Navigating the Looming U.S.-Canada Tariffs: The Impact on Canadian SMEs and Their Next Steps

Consider a small Canadian business tightly connected to the U.S. market—whether by exporting goods or relying on imports to meet customer demand. Business is steady, until a tariff on Canadian and U.S. goods abruptly drive up costs. Now, businesses face a tough choice - raising prices and risking losing customers or absorbing the cost and watching margins shrink?

For this business, the effect is the same: declining sales and reduced profits mean fewer opportunities and incentives to grow, invest, or hire more workers. This dilemma is not unique as many Canadian small and medium-sized enterprises (SMEs) now face growing uncertainty due to looming U.S.-Canada tariffs.

“The main risk and uncertainty is the threat of 25% tariff. 90% of our production goes to the US. If tariffs are in fact implemented, all forecasts will be out of the window. We will pass on the tariffs via price increases, but that will take a while."

- Agriculture business in Ontario 

Canada-U.S. Trade: A Vital Partnership 

Canada’s trade relationship with the United States is unparalleled, bolstered by the tariff-free provisions of the Canada-United States-Mexico Agreement (CUSMA). In 2023, about half (49.5%) of Canada’s imports originated from the U.S., while approximately three quarters (77%) of its exports were destined there.[1] SMEs contributed about 40% of Canadian exports to the U.S. and accounted for 97% of exporting enterprises. On the import side, SMEs represented 42% of trade value and 98% of importing firms. [2]

This deeply integrated trade relationship is essential to both economies. In 2023, the U.S. ran a $41 billion USD (around $60 billion CAD) trade deficit with Canada - representing roughly 0.2% of U.S. nominal GDP[3]. Among its major trade partners—Canada, Mexico, China, and Germany—the largest deficit is with China, but Canada and Mexico lead in overall trade volume, reinforcing the North American region’s strong economic integration.

Among U.S. major trading partners in 2023, Canada boasts high trade volume and the lowest deficit (billions of dollars) 

Source: Author’s own calculation from U.S. Census Bureau, U.S. Trade in Goods and Services by Selected Countries and Areas, 1999-present.

The energy sector is a cornerstone of this bilateral trade. Energy products accounted for one-fourth of U.S. imports from Canada in 2023. As the largest supplier of U.S. energy imports - including crude oil, natural gas, and electricity[4] - Canada provides stability in a key industry, making it a major factor in ongoing trade discussions. SMEs play an important role in this sector, contributing $35.6 billion of the oil and gas industry's $116 billion in total exports, or 31% of the sector’s export value. Although large corporations dominate in terms of export volume, SMEs make up 88% of exporting enterprises in the sector.[5] The oil and gas extraction industry relies heavily on the U.S. market, with 74% of its output exported there.[6] The importance of this energy trade extends beyond economic figures—it supports a vast network of refineries and related infrastructure, providing thousands of jobs in both Canada and the U.S.

Without these energy exports, Canada’s total export value to the U.S. would decline sharply, while U.S. imports—consisting of high-value finished goods, machinery, and technology—would remain relatively stable. This would lead to a trade deficit for Canada.

Furthermore, the near parity in sectors like motor vehicles and industrial machinery highlights deep integration of the two economies, particularly in manufacturing. In 2023, over 65% of Canadian exports to the U.S. and nearly half of U.S. exports to Canada were intermediate goods—key inputs for production[7]. These include things like lumber used to make products like furniture that are then sold to other customers. Tariffs on intermediate goods ripple through supply chains, inflating costs, reducing productivity, and increasing prices economy-wide in both countries.

"Our industry supplies raw material and finished products for manufacturing and assembly in the USA which is part of the products imported back to Canada. Our cost and retail pricing will increase."

- Retail business in British Columbia

Energy trade dominates Canada-U.S. commerce, while near-parity in key sectors highlights deep economic integration and interdependence in 2024 (in thousands of $)

Source: Author’s calculations from Statistics Canada. Table 12-10-0175-01  International merchandise trade by province, commodity, and Principal Trading Partners (x 1,000).

The Looming Impact of U.S. Tariffs on Canadian SMEs

This interconnected supply chain makes Canadian businesses especially vulnerable to shifts in trade policy. Recognizing this, in December 2024, we surveyed SMEs to assess the anticipated impact of U.S.-Canada tariffs. With the threat of U.S. tariffs and possible retaliatory tariffs, 82% of Canadian businesses trading with the U.S. anticipated significant impacts. Many predicted higher costs, increased prices for Canadian consumers, potential loss of U.S. customers or contracts, and considering alternative suppliers.

Fast forward two months, and while across-the-board tariffs have yet to be imposed, the uncertainty surrounding potential trade restrictions is already taking a toll. With more than half of U.S.- trading Canadian businesses moderately to significantly dependent on the U.S. market, the looming tariff environment has become a serious challenge. Many businesses estimate it could take six months or longer to pivot to new suppliers (27%) or markets (50%), reflecting the difficulty of adjusting in a highly integrated trade ecosystem.

"We are a very specific technical business. All parts we use are US based. There are no other suppliers. None of these parts are made in Canada. We rely on discretionary income of our customers so adding 25% to the total cost would be unacceptable to them. This would destroy our business."

- Retail business in Nova Scotia

The economic repercussions are becoming clear—nearly one-third of SMEs have experienced rising costs, partly driven by supply chain disruptions and the weakening Canadian dollar, and over a quarter report reduced demand. Exporters are feeling the strain more acutely, with 39% facing declining customer demand and 34% already dealing with canceled or postponed contracts as trading partners grow increasingly cautious and hedge against future risks. This has left businesses grappling with higher costs, reduced competitiveness, and shrinking profits.

