Lessons from Canadian exporters during the U.S. 2018/2019 steel and aluminum tariffs

With rising barriers to trade with the United States, it is important to understand how Canadian firms adjust to tariffs. To provide insight, this paper examines the effects of U.S. tariffs imposed on Canadian steel and aluminum products from June 1, 2018, to May 20, 2019. Over the months tariffs were imposed, the value of tariffed steel and aluminum exports fell by about 50%, with U.S. importers paying the full cost of tariffs through higher prices. Exports of steel declined as exporters affected by tariffs responded by exiting the U.S. market and halting operations. Exports of aluminum declined as exporters affected by tariffs adjusted by reducing their exports, rather than severing supply chains by exiting the U.S. market. Across the 2017 cohort of steel and aluminum exporters affected by tariffs, gross output and employment levels were at least maintained from 2017 to 2019. Moreover, steel and aluminum producers affected by tariffs that continued to export to the United States increased investment by about 60%, which far outpaced firms that exited the U.S. market (-36% and +37% for steel and aluminum producers, respectively). Lastly, firms that left the U.S. market tended to have higher debt levels relative to those that continued, suggesting a link between the health of balance sheets and firms’ ability to continue as exporters. In the face of higher tariffs, declining trade (in value and volume) is expected. The resilience of steel and aluminum exporters is a more surprising outcome, and the lessons learned from this are more tentative given that current tariffs are higher, more uncertain and potentially more persistent.