a good knowledge of specific markets.

Innovating to adapt

The development of new products for existing markets represents a third strategic avenue. These initiatives aim either to create products that circumvent tariffs, or to attract new customer segments.

Companies can consider :

• Create products using materials or components not subject to tariffs;
• Expand their product range with complementary offers to reduce the impact of tariffs on a particular product;
• Invest in research and development to create innovative products that differentiate the company;
• Collaborate with partners to jointly develop new products, sharing costs and risks.

Diversifying our offering is the riskiest option, but potentially the most transformative. This strategy can include acquiring companies to gain rapid access to new products or skilled personnel, or creating joint ventures, notably to have products manufactured in another jurisdiction at a similar or lower price.

7. Strengthen your teams

Beyond the classic strategies aimed at increasing market share, an often underestimated element plays a key role in a company’s performance: employee well-being. This is all the more important in difficult times, when team motivation and commitment become essential levers for successful transformation.

Interactions between employees and customers are crucial to brand perception. Training and raising awareness of the importance of the customer experience not only enhances satisfaction, but also increases sales with existing customers.

Increased marketing efforts, the adoption of new promotional strategies or the rethinking of sales methods can generate stress and uncertainty within teams. The right support can help avoid a drop in commitment and ensure a smooth transition. It will be important to explain to employees why these adjustments are necessary and what benefits they will derive from them, in order to win their support for the new initiatives. Organizing regular meetings to gather concerns and proactively address them, as well as celebrating successes, strengthens team spirit.

Employees, especially those in direct contact with customers, can be true ambassadors for the company’s products and services. Setting up recognition programs to reward employee performance, whether through financial incentives, days off or perks, helps motivate teams. Giving teams the opportunity to put forward ideas for improving products or sales strategies also fosters their involvement and sense of belonging to the company.

Motivated, well-supported and valued staff will not only be more productive, but also more likely to contribute actively to the company’s growth.

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