Trade War Introduction
The storm clouds of a global trade war are gathering on the horizon. As a licensed insolvency trustee working with Canadian entrepreneurs in the Greater Toronto Area, I’ve witnessed firsthand the anxiety that comes with economic uncertainty. The recent Bank of Canada report released on April 16, 2025, has raised serious concerns about how proposed United States tariffs and overall trade tensions could trigger a worldwide trade war with significant consequences for Canadian businesses.
A few weeks ago I wrote a blog titled TARIFF-INDUCED BANKRUPTCY: WHAT CANADIANS NEED TO UNDERSTAND. If you’re a Canadian entrepreneur wondering how to steer your company through these choppy waters, you’re not alone. This Brandon’s Blog breaks down what’s happening, what might happen next, and most importantly, how you can prepare your business for the challenges ahead.
Understanding the Trade War Threat
What the Bank of Canada is Saying
The Bank of Canada’s latest Monetary Policy Report maintained the overnight interest rate at 2.75% following seven consecutive rate cuts. But the real headline is their warning about a potential economic downturn due to global trade war tensions. In fact, the word “uncertainty” appeared 49 times in their report—a clear signal that even our financial experts are concerned.
The Bank outlined two possible scenarios that could play out through 2027 due to American tariffs on international trade:
Scenario 1: Moderate Percent Tariffs and Slower Growth
- Moderate US-China Trade War resulting in 10% tariffs on Chinese imports
- 25% tariffs on imported steel and aluminum
- Retaliatory tariffs from China averaging 1% on United States imports
- Canada imposes 25% reciprocal tariffs on $29.8 billion of United States goods
- Canadian dollar valued at USD 0.70
Under this scenario, the Canadian economy GDP growth would slightly increase from 1.5% in 2024 to 1.6% in 2025, before dipping to 1.4% in 2026 and recovering to 1.7% in 2027. This represents a slowdown in economic growth but avoids recession.
Scenario 2: Extreme Percent Tariffs Leading to Recession
- 12% tariffs on imports of Canadian and Mexican goods (excluding motor vehicles and parts)
- 25% tariffs on non-US content of imported vehicles and parts
- 25% tariffs on all goods from other countries, including Chinese imports – a less extreme US-China Trade War with less punitive tariffs than is currently the case
- Canada imposes an additional 12% reciprocal tariff on $115 billion of United States goods
- Canadian dollar dropping to USD 0.67
This second scenario is much more troubling. The Bank projects the Canadian economy GDP growth would decline from 1.5% in 2024 to just 0.8% in 2025, before contracting to -0.2% in 2026. This would mark a recession from Q2 2025 to Q1 2026, with inflation potentially peaking at 2.7% in 2026.
Direct Trade War Impacts on Canadian Businesses
As a trade war intensifies, Canadian businesses would face several immediate challenges:
Higher Costs and Supply Chain Disruptions
With tariffs as high as 25% on many imported goods, your business costs could rise dramatically overnight. Products you import from the United States would become more expensive, forcing tough decisions about whether to absorb these costs or pass them on as higher prices for consumers.
Supply chains built over decades could unravel quickly as goods get stuck at borders, tariff calculations cause delays, and shipping routes are reorganized. This disruption means more than just higher costs—it could mean unfulfilled orders and disappointed customers.
Shrinking Markets and Cash Flow Pressure
Perhaps more concerning is what happens to your export opportunities. If you sell to United States customers, you might find your products priced out of the market as new tariffs make them too expensive for American buyers.
This double squeeze—higher costs for inputs and reduced sales opportunities—creates serious cash flow challenges. Many businesses that look profitable on paper could quickly face liquidity problems as cash gets tied up in more expensive inventory while sales slow down.
Financial Planning During a Trade War
Know Your Exposure
The first step in preparing for a potential trade war is understanding exactly how exposed your business is:
- What percentage of your inputs come from the United States or other countries that might face tariffs?
- How much of your revenue comes from exports that could be affected?
- Which specific products in your inventory would face the highest import tariffs?
This analysis will help you prioritize your response strategy.
Build Financial Buffers Now
With the Bank of Canada warning of potential recession, now is the time to strengthen your financial position:
- Increase your cash reserves where possible
- Reduce non-essential spending
- Review and potentially renegotiate payment terms with suppliers and customers
- Consider securing credit lines before economic conditions worsen
Remember, in economic downturns, cash is king. Businesses with healthy cash reserves can often find opportunities while their competitors struggle.
Stress-Test Your Business
Run financial projections based on the imposition of tariffs under both Bank of Canada scenarios:
- How would your business perform if costs increased by 10-25%?
- What if sales decreased by 10-20% simultaneously?
- How many months could your business survive under these conditions?
This exercise might be uncomfortable, but it provides valuable insights into your vulnerabilities.
