Rising to the Opportunity: What's Ahead for Canada’s Restructuring Playbook in the Trade War Era

Imagine navigating turbulent waters, only to be struck by a larger wave. Higher interest rates, rising inflation, mounting insolvencies, weak consumer spending, and escalating public debt have placed the Canadian economy in an uncomfortable spot. Now, with the potential for a trade war with its largest trading partner—the United States—looming on the horizon, Canadian businesses must brace for yet another destabilizing force.

How Tariff Increases Can Destabilize Businesses

• Increased Costs and Supply Chain Disruptions: Tariff increases inflate the cost of trade, particularly for industries reliant on global supply chains, driving up production expenses. Companies often respond by reshoring operations or diversifying suppliers, but these adjustments strain financial resources, often prompting restructuring.

• Reduced Demand and Debt Pressure: Retaliatory tariffs restrict access to international markets leading to declining revenues. Highly leveraged firms face mounting debt-servicing challenges, driving them toward restructuring or insolvency proceedings to manage financial pressures.

• Macroeconomic Impacts and Policy Reallocation: Tariff hikes drive up inflation, reduce consumer purchasing power and lower demand across sectors. Businesses unable to adapt are forced into distress, leading to restructuring, sectoral pivots, or market exits in response to shifting policy landscapes. The destabilizing impact of tariffs is particularly magnified in economies particularly sensitive to such trade barriers.

Canada’s Sensitivity to Tariff Threats

The threat of foreign tariffs highlights the evolving complexity of global trade and reveals the underlying sensitivity of key Canadian industries in the face of U.S. trade actions. Historical examples demonstrate a vulnerable trend across several sectors.

• Steel: The 2018 U.S. imposition of a 25% tariff on steel imports under caused widespread challenges for Canadian producers. Small and medium-sized enterprises (SMEs), like Tenaris Algoma Tubes in Ontario, faced layoffs due to unsustainable market conditions. Larger players like Algoma Steel, already financially challenged, saw costs rise and market access restricted, leading to workforce reductions and pushing the company closer to insolvency. These tariffs disrupted trade flows, heightened market volatility, and placed immense pressure on industry.

• Automotive Sector: In 2017, a proposed 300% U.S. tariff on Bombardier’s CSeries aircraft forced the company to sell a majority stake in the program to Airbus in a significant restructuring move. Today, Canada’s automotive sector, especially in Ontario and Quebec, remains deeply integrated with U.S. supply chains. Proposed tariffs on auto parts and vehicles threaten to disrupt this relationship, increasing costs and reducing competitiveness.

• Softwood Lumber: The 2017 U.S. tariffs of 3% to 24% on Canadian softwood lumber intensified trade tensions. Companies like Canfor Corporation and West Fraser Timber Co. experienced shrinking profit margins, leading to mill closures and workforce reductions. Many firms turned to financial restructuring to manage rising costs and restricted market access.

• Renewable Energy: In 2018, the U.S. imposed safeguard tariffs on imported solar products, including those from Canada, citing increased imports as a substantial cause of serious injury to U.S. manufacturers. This led to an 82% decline in Canadian solar product exports to the U.S.

These industries illustrate the acute impact of trade shifts on Canada’s economy. However, the sensitivity extends to emerging sectors as well.

• Healthcare: Changes in U.S. healthcare policies could indirectly affect Canadian medical device and pharmaceutical exports. Reduced demand or pricing pressures may necessitate operational restructuring or a strategic pivot to other international markets.

• Agriculture: The tariffs increase on agricultural products would cause financial strain on Canadian farmers. Sectors like beef and pork, heavily reliant on U.S. export markets, may experience reduced demand, particularly impacting small and medium-sized agricultural businesses.

These sectoral challenges stem from Canada’s heavy reliance on the U.S. as its primary export market, which may need to be reassessed.

Reassessing Canada’s Trade Strategy

A looming 25% tariff on Canada’s exports to the U.S.—which account for nearly 77% of its total exports—highlights the dangers of overreliance on a single trading partner. While proximity and shared economic interests have historically benefitted Canada, rising protectionism makes this dependence a liability. Trade diversification is no longer a choice but a necessity.

For example, Canada remains underrepresented in emerging markets such as India and China, which account for about 50% of global growth according to the International Monetary Fund (IMF). With just 3.6% of exports directed to these high-growth economies in 2023, Canada risks marginalizing itself in regions shaping the future of international trade dynamics. Engaging with these markets, though complex, reveals untapped potential and represents a new-age reality for policymakers and restructuring professionals.

New-Age Restructuring Work

Restructuring in a tariff-driven environment could require businesses to adopt innovative strategies to manage emerging financial and operational risks. Advisors may play a crucial role in guiding companies through renegotiating supply chain contracts with tariff-adjustment clauses and restructuring debt linked to export-dependent revenue streams. Financial models may need recalibration to account for increased costs and market volatility, ensuring that businesses remain agile and adaptable in an era of protectionist trade policies.

Restructuring professionals could also increasingly prioritize scenario planning and stress-testing operations against geopolitical, environmental, and technological disruptions. Restructuring lawyers may be tasked with drafting agreements that offer the flexibility needed to pivot in response to future shifts, including new trade blocs, evolving tariffs, or unforeseen regulatory changes.

Conclusion

Canada stands at a crossroads where resilience will determine its future. The era of relying on a single trading partner is over—diversification and adaptability are now essential. As tariffs threaten to upend industries, businesses that embrace strategic restructuring will lead the way, transforming challenges into opportunities. The question is no longer whether disruptions will hit, but how ready we are to face them head-on.

* Divi is a restructuring lawyer and the founder of Divi Distressed Investments, L.P., specializing in business rescue and distressed corporate investments. The views expressed are personal.