Tariff impacts: walking a trade tightrope

US tariff measures will not only impact the relationship between Canada and the US. Other countries exposed are Mexico, set to incur tariffs of 25 percent on all goods exported into the US, and China, who received 10 percent in addition to current sanctions. 

Just hours before proposed tariffs on Canadian and Mexican goods were set to go into effect on the 4 February 2025, a 30-day reprieve was agreed. This also coincided with a pause on any corresponding retaliatory measures. 

China, however, was not exempt and the US government followed through with their proposed tariffs. Shortly after, countermeasures were put in place by China. These range between 10 and 15 percent, with a focus on energy, and will be implemented alongside export controls on rare metals – many of which are used in high-tech products. 

With a renewed sense of cooperation between the US, Canada and Mexico, based on the 30-day reprieve, a more lasting solution could be on the cards. However, there’s a risk this will not materialise. 

“Recent announcements of a blanket 25 percent tariff on steel and aluminium imports into the US, enforced on 10 February, emphasise this risk.”

The current situation leaves the US economy and its construction industry exposed to increased market volatility and potential tariff implications. 

Tariffs typically make both imports and domestically produced goods costlier. Should they be applied in full force, inflation, alongside unemployment, would rise and Gross Domestic Product (GDP), in tandem, would likely weaken. However, the strength of the US dollar, tariff revenue generation and a transition to domestic production of goods and services could offset those effects. 

According to the Peterson Institute for International Economics, a 25 percent tariff on all goods from Mexico and Canada would significantly stall US economic growth and increase inflation. Their estimates suggest that through the duration of President Trump’s term, US GDP could be nearly $200bn lower than if no tariffs were implemented. 

The impact on US construction could be similar – lower growth and higher costs. Unemployment could also increase as companies cut costs to manage reduced consumption and elevated inventories. In addition, projects are likely to experience delays due to procurement challenges should material provenance shift to an alternative base. 

“While labour availability and capability could be affected, construction employment could perhaps be more impacted by immigration policy and natural disasters than tariffs.”

Materials and machinery and equipment costs arguably bear the initial brunt of the preliminary phases of tariff implementation. The US sources a significant share of lumber, metals and other vital building materials from Canada.  

Meanwhile, Mexico, China and other countries supply steel, aluminium and various manufactured inputs – including mechanical and electrical items. Tariffs placed on these imports will likely elevate construction material costs, affecting both residential and non-residential workloads alongside infrastructure projects and programmes. 

If domestic suppliers can’t expand supply or choose to price near import levels, the supply chain must absorb higher costs, or pass increases through the value chain. When contractors and developers can’t fully transfer these elevated costs to end customers, margins narrow.  

“With borrowing costs already high, added input expenses could further stall new projects, and the balance sheets of firms may become strained - increasing insolvency risks.”

Even now prior to any major implementation, materials and machinery and equipment costs could rise. As speculation grows, forward purchases are being considered and the stockpiling of goods can reduce supply, potentially inflating costs under increasing demand. 

Navigating tariffs for project success  

While the scale may be different, tariffs aren’t exactly a new challenge.  

“Being proactive will allow the best opportunity to mitigate cost increases alongside tariff impacts. Any lulls in tariff implementation is a chance to do exactly that.”

A step-by-step model that factors in project feasibility, design measures and construction best practice is crucial to mitigate the challenges introduced by tariffs.

Pre-project feasibility: determine project feasibility from the outset  

1. Review all budgets and plan accordingly with adequate contingency. Scenario planning may also help to evaluate the opportunity cost of alternative options and locations. Costs typically increase over time and schedule gains can compromise rates of return should a project pause. 
2. Even if project viability is compromised – review the overall business case. There may be options that mitigate budgeted costs vs future construction costs. 
3. Discuss your pipeline with the market. As market volatility and uncertainty increases, open lines of communication about future workloads, specific project risks and opportunities allow contractors to schedule tenders, which can improve collaboration. 
4. Early engagement with the supply chain can also help warm contractors up to alternative, more suitable, commercial models. Listen to their views on procurement routes, unacceptable risk transfer, and unrealistic deadlines and take this back to project teams. 
5. Explore structured and scaled procurement programmes to help maintain high-quality standards and supplier engagement. This may also help widen the pool of contractors and other industry operatives to potentially work with. 

Design: evaluate cost efficient measures

1. Evaluate alternative design options to assess whether the current design is still the most cost efficient following the shift in market conditions and consider local material where practical in terms of time and cost. 
2. Place early orders/pre-purchase materials, where possible, and try to negotiate stable pricing agreements with pre-negotiated terms of future cost, particularly for materials that are unlikely to change but could be impacted. 
3. Consider alternative or open specifications to avoid having to use certain manufacturers who may be only in one location. Consider risks when procuring substitutes, as alternative materials and equipment may be less expensive, but changes could impact quality and timelines. 
4. Reduce onerous terms and improve contract conditions. Complex bid qualification criteria and passing more risk and liability to the contractor can deter collaboration and delay project approval. They may also generate confusion or contention once a project is underway. 
5. Fixed price contracts may represent a ‘lose-lose’ deal for both parties in the current climate. Alternative forms of procurement and contracts could be explored, which apportion risk fairly and incentivise suppliers to maximise value, rather than hit target costs. 

Construction: keep close to contractors 

1. Check your contract: 

   For lump sum or stipulated contracts - liaise closely with your supply chain to ensure there is an understanding of risk and pain and gain mechanisms as contractors and sub-contractors will likely have already committed to pricing.

   For cost plus contracts - review current budgets and re-baseline these where applicable based on the likely impact of tariffs on material costs. This will vary by project and depend on several nuances - including project stage and scope. 

2. Engage with contractors and collaborate on risk management strategies around the potential impact on cost of materials and machinery and equipment not already ordered and potential cost impacts. 
3. Review change orders for contractual viability. A 25 percent tariff doesn’t always mean a 25 percent cost increase. 
4. Monitor staffing trends and discuss labour pipelines with contractors. Schedule may be affected by changes to labour availability should personnel be downsized to mitigate material cost increases and/or balance sheets become strained. 
5. Stay close to the supply chain to understand financial health, stability and insolvency risks to help avoid disruption and delays. 

Although tariffs implementation has created instability and uncertainty within the construction industry, robust planning, careful monitoring and working closely with supply chains can help to moderate the impact during this period of instability.