The Impact of Tariffs on Business Valuation: Part 2 – Economic and Industry-Wide Effects

Since the release of Part 1 of our mini-series, much has changed; however, one thing remains consistent– Canadians will continue to face uncertainty as the tariff ‘tit for tat’ tensions drag on.

As promised, this blog post will focus on the broader economic and industry-wide effects of tariffs – preceded by a summary of significant tariff-related events that have occurred since Part 1 of this mini-series was published – March 6, 2025:[1][2]

Economic and Industry-Wide Effects of Tariffs

Tariffs are a key factor in international trade, influencing economies, businesses, and consumers in both beneficial and adverse ways.

1. Domestic Industries
   • Tariffs protect domestic industries by increasing the cost of imported goods, encouraging consumers to choose locally made products and potentially boosting job growth in domestic markets.
   • For instance, if a country imposes high tariffs on imported cars, consumers may be more inclined to buy domestically manufactured vehicles, benefiting local carmakers.
   • While tariffs can help protect certain domestic industries, they may also harm others that rely on imported inputs or raw materials. Industries such as manufacturing, construction, and technology often depend on affordable and high-quality imports for essential components.
2. Consumers
   • Tariffs can increase the costs of imported goods, making them more expensive for local consumers.
   • For example, if a country imposes tariffs on imported smartphones, then prices (particularly for foreign made models) may increase. Consumers who once benefited from lower-priced imports might face higher costs or opt for domestic alternatives, if available.
3. International Relations
   • The imposition of tariffs can trigger retaliation. Escalating brinkmanship and one-upmanship may lead to trade wars – one example of this would be heightened economic conflicts where countries impose tariffs or other trade barriers on each other in response to perceived unfair trade practices. Such conflicts often result in increasing restrictions on imports and exports, impacting global trade, businesses, and consumers.
   • For example, the U.S. and China were engaged in a trade war starting in 2018, with both countries imposing tariffs on hundreds of billions of dollars’ worth of goods. The conflict, driven by concerns over trade imbalances and intellectual property theft, led to higher costs for businesses, supply chain disruptions, and economic strain on industries such as agriculture and manufacturing.
4. Government Revenue
   • Tariffs are a source of income for governments, especially in developing countries that may rely on them to fund operations.
   • For example, a small country may lack a comprehensive income tax system or the infrastructure necessary to efficiently monitor the collection of sales and income taxes. As a result, tariffs may become a crucial source of revenue, potentially accounting for a significant portion of the country’s total revenue through taxes on imports.
5. Global Supply Chains
   • Tariffs can disrupt global supply chains by raising the cost of sourcing materials or products from abroad, leading to higher production expenses for businesses that depend on imported inputs. In response, companies may seek alternative suppliers or relocate production.
   • For example, an electronics manufacturer might source microchips from one country, obtain raw materials from another, and assemble products in a third. Tariffs imposed at any stage of this supply chain can drive up production costs, ultimately affecting pricing and profitability.
6. Economic Growth and Trade Balances
   • Some countries use tariffs to address trade deficits, where imports exceed exports. By imposing tariffs, they aim to reduce imports and encourage domestic production or export
   • For example, if Country A has a significant trade deficit with Country B, it may impose tariffs on goods from Country B to curb imports and promote local industries.
7. Long-Term Effects
   • While tariffs can provide short-term protection for domestic industries, they may also lead to inefficiencies. Reduced competition can weaken the incentive for domestic producers to innovate, and retaliatory tariffs from other countries can harm businesses that depend on export
   • For example, if a country imposes tariffs on steel imports to shield its domestic steel industry, it may increase costs for steel-dependent manufacturers, such as automakers, appliance producers, and construction companies, ultimately raising prices for consumers.

Ultimately, while tariffs can help protect domestic industries and generate government revenue, they also come with drawbacks such as higher prices, potential trade wars, and economic inefficiencies. Additionally, tariffs can slow or even halt cross-border transactions, creating uncertainty for businesses and disrupting global trade.

Moving Forward

Although our focus has been on the broader economic effects, certain industries are particularly vulnerable to tariffs, such as:

• Manufacturing – Tariffs may result in higher input costs and reduced export demand.
• Retail and Consumer Goods – Price-sensitive consumers may squeeze margins as costs increase from tariffs.
• Technology – Tariffs may increase intellectual property risk and cause supply chain reconfigurations.
• Professional Services – Tariffs may impact the value of client portfolios and future transactions.

Understanding these effects is crucial in determining how a business’ future cash flows, risk profile, and working capital requirements will be impacted by tariffs moving forward. In part 3 of our series, we will shift our discussion to direct valuation implications, as well as provide actionable takeaways and strategies for business advisors.

If you would like a further discussion on any of the topics covered in our miniseries, please do not hesitate to contact our team!

[1] https://globalnews.ca/news/11076387/donald-trump-tariffs-canada-timeline/

[2] https://www.blakes.com/insights/us-canada-tariffs-timeline-of-key-dates-and-documents/

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