Trade Lawyer Martha Harrison in her Toronto office on Nov. 11.Jennifer Roberts /The Globe and Mail
The morning after the U.S. election, trade lawyer Martha Harrison’s phone rang.
It was a client – a large Canadian manufacturer that does the bulk of their business south of the border.
“Okay it’s happened,” the client said. “Now what?”
She and the client had been preparing for a second Trump presidency – and his vow to impose a universal tariff of 10 per cent to 20 per cent on imports to the U.S. – for months. But now that Donald Trump had actually won, it was time to put their contingency plans into action.
Similar conversations have been playing out in Bay Street law offices for the past week, as businesses brace themselves for a new era of U.S.-Canadian economic relations.
Ms. Harrison’s client, which makes product in Canada and then exports it to the United States to a commercial partner, will be significantly affected by any large tariffs. As a result, they have been exploring the possibility of opening a branch south of the border. This would allow them to sell product to their U.S. enterprise at a transfer price – below retail – and then use the U.S. enterprise to sell directly to American clients. However, setting up shop in the U.S. is a costly endeavour and it still wouldn’t shield them from tariffs entirely.
“It would still be the transfer price – and that price has to be acceptable with taxation authorities – plus 10 to 20 per cent, which is still a lot more than most profit margins can handle,” warned Ms. Harrison, a partner at McCarthy Tétrault LLP, who specializes in international trade and regulatory law.
Another big concern for clients, she said, are long-term contracts, in which a Canadian company has agreed to a fixed price for a good that could now face a 20-per-cent markup.
“At minimum, we expect a number of contract renegotiations and I also expect that there will be some cancellation in contracts. And probably the Canadian companies are going to be forced to look to alternative jurisdictions to sell product,” she said.
For example, some businesses are looking at how to boost sales domestically, or how to expand into the Mexican market – the third partner in the United States-Mexico-Canada Agreement (USMCA) – or Europe, where Canadian businesses still benefit from duty-free entry, provided the goods are made in Canada or in the European Union, thanks to the EU-Canada Comprehensive Economic and Trade Agreement (CETA).
Other strategies include trying to ship as much product as possible ahead of any tariffs. Although this leads to another potential problem that Ms. Harrison is warning clients to consider: overtaxed supply chains.
As companies rush to move goods ahead of January when Donald Trump takes office, ports, planes, roads and rail will become extremely busy, potentially causing delays.
“Trade lawyers like me are going to be very busy in the next four years supporting Canadian business and international businesses,” she said.
Trevor Zeyl is a partner with Norton Rose Fulbright Canada LLP who practices corporate and securities law. Just days before the election, he attended a global partnership conference in Chicago, with corporate mergers and acquisitions (M&A) partners from Norton Rose offices around the world.
Mr. Zeyl said what they heard from their American colleagues is that, while there is a large amount of uncertainty, U.S. clients were feeling very optimistic about what a Trump presidency would look mean for deal flow and the stock market. President-elect Trump may be unpredictable, but they felt he will undoubtedly move toward deregulation and lower corporate taxes.
He added that one unique conversation that he’s having with clients that isn’t being discussed much is the potential for increased shareholder activism.
“The fact that he’s mentioned there is going to be tariffs, but we don’t know what they are, creates uncertainty. But tariffs themselves create volatility because it’s unclear how tariffs will effect each impacted business,” he said. “This is something U.S. activists could seize upon because those types of investors like risky, volatile environments. That’s where they find undervalued targets and where they can make the most money.”
Canadian companies that lose value because of tariffs aren’t necessarily going to be targeted by activist investors if the valuation is justified, he said. Rather, activists will be on the lookout for businesses that aren’t handling the new economic landscape properly.
For example, an activist may try to force a company to buy a U.S. competitor and move their manufacturing capabilities south of the border to mitigate the impact of tariffs.
“So are companies making strategic missteps or sitting on their hands. Activists will seize upon the opportunity to invest in undervalued targets.” said Mr. Zeyl, who is part of the firm’s special situations team, which focuses on managing activist threats. “It’s the same type of playbook but in a unique economic environment.”
Still, at this stage, Mr. Zeyl says Canadian businesses shouldn’t rush to make any significant move too quickly, given how unpredictable Mr. Trump was the first time around.
“What we are advising clients is to not pre-empt any decisions president Trump may make until there is certainty – because right now there is no certainty,” he said.