U.S. Factory Executives Say Tariffs on Canada Are Raising Their Own Costs and Scrambling Supply Chains

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American factories can be producing more goods and still find themselves under greater financial pressure. That contradiction is increasingly visible as manufacturers adjust to a new round of trade barriers between the United States and Canada. U.S. manufacturing expanded again in September, yet executives in machinery, electrical equipment and transportation reported rising cross-border expenses, sourcing problems and uncertainty over what customers will spend next.

The problem is particularly complicated because Canada is not simply a market for finished American products. It is deeply embedded in U.S. industrial supply chains, supplying metals, components and assemblies that American factories use every day. As tariffs become layered across selected Canadian products and major industrial categories, some U.S. companies are discovering that protecting domestic production can also make domestic production more expensive.

The Factory Data Now Has a Canada Problem

The headline manufacturing numbers still look healthy. The Institute for Supply Management’s U.S. Manufacturing PMI reached 54.5 in September 2026, marking a ninth consecutive month of expansion. New orders registered 55.3 and production reached 56.7, both comfortably above the 50-point dividing line between expansion and contraction. Yet beneath those figures, manufacturers were describing a much more difficult operating environment. ISM reported that 60% of the respondent comments it classified were negative, with tariffs cited in roughly one-third of those negative remarks. Its Prices Index jumped to 77.9, indicating widespread upward pressure on what factories pay for materials.

Comments from individual industries made the Canada connection unusually explicit. A machinery executive said tariffs involving Canada had increased cross-border expenses and left the company’s supply-chain group scrambling to adjust relationships that took years to develop. An electrical-equipment manufacturer reported sharply higher costs for assemblies and capital expenditures. In transportation equipment, an executive described higher prices and uncertainty stemming from the Canada trade dispute, adding that some customers were delaying capital investments until costs and demand became easier to predict. These are individual company experiences rather than a universal verdict on manufacturing, but the same problem appearing across several industries makes the pattern difficult to dismiss.

The Tariff Bill Can Land Inside an American Plant

The mechanics of tariffs help explain why U.S. manufacturers are complaining. Tariffs imposed at the American border are initially paid by the importer bringing the affected product into the United States. When that importer is a manufacturer purchasing a Canadian component, metal product or assembly, the tariff can become another input cost long before a finished American-made product reaches a customer. The current U.S.-Canada trade regime is also more complicated than a single blanket tariff. Washington has imposed Section 338 tariffs on selected Canadian products while separate Section 232 measures cover areas including steel, aluminum and automotive goods, with rates, exemptions and treatment varying by product.

Research on recent American tariffs indicates that foreign suppliers do not necessarily absorb most of those costs by lowering their prices. An April 2026 National Bureau of Economic Research study estimated that about 90% of the 2025 tariff increase was passed through to tariff-inclusive prices paid by U.S. importers. Another NBER study released in July estimated that roughly 26% of tariff increases ultimately passed through to consumer prices, with part of the effect arriving indirectly through imported inputs and domestic markups. Those estimates cover the broader U.S. tariff regime rather than Canada specifically, but they illustrate why a border measure aimed at imports can quickly become a cost issue for a factory located hundreds of kilometres inside the United States.

Steel and Aluminum Turn Tariffs Into a Bigger Industrial Cost

Metals make the Canada-U.S. relationship especially sensitive because American manufacturers rely heavily on Canadian supply. Congressional Research Service data show that Canada accounted for about 43% of the value of U.S. aluminum-article imports in 2025 and roughly 18% of steel imports. U.S. Geological Survey estimates also put Canadian primary-aluminum production at approximately 3.3 million metric tons in 2025, compared with about 660,000 metric tons in the United States. That gap helps explain why replacing Canadian metal with domestic production cannot necessarily happen immediately, even when tariffs are designed partly to encourage more American capacity.

Factory purchasing data are already showing pressure. ISM reported in September that aluminum had been listed as increasing in price for 34 consecutive months, while steel had risen for 11 consecutive months. Hot-rolled steel, stainless steel and broader steel products were also among materials reported as costing more, while some aluminum and steel products appeared on ISM’s shortage list. Current Section 232 rules can impose steep duties on covered steel and aluminum products, although the precise rate depends on the product and classification. For manufacturers building machinery, electrical equipment, vehicles or industrial infrastructure, a metal-price increase can therefore travel through multiple components before it appears in the final selling price.

Decades of Cross-Border Integration Cannot Be Rewired Overnight

The scale of Canada-U.S. industrial integration makes the current disruption different from a trade dispute with a distant supplier. U.S. Trade Representative data put total American goods-and-services trade with Canada at approximately $872.3 billion in 2025. Census Bureau figures show another $205.5 billion in U.S. goods exports to Canada and $233.7 billion in imports during just the first seven months of 2026. Canada remained the United States’ second-largest goods-trading partner in July, accounting for nearly 12% of total American goods trade.

