Navigating Tariffs and Uncertainty in Canadian Government Contracting

The Canadian public sector market is facing unprecedented challenges as Canada and the United States remain embroiled in a tariff war that is beginning to impact suppliers and government contracts. Keeping track of tariffs has been nothing short of confusing, with several rounds of announcements, pauses and backtracking over the last few months. By the end of April, Canada and the U.S. had each imposed levies on select goods and industries from the other country.

This is a challenging time for suppliers navigating the Canadian market, with so much changing every week and sometimes every day, creating an atmosphere of uncertainty. However, now that the dust has mostly settled around tariff decisions, it will be more straightforward for suppliers to understand their impact and navigate accordingly.

Status of U.S. and Canadian Tariffs

Canada was one of the first countries to be tariffed by the Trump Administration, so relations with the U.S. have been strained for months. U.S. tariffs have now reached a global scale, but some of the current levies on Canada were announced on Trump’s first day back in office. In response, Canada has imposed retaliatory tariffs on the U.S. Here’s a breakdown of all the tariffs in effect between the U.S. and Canada at the end of April:

U.S. Tariffs

The Trump Administration initially imposed a baseline 25% tariff on imported goods and a 10% tariff on energy exports and potash from Canada. Canadian goods that are compliant with the Canada-United States-Mexico Agreement (CUSMA) are exempt from these general tariffs. To be compliant with CUSMA, goods must fit the rules of origin defined under the treaty and go through the administrative process of certifying compliance with the rules of origin before export. According to Canadian law firm Torys, the majority of Canadian goods are or could become CUSMA compliant.

There is an additional 25% global tariff on all steel and aluminum products, which are stacked on top of Canada’s general tariffs, resulting in a minimum 50% tax for certain goods. Stacking does not apply to CUSMA-compliant goods.

Another 25% worldwide tariff applies to the automotive industry. Automobiles and auto parts that are compliant with CUSMA are subject to a 25% levy on their non-U.S. content. For vehicles, importers must provide documentation detailing the value of U.S. content in each imported model to calculate the portion subject to the tariff. The tariffs on automobiles and auto parts originally were stackable, but Trump signed two executive orders that preclude U.S. auto importers from being subject to other levies, including those on steel and aluminum and Canadian imports. Over the next two years, carmakers will also be able to qualify for tariff relief for a proportion of the cost of their imported components.

The Trump Administration is also taking steps to initiate tariffs on semiconductors and pharmaceuticals, though these are still in an investigative phase.

Canadian Tariffs

In response to the Trump Administration’s general tariffs, Canada imposed 25% reciprocal tariffs on $30 billion CAD in goods imported from the U.S. This includes products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics and certain paper products.

Canada countered U.S. steel and aluminum tariffs with 25% reciprocal tariffs on an additional list of products totaling $29.8 billion CAD. These include $12.6 billion CAD in steel products, $3 billion CAD in aluminum products and $14.2 billion CAD in additional imported U.S. goods (e.g., tools, computers and servers, display monitors, sport equipment and cast-iron products).

Canada retaliated against U.S. automotive tariffs by imposing 25% tariffs on non-CUSMA compliant vehicles imported into Canada from the U.S., plus 25% tariffs on non-Canadian and non-Mexican content of CUSMA-compliant vehicles imported into Canada from the U.S.

Trade Repercussions

The silver lining in all of this is that neither the U.S. nor Canada has implemented the full breadth of tariffs they initially threatened on one another, largely because the two countries are honoring most of the trade provisions laid out by CUSMA. Many trade experts argue that tariffs on steel, aluminum and the automotive industry are in direct violation of CUSMA. Regardless, Canada and the U.S. have so far avoided an all-out trade war that targets all goods crossing the border. Canada has also fared slightly better than other countries in the global trade war being waged by the Trump Administration.

