Industry in Focus: How Trade Volatility is Affecting Manufacturing

U.S. tariffs on imported steel and aluminum have sent shockwaves across Canadian and American manufacturing and their supply chain networks.

To better understand the impact of these tariffs, Camilla Sutton, Managing Director, Head of Equity Research, Canada & UK, BMO Capital Markets, led a discussion on how trade volatility is affecting manufacturing. The panel included: 

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  Fadi Chamoun, Transportation Analyst, BMO Capital Markets

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  Erik Johnson, Senior Economist and Vice President, BMO Economics 

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  Andrew Pappas, Managing Director, Team Leader and Head of ABL Metals Group, BMO Commercial Bank U.S.  

“This current policy mix is unlikely to lead to a renaissance of the U.S. manufacturing employee,” Erik Johnson said. “Instead, what we’re likely to see is increased production costs for manufacturing, and in some cases, they might even be disadvantaged relative to their competitors from abroad.” 

For example, a U.S. manufacturer specializing in high-value-added electronics may have to pay tariffs on resources used in the production process, while competitors in China and elsewhere might not pay tariffs if they’re just shipping a final good to the U.S., he added.  

Uncertainty about the longevity of the new tariff regime is another challenge. “One of the reasons why many advanced economies largely shifted away from raising revenue using tariffs decades ago is that it creates incentives for firms to divert resources from business investments towards lobbying,” he explained.  

The U.S. steel industry had been pushing for tariffs, arguing that global trade previously wasn’t free and fair. In anticipation that tariffs would be imposed, some companies began stockpiling metal and metal prices began to gradually rise then and for the futures market, explained Andrew Pappas. While most manufacturers will try to pass higher prices onto customers, the real challenge is the number and level of tariffs and the uncertainty about final overall costs. 

In response to this environment, Pappas thinks manufacturers are going to have to take a step back and examine their cost structure and see where they can make adjustments to their cost and production process (i.e., can they cut some costs or purchase more domestically). In some cases, this analysis may have to happen on a component-by-component basis.  

Companies can’t change vendors overnight because it takes time to get approvals, plus there may already be contracts in place, he explains. Large manufacturers who want to keep their costs down to their customers could have some leverage over their suppliers, but it’s going to be a negotiation, he said. “Some increases will be passed along, and others will not because everyone is in a competitive environment,” he said. 

The other challenge is that the U.S. tariffs extend beyond steel and aluminum, Pappas said. “Any tariff is going to result in higher prices, ultimately, throughout the entire chain, and too many tariffs are going to end up in demand destruction,” he noted.  

Many transportation companies, concerned about weakening demand, are holding off on capital investments and focusing instead on preserving their balance sheets, said Fadi Chamoun. The impact of the U.S. tariffs may already be affecting shipments. There are reports that some shipping lines have canceled 90 sailings from Asia – mainly from China – to the U.S.  

“We’re talking about ships that carry 8,000 to 13,000 containers, so you can do the math,” he said. “You could be closing in on a quantity of near a million containers potentially being pushed off.” When you factor in the time it takes to complete a sailing, Chamoun said the impact on volumes could materialize in the next few months. 

In this environment, companies are focused on “trying to emphasize controlling what they can control,” by cutting costs, tightening expenses and even enforcing stricter travel policies, he explained.  

Still, some companies are taking steps to minimize the impact of tariffs. For instance, General Motors recently announced plans to expand overtime and hire more employees at one of its U.S. assembly plants to reduce reliance on non-U.S. plants. 

In Canada, businesses and government agencies are increasing their communications with railroad and transport companies to plan for equipment shortages and potential bottlenecks, Chamoun said. These conversations could potentially lead to stronger and more efficient supply chains within Canada.  

While the Canadian and U.S. economies will react differently to the tariffs, overall, it’s creating a weaker backdrop for growth, said Johnson. The U.S. is less reliant on trade than many other advanced economies; however, Trump’s new regime has still caused “stagflationary shock,” where unemployment and inflation will likely be higher amid slower economic growth, he noted. 

Canada, on the other hand, is far more reliant on trade with the U.S., with 20% of its GDP tied to goods-related exports with its southern neighbors. The mix of tariffs on steel, aluminum, auto and non-USMCA compliant goods are likely to tip Canada’s economy into a two-quarter contraction in the middle of this year, with GDP growth averaging just 0.7% this year, Johnson said. 

“The challenge for the global economy is that the current fashion in which trade policy is being reshaped, creates tremendous confusion about what the rules of the game are going to be,” he explained.  

He projects that the Bank of Canada and the Federal Reserve will each cut rates three times over the remainder of the year. “The longer we’re under the current global trade policy regime, the worse the economic outcomes are likely going to become,” he said.  

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