The prospect of U.S.-Canada tariffs adds further uncertainty. Higher costs would make Canadian products less competitive, prompting U.S. buyers to seek cheaper alternatives, accelerating order declines. Exporting businesses may be forced to cut prices, reduce production, or pivot to alternative markets—an adjustment that takes time and leaves many vulnerable in the short term. For importers, tariffs on U.S. goods would significantly raise import costs, forcing businesses to either absorb the impact or pass it on to consumers, leading to price hikes. The ability to adjust varies by sector and contract terms, leaving some businesses with little room to maneuver. 

Sectors engaged in both importing and exporting face the greatest risks, as higher costs, supply chain disruptions, and shrinking demand threaten to reshape cross-border trade. For some, this could be an opportunity to diversify and reduce reliance on U.S. trade, while others will find adaptation more difficult. Regardless of strategy, the coming months will test the resilience of Canadian SMEs as they navigate a shifting economic landscape.

“To date, we have seen $1.6 million of orders put on hold till there is a clear indicator that there will be no tariffs."

- Manufacturing business in Manitoba

"Our biggest challenge right now is the USD exchange rate! In our industry, most items pass through the US before hitting Canada - it's driving costs way up."

- Retail business in British Columbia

Many businesses have already experienced higher costs and lower demand due to the tariff situation; exporters feeling the strain more acutely

Source: CFIB, Survey on the impact of U.S.-Canada tariff situation on businesses, February 6 - February 13, 2025. Based on responses from 2,510 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/-1.96%, 19 times out of 20.

Question: What changes has your business experienced due to the U.S.-Canada tariff situation? (Select all that apply)

Note:  "importers" and "exporters" refer to businesses engaged in trade with the U.S., whether directly or indirectly, including those involved in both importing and exporting.

How Businesses Are Responding or Planning to Respond to Tariff Uncertainty

In response to ongoing tariff discussions, Canadian businesses are adjusting strategies to mitigate risks and maintain stability. More than 2 in 5 (44%) are exploring alternative suppliers to diversify supply chains and reduce dependency, while almost a quarter have delayed or canceled expansion plans, reflecting a more cautious approach to capital investment. Labor adjustments are also notable, with 19% reducing their workforce to manage rising costs. Additionally, 18% are pursuing market diversification or seeking external advice to strengthen their competitive position (19%).

In response to tariff talks, business owners are focusing on finding new suppliers, foregoing expansion plans
and reducing their workforce

Source: CFIB, Survey on the impact of U.S.-Canada tariff situation on businesses, February 6 - February 13, 2025. Based on responses from 2,510 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/-1.96%, 19 times out of 20.

Question: Which of the following actions is your business taking or considering to deal with the U.S.-Canada tariff situation? (Select all that apply)

These actions reflect the growing pressure on businesses to adapt and build resilience in an evolving trade environment. Trade policy uncertainty amplifies risks and slows growth—not only for industries tied to U.S. supply chains but also for those relying on consumer confidence and a stable economic climate. Discretionary spending often declines during periods of instability, and as confidence weakens, the broader economy feels the impact. For policymakers, the challenge is to contain these costs through targeted measures that stabilize the business environment and promote diversification.

“It will make the cost of doing business higher. Canada needs to focus on being more self-sufficient and being able to provide the needs of our country internally without having to outsource internationally. The Canadian government should invest in supporting businesses within Canada to be able to produce what we can."

- Construction business in Ontario 

Recommendations for Canada’s Trade Strategy 

Canadian governments need a unified and proactive response to minimize harm to businesses and the economy and should focus on the following:

Here are some public policy measures that could be implemented:

• Focus efforts on building a stronger and more competitive business environment for SMEs by prioritizing tax reductions, tackling excessive regulations and encouraging provinces to eliminate interprovincial trade barriers by adopting a policy of mutual recognition.
• Help smaller businesses navigate to new markets by ensuring trade services and programs (e.g., TCS, EDC) are accessible to SMEs as these services remain underutilized by small business owners.
• Ensure any relief programs, such as tariff rebate initiatives, also provide support for SMEs impacted by tariffs.
• Expand and promote the work-sharing program to help SMEs retain employees during periods of reduced business activity caused by tariff impacts.
• Regularly consult with SMEs, and organizations like CFIB, to ensure their needs are reflected in government's responses.

[1]Statistics Canada. Table 12-10-0175-01  International merchandise trade by province, commodity, and Principal Trading Partners (x 1,000), and Congressional Research Service Report. US-Canada trade relations, February 13, 2025, https://crsreports.congress.gov/product/pdf/IF/IF12595

[2] Statistics Canada. Table 12-10-0095-01  Trade in goods by exporter characteristics, by enterprise employment size and country of destination; Statistics Canada. Table 12-10-0108-01  Trade in goods by importer characteristics, by enterprise employment size and country of origin

[3] Bureau of Economic Analysis, Gross Domestic Product, Fourth Quarter and Year 2023 (Second Estimate). https://www.bea.gov/news/2024/gross-domestic-product-fourth-quarter-and-year-2023-second-estimate 

[4] Congressional Research Service Report. US-Canada trade relations, February 13, 2025. https://crsreports.congress.gov/product/pdf/IF/IF12595

[5] Statistics Canada. Table 12-10-0094-01  Trade in goods by exporter characteristics, by enterprise employment size and industry 

[6] Statistics Canada. The Daily. Gross domestic product by industry, November 2024 https://www150.statcan.gc.ca/n1/daily-quotidien/250131/dq250131a-eng.htm

[7] Statistics Canada. Table 12-10-0143-01  International merchandise trade by Broad Economic Categories and top sixty trading partners (x 1,000)