Xiaodan Pan, Associate Professor, John Molson School of Business, Concordia University, Benny Mantin, Professor of Logistics and Supply Chain Management, Director of the Luxembourg Centre for Logistics and Supply Chain Management, University of Luxembour
United States President Donald Trump has officially imposed 25 per cent tariffs on Canadian and Mexican imports, sending shockwaves through Canadian consumers and businesses.
The decision escalates tensions in an increasingly fragile relationship between the countries, marking a significant shift in North American economic ties.
The unfolding trade war between is expected to have far-reaching consequences for people and businesses on both sides of the border. How can Canadians navigate the trade war and minimize the financial strain of the tariffs?
As experts in supply chain management, we aim to break down the impact of these tariffs and offer practical strategies for Canadians to help navigate the economic turbulence ahead.
How consumers react to trade wars
When the news of a potential trade war is first publicized, consumers tend to react by monitoring the situation until further information is available.
Once the government announces which products will be affected, consumers begin to take action. Some Canadians have already started stockpiling products whose prices are likely to rise or be in short supply following the imposition of tariffs.
Stockpiling can lead to product shortages at retailers, which may be worsened by the fear of missing out. Media headlines highlighting empty shelves can act as reinforcement loops, further fuelling frenzied shopping behaviour.
This kind of “panic buying” is common in times of crisis, much like the rush to buy supplies before the onset of a major hurricane and the hoarding of essential supplies during the COVID-19 pandemic.
Consumers and retailers face challenges
With a trade war breaking out, both consumers and retailers will need to adapt.
Shortages are likely to occur as new importation procedures slow the time products take to cross the border. The ensuing delays, along with higher tariff rates, will push some retailers to raise prices to cover cost increases. Others may limit purchases to discourage hoarding behaviour.
Some firms may even take advantage of the situation by raising prices on products not covered by the tariffs to pad their profits — a practice known as “greedflation,” which happened during the pandemic. Another potential consequence is “shrinkflation,” where package sizes become smaller while prices remain unchanged.
As consumers adapt by changing their shopping habits or using their stockpiled reserves, some of the shortages may be eased. However, retailers may struggle to manage their inventories as demands fluctuate — a phenomena known as the “bullwhip effect.” Navigating these shifts will require careful planning.
Challenges of buying domestic
Trump’s trade war has intensified calls to “buy Canadian” as a way to support domestic products.
Recently, the Canadian government has threatened counter-tariffs on imported products that have Canadian substitutes — for example, targeting Kentucky bourbon in favour of Canadian whiskey or Florida orange juice for Canadian apple juice.
Read more: ‘Buying Canadian’ is an opportunity to reflect on the ethics of consumerism
However, fully replacing imports with domestic goods presents significant challenges. Many Canadian farmers and manufacturers lack the capacity to quickly scale up production to meet demand, at least in the short run.
Production costs may also be significantly higher in Canada than abroad, which is a major reason for relying on imports in the first place. Apparel manufacturing is a good example. It has a high labour component — the reason that most of it has been moved to low-cost countries in Asia.
In general, U.S. productivity is higher than Canadian productivity, contributing to lower costs in the U.S. In addition, some products simply cannot be produced in Canada at all, such as tropical fruits and vegetables.
Furthermore, trade wars create uncertainty, making farmers and manufacturers hesitant to make large-scale investments that may not pay off once the trade conflict ends. While this approach foregoes potential short-term gains for long term stability, it also exacerbates shortages and price hikes during and after the trade war.
The new normal
Unlike one-off events like hurricanes, or fluctuating disruptions such as COVID-19, the outcome of a trade war is difficult to predict. This makes it difficult to forecast what the “new normal” will be.
Certainly, some consumers who substitute domestic products for imported products may continue to do so in the long run. However, others may switch back to imported products if the tariffs are lifted and prices are lowered.
Knowing that this might happen, domestic producers may not ramp up production during a tariff war. Those who do increase production may later find themselves with excess capacity and inventory surpluses after the conflict ends.
Meanwhile, manufacturers and retailers that raise prices to cover tariff-related costs may choose to keep them elevated even after tariffs are removed. For instance, canned food prices saw a significant price rise following the implementation of the 2018 U.S. steel tariffs.
Consumer acceptance of the price increases, adjustments to new higher cost supply chain structures, or efforts to maintain profit margins, may potentially establish a higher baseline prices in the post-trade-war economy.
Navigating the trade war
How can Canada best shield itself from the effects of the trade war? The easy answer is to become more self-reliant, but this is a costly option that requires technology, skilled labour and capital investments.
As a result, this option should only be chosen for the most necessary and essential items, like certain pharmaceuticals and food staples. Other strategies must also be considered:
Building supply chain resilience: Sourcing from multiple suppliers and retaining inventories of the most essential products may increase inventory and purchasing costs, but will reduce risks. It allows enterprises to withstand short-term supply chain disruptions and puts them in a better position to survive a trade war.
Engaging in honest communication: Governments and retailers should regularly update the public on negotiations, new tariff schedules and potential price changes, reducing the guesswork that fuels panic buying and stockpiling. Transparency allows individuals to make the best purchasing decisions.
Protecting low-income consumers: Retailers should limit sales quantities of staple products during disruptions to avoid hoarding behaviour. Governments should consider tax relief and subsidies aimed at budget-constrained individuals to relieve the burden of higher tariff-related costs.
Supply chain disruptions inevitably result in higher costs and product shortages, often impacting low-income households the hardest. Even after the trade war ends, higher prices may persist as the new norm. To minimize the impact of tariffs, governments and enterprises need to adopt policies that reduce economic strain and result in fairer outcomes for all.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