Much of that commerce reflects supply chains that were designed around a relatively open continental market. Automotive production is the clearest example. U.S. and Canadian plants have spent decades specializing in particular vehicles, engines, components and materials, while parts can move across the border more than once during the manufacturing process. Canada hosts assembly operations involving Ford, General Motors, Stellantis, Toyota and Honda, while hundreds of suppliers operate around those plants and their American counterparts. When trade rules suddenly change, manufacturers cannot simply draw a new national border around an existing production network. Purchasing contracts, production schedules, transportation routes and supplier relationships all have to be reconsidered, creating disruption even before companies decide whether reshoring a component is economically practical.

Finding a New Supplier Is More Complicated Than Finding a Lower Price

One response to tariffs is obvious on paper: buy the affected product somewhere else. Factory executives say the reality is considerably harder. An ISM respondent in computer and electronic products reported evaluating alternative sources as tariff rules changed, but noted that supplier capacity and qualification requirements limited the available choices. The machinery executive discussing Canadian tariffs similarly emphasized that affected supplier relationships had taken years to establish. A replacement vendor therefore has to offer more than a cheaper invoice; it must be capable of reliably producing the required component at the necessary scale and specification.

Past tariff episodes show why supply chains tend to adjust gradually rather than instantly. Research published by the American Economic Association examining earlier U.S. tariffs found that the response of import volumes became larger over time, a pattern consistent with companies needing time to reorganize sourcing networks. For industrial businesses, that transition can involve qualification work, production testing and ensuring a new supplier has enough capacity to serve a factory continuously. A temporary sourcing problem can be tolerated in some consumer businesses. On an assembly line, an unavailable component can prevent a much more valuable finished product from being completed. That makes supply-chain resilience valuable, but it also makes rapid tariff-driven changes costly.

Manufacturers Cannot Always Pass the Cost to Customers

A factory facing a higher import bill has several options: raise prices, persuade suppliers to absorb part of the increase, cut other expenses or accept a smaller profit margin. Recent Federal Reserve research suggests many companies are being forced to use a combination of those choices. An October 2026 Federal Reserve analysis of manufacturing subsectors found that industries with greater exposure to imported inputs experienced particularly strong increases in input prices following the 2025 tariff changes. In several heavily exposed subsectors, input-price measures rose considerably faster than output-price measures, a pattern the researchers described as consistent with margin compression.

Regional Federal Reserve reports provide a more human picture of the same problem. Manufacturers told the Richmond Fed that input costs were rising while their ability to increase selling prices remained limited. One bicycle-component company said it had frozen wages and paused capital spending because it could not fully pass higher expenses to customers. Businesses surveyed by the New York Fed similarly reported tariff-related input pressure alongside customer resistance to higher prices, forcing some companies to absorb costs. Recent NBER research suggests some tariff effects also take months to reach consumers because higher costs first travel through supply chains. That lag can leave manufacturers carrying a larger portion of the burden before retail prices eventually adjust.

Uncertainty Is Starting to Affect Capital Spending and Delivery Times

The challenge is not only what tariffs cost today. Manufacturers also have to make decisions about equipment, inventories and production capacity based on what tariffs might cost months from now. That uncertainty appeared directly in September’s ISM comments, where a transportation-equipment executive said customers were postponing capital expenditures while waiting for greater clarity on costs and demand. The Richmond Fed’s bicycle-component example showed similar behaviour inside a manufacturer itself, with capital spending paused as the company dealt with rising expenses and limited pricing power.

At the same time, several manufacturing indicators suggest companies have little room for complacency. ISM’s Backlog of Orders Index climbed to 56.4 in September, while inventories registered 48.6, indicating contraction. The Supplier Deliveries Index reached 59.0, with readings above 50 indicating slower deliveries. New orders, meanwhile, remained in expansion territory. That combination creates an awkward environment: demand can be healthy while sourcing becomes less predictable and costs become harder to quote. A company considering another machine, warehouse expansion or additional production line must therefore weigh not only customer demand but also whether material prices, tariff classifications and supplier arrangements will remain stable enough to justify the investment.

Tariffs Can Help Some Producers While Squeezing Their Customers

The Trump administration says its tariff policies are intended to counter what it describes as unfair treatment of American commerce, strengthen domestic industrial capacity and encourage more production inside the United States. Some American steel and aluminum producers have likewise supported strong trade protections, arguing that tariffs can improve capacity utilization and reduce dependence on foreign supply. Those effects matter when assessing the policy because the manufacturer producing raw steel may experience a tariff very differently from the manufacturer buying that steel to build machinery.

Earlier U.S. experience demonstrates the trade-off. A U.S. International Trade Commission study of the 2018–2021 Section 232 measures found that steel imports fell about 24% while domestic steel production increased about 1.9%. Aluminum imports declined 31% and U.S. production rose 3.6%. At the same time, the commission estimated that higher steel and aluminum prices reduced production in downstream industries that use those metals, with their output about $3.5 billion lower in 2021 than it otherwise would have been. Those historical results do not determine what the 2026 Canada measures will ultimately do. They do explain why today’s factory complaints deserve attention: tariffs can support one part of the manufacturing base while simultaneously increasing costs for another, and deeply integrated Canada-U.S. supply chains make that tension especially visible.

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