Tariff impacts: walking a trade tightrope

U.S. tariff measures will not only affect the relationship between Canada and the U.S. Other countries exposed include Mexico, set to incur tariffs of 25% on all goods exported into the US and China, which received an additional 10% on top of current sanctions.

Just hours before proposed tariffs on Canadian and Mexican goods were set to go into effect on February 4 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 U.S. government followed through with its proposed tariffs. Shortly after, countermeasures were put in place by China. These range between 10% and 15%, 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 U.S., Canada and Mexico, based on the 30-day reprieve, a more lasting solution could be on the horizon. However, there’s a risk this won’t materialize.

“Recent announcements of a blanket 25% tariff on steel and aluminum imports into the U.S., enforced on 10 February, emphasise this risk.”

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

Tariffs typically make both imports and domestically produced goods more expensive. If applied in full, 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 shift toward domestic production of goods and services could offset some of those effects.

According to the Peterson Institute for International Economics, a 25% tariff on all goods from Mexico and Canada would significantly slow U.S. economic growth and increase inflation. Their estimates suggest that over the duration of President Trump’s term, US GDP could be nearly $200b 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 sourcing shift to an alternative supply base.

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

Materials, machinery, and equipment costs arguably bear the initial brunt during the early 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, aluminum and various manufactured inputs—including mechanical and electrical items. Tariffs placed on these imports will likely raise construction material costs, affecting residential and non-residential work as well as infrastructure projects and programs.

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 pass these elevated costs on 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, ahead of any major implementation, materials and machinery and equipment costs could rise. As speculation grows, forward purchasing is being considered, and stockpiling can reduce supply—potentially pushing costs higher as demand increases.

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 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 reduce budgeted costs compared to future construction costs.

3. Discuss your pipeline with the market. As market volatility and uncertainty increase, 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 prepare contractors for 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 scalable procurement programs to help maintain high-quality standards and supplier engagement. This may also help widen the pool of contractors and other industry operatives available.

Design: evaluate cost efficient measures

1. Evaluate alternative design options to assess whether the current design is still the most cost-effective given shifting market conditions, and consider locally sourced 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 for future cost—particularly for materials that are unlikely to change but could be impacted.

3. Consider alternative or open specifications to avoid being locked into manufacturers limited to a single 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 pushing more risk and liability to the contractor can hinder collaboration and delay project approval. They may also create confusion or disputes once a project is underway.

5. Fixed-price contracts may represent a “lose-lose” deal for both parties in the current climate. Alternative procurement approaches and contract forms could be explored that allocate risk fairly and incentivize suppliers to maximize value, rather than simply 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/gain mechanisms, as contractors and subcontractors will likely have already committed to pricing.
   For cost-plus contracts—review current budgets and re-baseline 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 the cost of materials, machinery and equipment not already ordered—and potential cost impacts.

3. Review change orders for contractual viability. A 25% tariff doesn’t always mean a 25% cost increase.

4. Monitor staffing trends and discuss labor pipelines with contractors. Schedule may be affected by changes to labor 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 tariff implementation has created instability and uncertainty within the construction industry, robust planning, careful monitoring and close coordination with supply chains can help moderate the impact during this period of uncertainty.