Navigating a Collision Course Between Tariffs, AI, and Canadian Politics
And the Impact they will have on Consumers and Businesses.
This quarter's issue tackles tariffs, their impact on consumers and businesses, how and why we need to begin developing AI capabilities faster, and the political policies and agenda needed to protect Canada’s future and economic stability.
The Economic Impacts of Tariffs
The global economy is no stranger to the turbulence of tariff wars, and Canadian business is increasingly aware of the potential disruptions that could arise from a 25% tariff on imports. Coupled with the rapid advancements and the pervasiveness of artificial intelligence (AI), these challenges demand not just resilience but a proactive strategy to ensure business continuance in the face of heightened costs, competitive pressures, and a weaker economy and job losses. So, how do businesses prepare and thrive even in challenging times.
As a former retail CEO and now an advisor/analyst, I know that each percentage point in GDP decline could equate to a 1-2% decline in retail sales; therefore, if these tariffs could impact GDP by 3.0%, a downward trend of 3-6% in overall retail sales is possible, that’s a substantial hit and it could spell trouble for many businesses still trying to dig themselves out from the pandemic. For reference as a result of the US financial crash, by 2009 Canada’s GDP had declined by 2.7% and retail sales declined by about 3.0%. So, there is strong link between GDP contraction and reduced consumer spending.
A pullback on consumer discretionary spending will impact categories like clothing, electronics, and furniture, where we might see a steeper decline of 5 -10%. Automobile sales are another challenge, the North American automobile manufacturing sector is so tightly interwoven, as parts flow between countries before they create a complete automobile the cost of purchasing a vehicle will increase and be too high for many consumers to absorb. In essence we could simultaneously see a rise in used car prices. All of this could happen over a period of months, even if Canada doesn’t respond to the US tariffs immediately.
Technological Shifts and Business Resilience
The growing technological capabilities that were developed before and during the pandemic by larger retailers will give them an advantage in resilience over disruptive events like tariffs. These artificial intelligence capabilities can be as simple as an algorithm managing inventory to as sophisticated as real-time predictive analytics and market responses with personalized competitive offers for consumers. A lot of this is already happening, and it will accelerate. Retailers, for the most part, have no choice. Online competition is growing from overseas players like TEMU and SHEIN. There is a lot of cheap product being bought by Canadians who are looking to save money. This situation, coupled with tariffs, will leave many retailers without the financial resources to respond. That means potential business failures will be higher when you couple the impact of tariffs. Said another way just having an ecommerce site with an interactive chatbot will not be enough to call it a level playing field to offset disruptions. Keeping in mind that 50-60% of consumers shopping online usually start with Amazon
There are low-risk categories such as essentials, which are groceries, healthcare, and personal care services. Low-cost options like discount retailers such as Dollarama often thrive during economic slowdowns. We cannot forget the plight of the consumer over the last five years with inflation and higher interest rates. With a few million homes that are coming up for mortgage renewal this year, it is a recipe for a significant slowdown, even a recession. This will also have an impact on shopping.
Organizations and Artificial Intelligence Capabilities
While writing the book Predictive Leadership – How Humans and AI Will Transform Organizations, Innovation, and Competition, it was clear how much of a hurdle it will be for many businesses that are classified as small, midsized, and generally independent to navigate this new landscape. AI is not going away, as I have shared with clients this technology will only evolve and be here for millenniums.
So how do businesses compete with potential tariffs and the pervasiveness of technological shift? No doubt, it will be complicated trying to address the disruptions and balance that with the need to develop the competitive power of AI. A significant challenge for small and mid-sized businesses.
To start with, organizational silos no longer have a place within business models. The new path is one of an organization that is unified between human and artificial intelligence working together to identify, develop, and deliver the next generation of strategies and innovations.
We’ve heard from some that businesses should take it slow and that there is a risk of too much AI alienating customer experiences. That is not accurate. The opposite is true; without enough AI, we will not develop the right types or levels of customer insights into experiences and innovative products or services.