Practical Trade War Strategies for Canadian Entrepreneurs
Diversify Your Supply Chain
Relying exclusively on United States suppliers is risky in a trade war environment. Consider:
- Identifying alternative suppliers in Canada or countries less likely to be affected by tariffs
- Stockpiling essential materials if you have the storage capacity and cash flow
- Exploring whether you can change production methods to use different inputs, such as more domestic products
Find New Markets
If United States markets become less accessible due to tariffs, look elsewhere:
- The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) offers preferential access to European markets
- The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provides opportunities in the Asia-Pacific countries
- Don’t overlook domestic opportunities—other Canadian businesses may be looking to replace United States suppliers
Adjust Your Pricing Strategy
Review your pricing strategy to maintain profitability:
- Can you pass some cost increases to customers?
- Should you adjust your product mix to emphasize items with better margins?
- Are there premium segments less sensitive to price increases?
Review Contracts and Force Majeure Clauses
Examine your existing contracts with United States partners:
- Do they contain force majeure clauses that might be triggered by significant tariffs?
- Can contracts be renegotiated to share the burden of new tariffs?
- Should you consider shorter contract terms to maintain flexibility?
Canadian Government Resources and Support
Available Canadian Programs
The Canadian government offers several resources to help businesses affected by trade disputes:
- The Trade Commissioner Service provides market intelligence and connection services
- Export Development Canada offers financing and insurance solutions
- The Business Development Bank of Canada provides specialized loans for businesses facing temporary challenges
Provincial Initiatives
Ontario has specific programs to help businesses in the province:
- The Ontario Together Fund supports businesses looking to retool their operations
- The Ontario Investment Office can help identify new market opportunities
- Regional innovation centers offer guidance on adapting business models
Debt Management in Uncertain Times
Warning Signs of Financial Distress
As a licensed insolvency trustee, I’ve seen how trade wars and economic downturns can push businesses into financial difficulty. Watch for these warning signs:
- Using credit to pay for regular expenses
- Missing tax payments
- Extending payables beyond 90 days
- Receiving collection calls from suppliers
- Difficulty making loan payments
When to Seek Professional Help
If you notice these warning signs, don’t wait until a crisis hits. Consider:
- Consulting with a licensed insolvency trustee to understand your options
- Exploring debt restructuring possibilities
- Investigating formal arrangements with creditors
Early intervention often provides more options and better outcomes. Many entrepreneurs wait too long before seeking help, limiting their available solutions.
Success Stories: Adaptation During Previous Trade Disputes
Learning from the Past
Canada has weathered trade disputes before. During the softwood lumber dispute and the 2018 steel and aluminum tariffs, many Canadian businesses successfully adapted:
- A Toronto-based furniture manufacturer shifted to domestic wood suppliers and developed new finishes that used different imported components not subject to tariffs
- An Ontario tech company that previously focused on United States clients pivoted to develop European partnerships, ultimately discovering a more profitable market
- A Hamilton steel fabricator invested in more efficient equipment that allowed it to remain competitive despite higher input costs
The common thread? These businesses didn’t just weather the storm—they used it as an opportunity to become more resilient and diverse.
Conclusion: Preparing for an Uncertain Future
The Bank of Canada’s warning about a potential trade war and recession is concerning, but it also gives Canadian entrepreneurs time to prepare. By understanding your exposure, building financial buffers, diversifying your markets and suppliers, and knowing when to seek help, you can position your business to survive and potentially thrive during economic turbulence.
As Tiff Macklem, the Governor of the Bank of Canada, emphasized,
“Flexibility and adaptability are vital in this unpredictable economic climate.”
These words have never been more relevant for Canadian businesses.
Remember that preparation is key. The businesses that start planning now for both moderate and severe trade war scenarios will be best positioned to navigate whatever economic challenges emerge in the coming months.
Need Help Navigating These Uncertain Trade War Times?
I hope you’ve found this trade war Brandon’s Blog helpful. If you or someone you know is struggling with too much debt, remember that the financial restructuring process, while complex, offers viable solutions with the right guidance. As a licensed insolvency trustee serving the Greater Toronto Area, I help entrepreneurs understand their options and find a path forward during financial challenges.
At the Ira Smith Team, we understand the financial and emotional components of debt struggles. We’ve seen how traditional approaches often fall short in today’s economic environment, so we focus on modern debt relief options that can help you avoid bankruptcy while still achieving financial freedom.
The stress of financial challenges can be overwhelming. We take the time to understand your unique situation and develop customized strategies that address both your financial needs and emotional well-being. There’s no “one-size-fits-all” approach here—your financial solution should be as unique as the challenges you’re facing.
If any of this sounds familiar and you’re serious about finding a solution, reach out to the Ira Smith Trustee & Receiver Inc. team today for a free consultation. We’re committed to helping you or your company get back on the road to healthy, stress-free operations and recover from financial difficulties. Starting Over, Starting Now.
The information provided in this blog is intended for educational purposes only. It is not intended to constitute legal, financial, or professional advice. Readers are encouraged to seek professional advice regarding their specific situations. The content should not be relied upon as a substitute for professional guidance or consultation. The author, Ira Smith Trustee & Receiver Inc., and any contributors do not assume any liability for any loss or damage.