Already beset by tariffs, Quebec braces for another big trade hit

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Quebec executives and union leaders are bracing for a tariff shock next week that they say would deliver an agonizing blow to business in the province, worsening prospects for what is already Canada’s hardest-hit regional economy if the U.S. unleashes a new wave of trade action.

The French-speaking province is a global power in aluminum and aerospace with renewable energy resources and several multinationals that are the envy of the world. But since U.S. President Donald Trump was elected, it’s also been the biggest Canadian casualty of his protectionist trade agenda.

The situation could get much worse if the White House makes good on its threat to levy new 50-per-cent tariffs on US$20-billion worth of Canadian exports as scheduled on Aug. 19, including machinery, textiles and furniture. High level negotiations are under way between the two countries but if no deal is reached, U.S. tariffs and Canada’s retaliatory actions could trigger a painful fallout, the likes of which we haven’t yet imagined.

“I’m not sure that Canadians and Quebeckers are prepared for what’s about to happen,” senior diplomat Louise Blais said on a recent podcast organized by the Canadian International Council. She evoked the prospect of thousands of layoffs hitting smaller communities in particular.

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Quebec’s official envoy for the review of the Canada-United States-Mexico Agreement, Ms. Blais said many of the companies she’s been in contact with during recent consultations would be hit quickly, with no time to pivot to other customers. Without help, “those companies will be gone in a month or two,” she said.

The stakes are high in Quebec. Exporters in the province have already been walloped with 50-per-cent tariffs on primary steel and aluminum and products made from those metals, as well as a 10-per-cent levy on lumber and 25 per cent on upholstered wooden furniture.

The U.S. then made changes to those Section 232 tariffs in April to apply duties on the entire value of articles made with steel, aluminum and copper rather than just the specific value of the metal content. That hit a new swath of exporters, including Sea-Doo and Ski-Doo maker BRP Inc. DOO-T

In all, the province currently has an average effective tariff rate of 7 per cent for goods going to the U.S., the highest of all provinces.

That rate would climb to about 11 per cent with the new 50-per-cent tariffs, which are being implemented under Section 338 of the Tariff Act of 1930, according to research published last month by National Bank economists, leaving Quebec heavily exposed as the only province above 10 per cent. The new tariffs would punch hardest in its dairy sector, as well as in manufacturing industries such as sporting equipment, ATB Financial said in a recent report.

The knock-on effects to the Canadian political dynamic could be significant. Quebec is widely seen as the primary reason Prime Minister Mark Carney’s government was elected last year, and its continuing support – both in the corridors of power and from average voters – will be crucial for Ottawa in the weeks and months ahead.

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Quebec Premier Christine Fréchette has already said she won’t necessarily follow Ottawa’s lead if it pledges to put American liquor back on store shelves as a concession to Washington, adding Quebec would need to see substantial improvements to the U.S. levies it already faces before making such a move.

And while a trade deal could bring relief to some sectors, others could wind up frustrated. The U.S., for example, is seeking concessions on how dairy quotas are allocated in Canada – a politically sensitive issue in Quebec.

Ms. Fréchette said on a social media post Thursday her government would offer “no compromise” on the supply management framework for dairy, and none on culture or language either.

She said if the worst happens, Ottawa will need to assume the costs of the agreement it negotiated, and offer “all the help necessary” to protect Quebec jobs. Nine per cent of Quebec’s exports, worth $7-billion a year, are affected by the new tariffs, according to the premier.

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If Mr. Carney makes a deal that’s unpalatable to certain provinces, other premiers could also break rank and throw what was a largely united Canadian side into disarray. In fact, Washington might be counting on exactly that.

“The negotiations, and opposing ideas of premiers, does reveal the decentralized and sometimes dysfunctional nature of the Canadian federation,” said Ian Lee, associate professor at Carleton University’s Sprott School of Business.

If we do not finalize a trade agreement, Canada will face a “catastrophic capital flight of businesses exiting to the U.S.” with a concomitant steep decline in the Canadian dollar relative to the U.S. greenback, Prof. Lee argues.

Quebec has lost 58,800 net jobs since the start of the year, according to research published this month by economists at Desjardins Group. Most of the decline has been concentrated in the construction and manufacturing sectors – both industries heavily tied to exports.

“I’ve never seen such little hope in the eyes of the people I represent,” said Magali Picard, president of the province’s powerful FTQ union, whose 600,000 members include a majority working in the private sector. She said uncertainty over Canada’s relationship with the U.S. has people worrying about their jobs, adding to cost of living concerns that have dominated headlines.

