Life After Tariffs

United States (U.S.) tariffs on Canadian steel and aluminum have chilled cross-border relations and given manufacturers reason for concern. At 25% for Canadian steel products and 10% for aluminum, the tariffs are no small hurdle, and with the Federal Government retaliating with similar fees on a range of U.S. imports, trade tensions are ratcheting up uncertainty with our most important ally and defence partner.

Canada's defence industry is among the most significant sectors hit by the U.S.'s trade action on steel and aluminum. Shipbuilders, aircraft manufacturers, military equipment suppliers, and members of their supply chains are being challenged to absorb the increased costs of doing business. Many are unable to fill their stocks with domestic supply, and others are locked into multi-year contracts that limit their ability to look elsewhere.

The upside is there are several ways defence industry manufacturers can seek relief. For example, shortly after the federal government announced its own tariffs on U.S. goods, it launched a program through which Canadian companies can apply for targeted relief from surtaxes collected on steel and aluminum products entering the country.

“Given the longstanding integration of Canada-U.S. supply chains, the Government recognizes that Canadian countermeasures against U.S. imports can create challenges for Canadian manufacturers that rely on steel and aluminum imported from the United States,” the Department of Finance stated in an October 2018 release, adding, “In light of this, the Government established a process for Canadian companies to request targeted relief from countermeasures under extraordinary circumstances.”

The program has granted support to a number of companies who have been able to prove such extraordinary circumstances; namely, that they are being hindered by a short supply of steel and aluminum products in domestic markets, they are beholden to contractual requirements to use U.S. steel or aluminum in their products, or they are experiencing what the government defines as “exceptional circumstances that could have severe adverse impacts on the Canadian economy.”

Indeed, there are other courses of action. In addition to imploring the Department of Finance for tariff exemptions, certain manufacturers can seek relief from the Canadian Border Services Agency (CBSA). Specifically, those that primarily make products for U.S. clients can ask for extra fees to be dropped on the basis that the steel and aluminum goods they are receiving will be used to manufacture goods heading back south of the border. They may then be eligible to pay duties on the steel and aluminum materials that remain in Canada. Worth noting, however, is that this approach requires companies to clearly track what was imported, how it was used in manufacturing, and where the final product ended up.

The case for alternative sources

Now may be a good time to re-evaluate supply chain and look to alternative sources with alternate trade partners – at least until such time as Canada and the U.S. have settled this issue. The only sticking point to this approach (assuming it's viable) is that those partners may also be on the wrong end of U.S. trade action, and doing business with them may expose manufacturers to knock-on penalties or other surcharges down the road. Here again, every strategy deserves due consideration.

Relief in sight?

What began as a move by the U.S. Trump administration to gain an edge in NAFTA talks remains a thorn in the side of many Canadian industries. Nonetheless, there are indications that talks to remove the tariffs are proceeding in earnest and that we could see progress in early 2019. Until such time, it's likely the Canadian government will expand its list of tariff-exempt products and continue to grant relief to manufacturers on a case-by-case basis.

It may be a momentary speed-bump or a long-term obstacle. How manufacturers in the defence space contend with U.S. tariffs today, however, will inform their ability to weather the road ahead.

This article was originally featured in CDR Magazine.

Authors include myself, Grant McDonald, Aerospace and Defence Industry Sector Leader and Joy Nott is Partner of the Trade and Customs Practice at KPMG in Canada.

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