While not every retailer can capitalize on the benefits of artificial intelligence there are things that they can do while on their journey to remain relevant and competitive. Here are some ways that businesses in all categories, not just retailing, need to prepare for a different future.
Leverage Predictive Analytics to Stay Ahead
Retailers must embrace analytics to anticipate market trends and consumer behaviors. With tariffs likely to influence both supply chain costs and consumer spending, they will need the power of AI tools help them in their decision-making:
Forecasting demand shifts, and adapt inventory accordingly.
Identify alternative supply chain routes to minimize delays.
Monitor real-time market conditions to adjust pricing strategies.
Real time tracking of consumer buying habits.
By equipping themselves with actionable insights, retailers can remain agile and respond effectively to economic changes.
Reimagine Supply Chains
Disruptions can and will create a ripple effect across the supply chain, often inflating costs and causing delays. To mitigate these issues, Canadian businesses should:
Prioritize Local Sourcing: Establish relationships with domestic suppliers to reduce dependency on imports subject to tariffs.
Enhance Communication: Maintain open communication with suppliers to anticipate potential disruptions.
Focus on Flexibility: Diversify suppliers, build a network of multiple suppliers to ensure continuity even if one source becomes unviable.
Automate Logistics: Implement AI-driven tools to optimize inventory management, streamline logistics, and minimize waste.
AI Driven Suppliers: A relationship with suppliers that use AI to manage production and customer purchases can offer a great deal of insight on what others are doing.
Strengthen Customer Engagement
Customer loyalty becomes critical when external factors, like tariffs, impact pricing. Businesses can:
Personalize Experiences: Use AI to tailor offers and communications, ensuring customers feel valued despite potential price hikes.
Communicate Transparently: Educate consumers about how tariffs affect costs and what measures are being taken to provide value.
Offer Creative Incentives: Implement loyalty programs or exclusive discounts to retain customers during volatile periods.
New Product Introductions: insights into past customer behaviors can lead to new opportunities.
How do they develop the foundation and key AI capabilities?
AI can be a competitive equalizer for those who adopt and augment their business models effectively. Even those that lack the resources can find subscription models to help bridge development.
Adopt Agile Business Models
The rigidity of traditional business models may fail under the strain of a domino effect of unexpected shifts. Business leaders must prioritize flexibility by:
Building hybrid AI-human workflows that enhance decision-making.
Midsized retailers need to rethink their organizations and building resilience through a higher level of responsiveness. That means critical functions at least for now are unified with AI.
AI will allow for experimenting with innovative pricing and product bundling strategies. A key opportunity with tariffs, it’s not dynamic pricing, it’s logistics pricing, getting the best deal to compete with!
Look for deep consumer insights, whether it leads to a higher level of service or innovations.
Marketing will also need to change as a function, responses need to be in real time. This function will also likely evolve as its experts become intelligence officers.
Invest in Strategic Partnerships and Capabilities
Data is a valuable revenue stream when it can be leveraged. Small businesses can;
Access advanced AI tools without significant upfront costs.
Share data and insights to enhance collective market intelligence.
Leverage joint initiatives that mitigate individual risks.
Smaller businesses should consider pooling their data, especially those within a similar trade area. This is an opportunity for data center developers to consider.
Larger businesses with hundreds of gigabytes of data will have significant advantages with the right AI and machine learning infrastructures.
Consumer Adoption of Artificial Intelligence
It is clear that consumer adoption of AI is growing faster than businesses are adopting. That is a problem no different than the one posed by smartphones, ecommerce, social media and digital marketing and many still struggle. Consumer adoption of AI is looming beyond using it for queries and creative work. The shape of things to come are personal AI assistants. Every major company is rushing to develop the perfect model: Amazon with Rufus, Apple with Siri, and others. However, these evolutions will become closed loops and consumers will adopt one and set parameters on what they want to communicate with the outside world, the news they receive and the brands they want to hear from.
