On May 31, 2018 the United States (U.S.) government announced that it would be imposing tariffs on a number of Canadian products, including steel and aluminum at a rate of 25% and 10% respectively. In response, the Canadian government imposed its own surtaxes of approximately C$16.6 billion on imports of steel, aluminum, and other products from the U.S. These countermeasures came into effect on July 1, 2018 and will remain in force until the U.S. repeals its tariffs on Canadian steel and aluminum.
At a market level, this escalating "trade war" between Canada and the U.S. has the potential to significantly impact cross-border M&A activity. With increased barriers to entry into the U.S. market, it is likely that valuations of Canadian companies could fluctuate wildly and risk-adverse investors may be resistant to acquire Canadian companies due to the uncertain geopolitical climate. Steel and aluminium are also essential resources in the oil and gas industry, and increased input costs resulting from tariffs could deter M&A activity in the energy space.
There may, however, be more opportunity for inbound M&A activity into the U.S. as foreign steel companies lose their competitive advantage over domestic producers. The increased tariffs could make the acquisition of American steel companies a more attractive option for foreign producers, who would prefer not to pay heavy import tariffs.
While the new U.S. tariffs on Canadian goods may impact cross-border M&A with U.S. companies, the fortunate news for the Canadian economy is that activities in other markets may operate to counter-balance the impact of these tariffs. As we have previously discussed, the potential rise of M&A activity in the cannabis industry could make Canada a global leader in the space. It appears likely that the last two quarters of 2018 will be characterized by a larger volume of domestic M&A deals and acquisitions by international companies looking to establish a presence in the Canadian cannabis market. Nevertheless, how the "trade war" affects other industries and M&A activity in other sectors should be an intriguing development going forward.
The author would like to thank Tegan Raco, summer student, for her assistance in preparing this legal update.
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