The looming threat of tariffs: how can businesses prepare?

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the proposed tariffs and other cross-border policy developments on the horizon.

Monday’s inauguration of Donald Trump sets in motion a new era of Canada-U.S. trade relations. President-Elect Trump has stated that he will impose tariffs on imports from Canada by way of executive order. Canadian leaders have suggested that Canada may respond with retaliatory tariffs and other measures. With 77% of Canada’s exports historically bound for the United States, and a significant portion of U.S. exports bound for Canada, the impact will be significant across industries, supply chains and transactions on both sides of the border.

Legal strategies and advocating for product exclusions: With the uncertainty of a looming tariff war, parties should implement safeguards into agreements and arrangements to protect against spikes in costs and impacts on businesses heavily affected by tariffs. Such strategies include: negotiating “tariff event” clauses to agreements; more flexible terms to account for the uncertainty; and potentially reopening existing agreements that are based on fixed prices that may be heavily impacted by tariffs. Canada has also announced its intention to impose retaliatory tariffs on the United States. Businesses should deploy advocacy strategies and already start preparing their documentation to apply to the Canadian government for product exclusions.

Mergers and acquisitions: Tariff uncertainty may have a dampening effect on M&A activity in both Canada and the United States. Sellers may opt to defer transactions, with prospective buyers likely to show greater caution as they assess trade implications for targets. Those transactions that will proceed may see lengthier diligence periods, and more guardrails put in place (e.g., earnouts, contingent payments, changes to MAE clauses and indemnities) to adjust for heightened risk. Canadian and U.S. companies reliant on trade will face growing pressure as a result of the uncertainty posed by tariffs, which in turn may lead to discounted valuations. For public companies, depressed valuations may give rise to activism and potentially unsolicited bids.

Private equity: Increased urgency among private equity sponsors to exit U.S. businesses that rely on imports (from Canada and other impacted companies) may be one outcome of tariffs. If tariffs prove longer-term or are expanded, we may see increased private equity interest in U.S. companies that manage their own supply chains. Tariffs would likely make U.S. domestic transport, logistics and manufacturing more attractive options for PE buyers. PE sponsors should stay attuned to the potential rise in the cost of labour as changes to U.S. immigration policy are also implemented by the Trump administration. For private funds, offering memorandum risk disclosures may need to be updated, while increased fund-level innovation—including extending fund terms and the use of ‘net asset value’ loans and continuation vehicles—may be part of the steps taken to help support portfolio assets particularly vulnerable to the effects of tariffs.

Foreign investment: The Canadian and US governments have been adopting more robust approaches to foreign investment screening, driven by both traditional national security concerns as well as heightened political sensitivity about impacts on domestic production, supply chains and employment levels. Tit-for-tat approaches to international trade could exacerbate these trends, leading to longer, more politicized reviews, for Canadian investors in the U.S. and U.S. investors in Canada.

Capital markets: Public issuers heading into annual reporting season should review the disclosures that may be impacted by the regulatory and broader risks related to tariff implications, including their risk factors and management’s discussion and analysis. Issuers should also consider the potential impact that any such tariffs (including any uncertainty surrounding tariffs) could have on their capital-raising initiatives. We also expect Canadian securities regulators will look to address these potential concerns by seeking to advance certain Canadian securities rules to promote capital raises in Canada.

Energy: The United States imports US$103B worth of oil and gas from Canada and the two countries share a number of north-south power agreements that may be vulnerable to change under imposed tariffs. Federal-provincial political tension may rise as Canada positions itself to respond to tariffs from the United States. For greenfield projects, including energy transition related projects, any retaliatory tariffs may impact how projects in Canada source supplies and resources. If the Trump administration significantly reduces or repeals President Biden’s renewable energy tax credits, there is some concern that analogous Canadian federal tax credits which have been announced may not be enacted, and existing tax credits might also be subject to change.

Business continuity: Canadian companies anticipating financial distress as a result of tariffs should begin planning now. There are a number of steps companies can take to help weather the impact of tariffs, including revising or shedding contracts, disposing of assets, financing, and other strategies. Proactive discussion with lenders and other stakeholders, where appropriate, can help keep lines of communication and relationships strong in the face of uncertainty.

Tax reform: President Trump has also pledged to enact potentially significant reform to the U.S. Tax Code, including extending and modifying certain provisions enacted during the first Trump administration. The economic and fiscal impact of tariffs will impact the size and scope of potential tax reforms and the long-term rates and extent of tariffs will also in turn be influenced by the administration’s commitment to its tax policy goals (such as lowering income tax rates) while maintaining fiscal restraint.

 
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