There are some significant shifts that consumer adoption of AI will lead to:
· Shifts in consumer behaviors when it comes to many activities from shopping to entertainment.
· A movement from Search to Ask when it comes to browsing for information.
· A new customer revolution – predicated on personalization and innovation.
· Businesses are driven to become competitively intelligent, meaning in-depth knowledge of markets and competitors.
· And even as organizations get flatter, the search for the right talent will become more competitive.
Today's push is abundantly clear that the investment community expects organizations to get flatter and faster at responding to consumer insights and shifts. That’s a problem for many consumer-facing businesses that just don’t have the depth. Personally, I know of several organizations that are midsized that fell behind well before the pandemic some did not recover others recently began the shutdown of their stores or have been acquired out of bankruptcy.
The end of globalization the return nationalism
Globalization has not been fairly distributed, and job losses and economic disparity in the US, especially within their manufacturing, have declined, leading to divisions and income inequality. The same can be said for Canada. Outsourcing and offshoring have all had a hand in distrust. While China was the primary beneficiary, as someone who has lived there, the cities, infrastructures, and economies are more modern, and they took the learning from foreign manufacturers to develop their own industrial machines in many sectors. In addition to that, their economic wealth was transferred to the development of their military something that was hoped not to happen, and that China would have turned toward a more democratic society. Instead, they are capitalist communists. All of this has led to the erosion of national identity in the Western world, loss of trust in government, immigration concerns a general unevenness in progress, and of course distrust of elites. Although, what is interesting is how the wealthy technocrats are surrounding President Trump for his support.
Through every industrial revolution, there have been instances of public pushback to technological and geographical change, and the impacts these changes have had on economies and the political attempts to stop them have been generally inadequate. We are likely seeing the beginning of the end of globalization.
Donald Trump is pushing for these tariffs to return America to its former self. At first, it was difficult for some to reconcile why the US considered tariffs. Even as we close the loopholes in border controls, the President keeps adding complexity. However, the clues lie in his statements about industries and what America buys from Canada. First, he is incorrect about the trade imbalance; we all know they are not subsidies. So, what is he really after? There is no question that this is about jobs being rebased back to the US. The pressure of tariffs would make it difficult for foreign and US firms to conduct business in Canada and sell to the US, therefore the idea being that tariffs would push them south. It may even push Canadian firms south of the border.
In 1988, in a debate, John Turner accused Brian Mulroney of selling out Canada and that it would first start with the pulling of economic levers by the US and then lead to the failure of our political systems, and I am sure they meant divisions. Certainly, the last few weeks have resurfaced this debate, and Canada clearly needs to redefine its overall trade relationships and strategies, which must begin with a plan to lead in other industries. We cannot afford to trust the US relationship as stable going forward and perhaps for the foreseeable future. Suppose the US is successful in rolling the clock back on globalization. In that case, we will see at least two more terms of a Republican mandate out of the US, which means Canada needs to work faster at rebuilding and retooling its economy.
A Canadian Plan for Resilience
Potential tariff wars and the pervasiveness of AI are realities that Canadian businesses cannot afford to ignore. However, they also present an opportunity to innovate, lead in AI, Robotics, Minerals for EV batteries and healthcare, finance our top Universities for R&D, and educate and hire the brightest Canadians to help develop our future. In addition to this, rather than run scared of risks of job losses, why are we protecting the US automakers who may rebase to the US? Why not kick the tires with China’s EVs, lower the tariffs, and build a different future for Canada? It may not be the best idea, but the rules have changed with both technology and trade.
George Minakakis is the CEO of Inception Retail Group. The IRG Report is a new quarterly publication. George is also the author of Predictive Leadership – How Humans and AI Will Transform Organizations, Innovation and Competition.
gminakakis@inceptionretailgroup.com mobile 416-460-4333
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