If there’s a rupture in talks and the trade conflict escalates, “it’s going to be devastating,” Ms. Picard said. “It’s going to be costly for Quebeckers and for all Canadians. For me, it’ll be like going on strike.”

The union boss, who’s part of Mr. Carney’s Advisory Committee on Canada-U.S. Economic Relations, said a comprehensive and durable trade pact between the two countries is urgent. She said workers can’t continue to navigate the stresses that come with the uncertainty much longer.

Business groups agree.

“We’re seeing a certain exasperation on the part of those leading small and medium enterprises,” said Simon Gaudreault, chief economist and vice-president of research for the Canadian Federation of Independent Business.

Ottawa is dealing with a situation that’s difficult to read, he said. But there’s also some dissatisfaction among business leaders with the way things have transpired since the White House first imposed tariffs on Canada, he added.

Some government programs put in place have “missed their mark.” Meanwhile, many of the things that would really help small businesses be more resilient, such as lower taxes, haven’t transpired.

U.S. levies already in place have slowed orders and shrunk profit margins for Quebec companies, prompting some of them to cut workers’ hours or lay off staff outright in a bid to slash costs. Other businesses, such as South Shore Furniture, have simply shut down as U.S. tariffs trigger shifting trade patterns they haven’t been able to overcome.

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Many executives are reluctant to speak to the media about their situation because they don’t want to scare their employees or shareholders. Drawing attention to their companies could also cause reputational harm and push customers to competitors perceived as more stable.

For others, too much is on the line to stay silent.

The Section 232 levies alone ”took us close to the break-even point,” said Alain Ouzilleau, owner and president of Cabico & Co., a maker of cabinets based in Coaticook, Que. The company has already trimmed its payroll from 700 to 450 employees in recent months.

Canadian wood-product manufacturers are being squeezed and they’re suffering, Mr. Ouzilleau said. While Section 232 tariffs restrict access to the U.S., global exporters displaced from that market are redirecting massive volumes of products into Canada, often at prices Canadian producers simply cannot compete against, he explained.

Any new tariffs will only deepen the distress, Mr. Ouzilleau said. “This is no longer simply a trade issue,” he said. “It is about the survival of Canadian manufacturing.”

He warns that the entire forest-products ecosystem and supply chain could collapse without more muscled intervention from Ottawa, echoing comments from other industry players. Given wood is one of Canada’s key natural resources, “it’s frustrating” that more attention hasn’t been paid to the the sector, he said.

The province’s clothing industry has already undergone major shakeouts in past decades as a result of aggressive global competition and the end of textile quotas. Its manufacturers are now girding for more tariff pain as the new levies apply to Canadian products that were previously exempt under CUSMA.

Greg Nicoghosian, vice-president of global sales at Pajar, a Montreal-based maker of winter apparel, said the company can deal with low single-digit import levies when it ships products to U.S. customers. Anything higher becomes problematic, even for its high-end boots coveted by customers, he said.

“If you’re at $495 a pair and now you need to retail at $595 or more, it’s a different ball game,” Mr. Nicoghosian said. “We will lose business if we increase our prices, so we have not increased prices... You swallow the pill and take the hit against your bottom line.”

Pajar maintains a factory in Montreal’s Plateau neighbourhood where it makes the hand-crafted boots. The site, which has been operating for more than 50 years, is a rare example of domestic production in an industry that has shifted to Asia and other lower-cost pockets of the world.

Tariffs will challenge the plant’s economics, Mr. Nicoghosian acknowledges. But “we will tough it out,” he vowed. “We’re positive. We believe something good will come out of it eventually.”

Others are striking an equally optimistic tone, at least as it relates to Canada’s unity and resolve.

Former Quebec premier Jean Charest, a lawyer who also sits on Mr. Carney’s Advisory Committee on Canada-U.S. Economic Relations, said he doesn’t see any province going rogue and defying the federal government in its dealings with Washington. He said the Prime Minister is providing premiers and other key leaders with regular briefings and listening to their concerns, and no one expects a full resolution by Aug. 19.

Then again, no one expected Mr. Trump to announce the Section 338 tariffs in July either.

“If the Americans go ahead with the 338s, then they’re crossing a line,” Mr. Charest said. “And that brings us to a new dynamic in the relationship where Canada will have to look at its options.”