How the U.S. trade shock exposed Canada’s weak spots

Jim Kilpatrick, global supply chain & network operations leader at Deloitte, joins BNN Bloomberg to discuss the impact of tariffs on Canadian exporters.

Canada’s era of easy, proximity-based trade with the U.S. came to an end after U.S. President Donald Trump applied sweeping tariffs on Canadian imports during his second term last year.

But the move also exposed a massive preparedness gap among Canadian businesses, according to a new report by Deloitte that details how Canadians are reeling from trade shocks caused by a lack of diversification and over-reliance on the U.S. market.

“Trade diversification has long been discussed, but it’s been inconsistently pursued,” says Jim Kilpatrick, global supply chain and network operations leader for Deloitte consulting.

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Long-term trends show that today’s trade problems run deep.

Since 2000, exports have fallen by about 12 per cent, which shows Canada has been trading less with the rest of the world than it used to, according to the report.

The country’s per capita exports have also “plateaued,” driving a steady drop in its global trade share since 2000.

Combined with continuously weakening labour productivity growth, Canada has locked itself into being one of the slowest-growing advanced economies over the past 50 years.

This shows that Canada’s trade performance “has relied more on favourable conditions beyond policy and strategy decisions-exchange rates, resource endowments, and proximity to U.S. demand-than on actual gains in firm-level efficiency and competitiveness,” according to the report.

The preparedness gap

Kilpatrick says the current situation goes beyond tariffs themselves.

“It’s really a story about a lack of diversification in our trade,” he says.

The report found Canadian companies that focused largely on the North American market were among the least prepared to react quickly when trade rules suddenly changed. Companies with more global operations were often better equipped because they had built flexibility into their supply chains and already had experience operating in different markets.

“That was probably the biggest surprise,” Kilpatrick says, referring to “the lack of preparedness of Canadian enterprises.”

He says Canada’s close ties with the U.S. may have also created a false sense of security for many businesses. The market is large, geographically close and shares many similarities in regulations and business practices, making it a natural place for Canadian firms to focus their efforts.

The cost of optimizing for efficiency

Kilpatrick says many businesses spent years optimizing for cost and efficiency, running factories at high capacity and reducing inventories wherever possible. While those strategies may have improved financial performance, they also left companies with less room to react when disruptions hit.

“Supply chain executives have been very focused on taking every little last bit of excess cost, inventory, or capacity out of the system,” Kilpatrick says.

“They haven’t really focused on building capabilities that enable a more resilient, more agile, more sustainable supply chain.”

Going forward, he says companies need to have a different equation so when changes do happen, they have the ability to shift.

“We saw even when the trade war started, many companies were technically compliant with The Canada-United States-Mexico Agreement (CUSMA), but hadn’t completed the paperwork and certifications,” he says.

Rewiring supply chains

As companies responded to the trade disruptions, many reassessed where and how products are made and shipped. Some looked at increasing manufacturing capacity in the U.S. for American customers, while others explored using contract manufacturers rather than building entirely new facilities.

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Kilpatrick says many companies are also now reconsidering Canada’s role in their long-term plans.

According to the report, about 70 per cent of companies surveyed viewed Canada as an attractive place to invest in manufacturing and distribution capabilities, while nearly one-third considered it very attractive.

“Making in Canada is a viable strategy,” Kilpatrick says, particularly as geopolitical tensions and trade rules continue to shift.

The report also found businesses are increasingly trying to build more flexibility into their operations by expanding supplier options, creating alternate logistics routes and developing plans for future disruptions.

Winners adapt faster

Kilpatrick says companies with the ability to move quickly and adapt have tended to fare better during periods of uncertainty.

“We’ve seen with many other crises… in the beginning of a crisis, you have to sense, you have to figure out how it impacts you,” he says.

As the CUSMA review date approaches on July 1, he says, many companies are waiting to take action.

“So while the wait and see approach for many companies is appropriate, and we still don’t have necessarily the clarity we need to make big bets, but those companies that are positioned to move quickly with the new rules as they’re written, tend to emerge stronger,” says Kilpatrick.

Still, he says Canada faces a broader challenge beyond individual companies adjusting their operations. While governments have spent decades opening international markets through trade agreements, progress has been gradual.

“The ambition is not for lack of ambition,” Kilpatrick says. “It’s really our ability to execute.”