While the tariffs themselves may not last long, the trade relationship between the United States and Canada — as well as the rest of the world — has been irreparably altered.
“The idea that this is sort of a temporary disruption, and in four years time or whenever, it will go back to normal, I don’t think that is the correct assumption,” said Al Mussell, research lead at Agri-Food Economic Systems, at the Saskatchewan Ag Summit in Saskatoon on March 27.
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The U.S. is a net importer of Canadian agri-food products, some of which it can only get from the Great White North. As such, Canadian agriculture has the target on its back.
Data shows that in the last five years, Canadian agri-food exports to the U.S. has significantly increased. A fact that up until the last four months was a pride to the industry’s competitiveness. Now it’s shaping up to be a liability.
For Saskatchewan, it’s a trade value liability of $500 million made up of live animals, raw and processed cereal and oilseed crops, prepared foods and animal or vegetable products that go through manufacturers.
Many of whom are moving to the U.S. and investing south of the border, because they already have their main market there. Mussell shared survey results of manufacturers, showing that on average, 31 per cent of all Canadian manufacturers shipments go to the U.S. However, some ship up to 80 per cent south, while others have none.
“As farmers, you tend to think about your direct exports, the animal, the crop, etc.,” he said. “But actually a lot of this, I think, comes down to not your customer, but your customer’s customer who’s on the front line of this. So, it’s the food processing company that has some of their sales badly impaired, and then everything runs back to the farm.”
In response, Canada needs to “retaliate aggressively” said Mussell. But the retaliation must be strategic, as some product areas are deemed safe with a higher likelihood of the importer accepting an increased price.
He gave the example of wheat versus oats. The U.S. grows much of their own wheat, so they’d be unlikely to accept and pay the tariff on Canadian wheat. But Canadian oats are one of the biggest imports to the U.S., and they’ll be required to pay the necessary tariffs.
“The U.S. supports a lot of oats from Canada… As a mater of practice they don’t grow oats,” Mussell explained. “It’s going to take some time for them to learn how to do it well. So, if you’re shipping oats, I think you probably got a better shot that some of that will be passed on to the south.”
The same situation goes for any sort of niche products or brands that have a strong following or that don’t face much competition. There’s a better chance for these to push through and not have extra costs pushed back.
It ultimately boils down to the price elasticity of the demand, as to what kind of costs can be passed on and what will be acceptable to the end consumer.
Mussell added that because of the “blank cheque” emergency measures clause in CUSMA and sidelined World Trade Organization appeal process, Canada must do what it can. It can’t wait for the lawsuits, appeals, or U.S. Congress to take action.
“The best things to retaliate on are the things that we export to them, because we can just turn around and replace the imports. It’s probably not going to be perfect, but that’s an option for us.”
He gave the example of putting tariffs on American orange juice. While many may think it’s ineffective, by increasing the prices on the product it reduces the likelihood of purchase and creates a ripple effect that will be noticed by the executives worried about their margins.
“You need to make a narrow set of people hurt real bad, and they’ll convince themselves that what they’re doing to us is a bad idea,” he said.
Canada’s other option is to look to the “third countries” and fill in the gaps. The E.U. is planning to tariff the U.S. on soybeans, so Canada should look at supplying that demand. Japan may retaliate against the U.S. following rice tariffs, another place that Canada could fill a gap with.
It is complicated, and it will be hard work, but Canadian governments, companies and producers, need to be ready to negotiate.
One way that the Canadian producer can stick up for themselves is with their grain contracts. Mussell says it’s important to be speaking to customers and customer’s customers to create understanding and determine a way for both parties to navigate the situation successfully.
As part of an ongoing study on grain contracts, Agri-Food Economic Systems has been gaining producer and grain companies perspectives and experiences on deferred delivery contracts.
“We want to be able to work through this, and characterize the essential elements of what I would call forward contracts and ultimately drawing experience with people’s needs, concerns they have, etc., in developing sort of a template for a modernized grain contract that everybody can use,” Mussell explained.
There is undoubtedly variability in agriculture and its environment. Variances in contracts are no exception, particularly now when it comes to tariffs. The choice of language often lacks balance on the responsibility of certain actions and puts risk back onto the farm and producer.
Currently, it’s the importer of record who is to pay the tariff. But Mussell warned that there is nothing to stop a company and importer from pushing the tariff onto the farmer as a deduction on payment.
There is no clear answer on how tariffs and grain contracts should be handled, and there’s a lack of priority given on the topic.
As with any contract, it will come down to legalities. But producers need to sit down and work it out with the contract parties.
Mussell’s biggest piece of advice was for producers to get a lawyer to read through the contracts, and have them explain how certain things will work. There are a few pieces to have in mind when the contract is being looked at.
Number one, when was the contract initiated and should tariffs have been anticipated? If the contract is drafted today, or in the last few months, producers should ensure there is language involved on how the tariffs will be dealt with. Anticipating who the costs will fall on, or will they be split — producer pays 12.5 per cent, and company pays 12.5 per cent.
However, if a contract was signed a few years ago, missing information on tariffs is expected — it wasn’t even on the horizon. So that’s a different conversation to be had, but still needs to be — ask what kind of provisions there are to deal with tariffs?
It’s also important for the producer to understand contract terms and conditions, such as reasonable ground to not fulfil a contract or when a contract is “frustrated” (meaning when both agreeing parties are unable to make the situation work).
The other key thing Mussell always wants producers to consider is what law the contract is written in.
“When you get in the situation that we’re in now, be very careful,” he said. “If I were in this province, I would want the contract to be under this province’s legal framework. Or at least Canadian framework.
“If you have something that is written under U.S. law, well, if it goes sideways. Good luck to you.”