However, Canada and the U.S. share one of the world’s most comprehensive trading relationships, and their markets are highly interconnected. Given this, tariffs have the potential to critically impact supply chains and the cost of doing business between the two nations.

Impacts and Considerations for Suppliers

While the trade war is certainly causing widespread confusion, government contracting can actually provide stability in tough economic times. Government contracts can provide a consistent revenue stream and are often viewed as recession-proof, even when the private sector experiences downturns.

Nevertheless, government contracts are not immune to tariffs, which can impact suppliers by increasing costs and reducing competitiveness. Tariffs can increase the cost of imported goods, affecting production costs, pricing and profit margins. For exporters, they make products more expensive in foreign markets, reducing competitiveness. As prices rise, longstanding relationships between suppliers and government buyers may be disrupted as the latter are driven to rethink their sourcing strategies and shift to new suppliers. But there are steps suppliers can take to mitigate these effects and plan strategically to weather this trade war.

Suppliers can start by diversifying their supply chains. This involves 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 suppliers employ when facing sudden shifts in the market. To offset increased costs due to U.S. tariffs, the Government of Canada has established a tariff-specific remission process for Canadian suppliers. Decisions are made on a case-by-case basis and, if granted, remission provides relief for surtaxes on certain goods that are subject to U.S. levies. Priority goes to goods used in Canadian manufacturing, processing, food and beverage packaging, public health, health care, public safety and national security. However, the Government of Canada is encouraging all Canadian suppliers to apply for remission.

Another consequence of the trade war is the burgeoning “Buy Canadian” movement, which is being embraced by some government buyers in Canada. Governments such as the Province of Ontario are restricting U.S. businesses from accessing their public sector procurements – to the extent they can buy what they need in Canada. Ontario’s policy states that should U.S. tariffs be lifted, the policy will be reassessed and adjusted or rescinded.

Businesses impacted by this trend should consider whether they can leverage a physical and legal presence in Canada. If your business can support Canadian employees and resources, that will improve your chances of winning government contracts during this period. “Buy Canadian” has its limits, though, since Canada has substantial barriers to interprovincial trade, making it difficult to easily replace imports from the U.S. with products made in other Canadian regions. Furthermore, in scenarios where U.S. goods are the best or only option, buyers may not want to put operations at risk by purchasing potentially inferior products.

The tariff war is also partially driven by U.S. frustration with Canadian spending on defence and national security. Despite a boost to Canada’s defence budget in 2024, U.S. officials have long complained about the level of Canadian contributions to NATO and North American security. Whenever formal trade negotiations finally take place between the two nations, Canada may find itself committing to bigger investments in areas like defence, cybersecurity and the border.

It takes several weeks for tariffs to be fully felt in the economy, and some companies may choose to absorb higher costs before raising prices while they wait out the current situation. However, this will no longer be possible at a certain point, and suppliers should be prepared.

The Road Ahead for Tariffs and Trade

Eventually, the trade war between Canada and the U.S. will end but how it ends – and how much it damages the relationship between the two countries – remains to be seen. Now that Mark Carney has been elected Prime Minister and delivered the Liberals a fourth straight term, trade negotiations are expected to begin in earnest between Canada and the U.S. During this process, a joint review of CUSMA could take place before its scheduled 2026 date, since Trump has expressed interest in an early renegotiation. U.S. priorities for renegotiation include Canada’s digital services tax, the supply-management system for dairy, eggs and poultry, and eliminating foreign parts – especially Chinese ones – from U.S. manufacturing.

At this point, experts and analysts can only speculate about what will happen in the next few months and years. The best-case scenario would be for Canada and the U.S. to recommit to a strong economic and defence relationship with each other, potentially with new advantages if the U.S. keeps its tariffs against other countries. The worst-case scenario would be a possible dissolution of CUSMA and a permanently strained relationship. No matter what the scenario, it will take time to build trust again, and suppliers should be prepared to mitigate the impact of tariffs for a little while longer.