How U.S. Tariffs Are Disrupting Canadian Supply Chains

The idea that Canadian companies can simply reroute supply chains in response to U.S. tariffs is largely unrealistic, experts warn. With 25% duties applying to some Canadian goods, sector-specific measures aimed at autos, and the possibility of additional levies, businesses north of the border are exploring alternative suppliers and markets. But after decades of integrated trade, specialization and tightly woven cross-border supply chains, rerouting is often harder and costlier than it appears.

Companies entrenched in complex North American manufacturing networks face practical barriers: transportation and labour costs, limited availability of raw materials, constrained manufacturing capacity, and saturated alternative markets. These obstacles mean many firms cannot “flip a switch” and instantly move production or redirect sales elsewhere.

Financial pain for companies on both sides of the border

“There are many, many industries that can’t just flip a switch,” said Ulrich Paschen, an instructor at Kwantlen Polytechnic University’s Melville School of Business.

Sourcing is one major constraint. There are only a limited number of manufacturers that produce critical components—especially in the auto sector—and those suppliers cannot be easily or quickly replaced. Canada exports about 1.5 million fully assembled vehicles to the U.S. each year and accounts for roughly 8% to 10% of American vehicle consumption and nearly all of Canada’s auto exports, according to the Canadian Chamber of Commerce. That scale of demand is difficult to satisfy by finding new markets overnight.

Complicating matters, many auto parts cross the border multiple times before final assembly. That means a 25% U.S. tariff—and any reciprocal duties—would raise production costs and ultimately increase retail prices. For U.S. automakers, cancelling contracts with Canadian suppliers could trigger substantial penalties: the chamber estimates potential breakage fees up to $500 million per U.S. factory.

The high costs of moving operations to the U.S.

Relocating facilities to the United States is not a simple or inexpensive option for Canadian suppliers. Closure and restart costs can reach tens of millions of dollars per plant. Labour costs in the U.S. may be more than 20% higher in many jurisdictions, and the process of establishing new plants can take several years.

“Canada and the U.S. have that integrated trading relationship. It’s been built over decades,” said Pascal Chan, vice-president of strategic policy and supply chains at the Canadian Chamber of Commerce. “It’s not easy to unwind and just unscramble the egg that is this trading relationship.”

Some industries face especially tough choices. Lumber and steel producers must consider both scale and transportation economics. Forestry exports have relatively low value per volume, so shipping long distances outside North America often becomes cost prohibitive. As Ulrich Paschen noted, it makes logistical and economic sense to move certain Canadian commodities directly across the border—but far less sense to send them halfway around the world when shipping costs dominate the final price.

Steel and aluminum present another set of challenges. The U.S. imposed 25% tariffs on steel and aluminum imports across the board, and Canada responded with countermeasures. Canada remains a dominant supplier to the U.S.: in 2024 it shipped approximately USD$11.4 billion in aluminum-related products and about USD$13 billion in steel and iron, according to U.S. Census Bureau figures cited by industry analysts. The volumes involved make redirecting these commodities to new customers difficult in the short term.

Beyond tariffs, trying to develop more domestic downstream processing—so raw materials are turned into finished goods in Canada—would require significant time, private investment and possibly government support. As Jesus Ballesteros, manufacturing industry leader at BDO Canada, explains, raw steel or aluminum may be sent to the U.S. for further processing into structural elements or finished cans, which are then shipped back to Canada for domestic use. That cross-border processing is precisely where tariffs have the most disruptive effect.

Canada’s vast geography, smaller population also pose challenges

Supply chain inflexibility extends beyond heavy manufacturing. Canada’s large geography and relatively small population create additional hurdles for companies that might hope to rely on a larger domestic market. For businesses that lose U.S. access, alternative customers are often much farther afield, meaning longer shipping times and higher freight costs.

“If we are not delivering to the States, we are sort of an island. Things need to go on long voyages from Canada to reach customers that are not in North America,” Paschen said.

Firms are likely to avoid major supply-chain overhauls unless they believe high tariffs will be persistent. Some experts urge strategic shifts—accelerating moves into electric vehicle production, reducing internal trade barriers within Canada, and improving coordination between industry and government to attract targeted investment. Stuart Trew, director of trade and investment research at the Canadian Centre for Policy Alternatives, suggests that market signals alone may be insufficient: “Sometimes some kind of additional co-ordination like a state role, where you decide what kinds of steel you’re going to be making and for what purposes, for example, is necessary.”

Many economists warn that broad, sustained tariffs could push Canada into recession, underscoring how difficult it is to swap suppliers and diversify markets quickly. In sectors with tight integration and high bilateral flows, the market can simply dry up if trade channels break—making recovery and reorientation slow and costly.

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