There has been a barrage of reporting in the media about the incoming Trump administration’s plans to impose an initial blanket 25% tariff on all goods entering the U.S. from Canada and Mexico and a 10% tariff on goods coming from China.

The U.S. is Canada’s largest trading partner with almost two-thirds of Canadian exports going to the United States. Thirty-four U.S. states rank Canada as their number one export market, and Canada serves as either the first or second export market for 45 U.S. states. In 2022, U.S. exports to Canada exceeded total U.S. exports to Denmark, France, Germany, Italy, Spain, and the United Kingdom combined. Mexico merely eclipses Canada’s 14% as the biggest export market at 16% and China in third place at 11%.

If tariffs proposed by the incoming administration are adopted, we can expect retaliatory tariffs imposed on the U.S. by each of these countries.

So, what does all of this have to do with customer loyalty programs? The answer is simple, a lot.

Customer loyalty program performance is intrinsically linked to the health of the underlying economy. A trade war could have a negative ripple effect on every customer loyalty program. Whether it is retail, travel and hospitality, financial services, or any other sector, no loyalty program is fully insulated from the impact of macro economic events.

We don’t have to go back too far in time to remember the last time an economic disaster negatively impacted the loyalty industry. The economic fall out from COVID-19, and the resulting impact on loyalty programs should be a good lesson to loyalty operators trying to insulate their loyalty program operations and financials from potential tariffs/trade wars.

Loyalty operators had to be agile in changing their value propositions to provide members with new options, as well as to extend grace to engage with their programs and stay relevant during that catastrophic economic time.

While the impact of a trade war spawned by new tariffs is not expected to be as severe, loyalty operators should be cognizant of where the potential impact will land and make changes to their program’s value exchange with members to secure their member engagement while balancing their program’s financial viability.

Here is a roundup of potential challenges that loyalty programs in North America will encounter as well as suggested remedies to be considered:

Loyalty Program Participation

As mentioned earlier, tariffs and trade wars can impact consumer confidence. Consumers may feel uncertain about their financial future and will therefore be inclined to reduce their spending on indulgence categories as well as everyday purchases. In addition to reduced spending levels, when consumers are uncertain about their financial situation, they may also become less loyal to their customary brands and seek out best deals wherever they may be found. This can lead to lower issuance of currency (i.e., points, miles etc.), lessened loyalty program participation and a reduction in the ability of loyalty programs to motivate and change member behaviors with brands.

Loyalty operators must be mindful of this possible outcome and are going to need to find new innovative ways to engage program members to transact. Consideration should be given to utilize their loyalty currencies to reward members for non-transactional signals of brand engagement and endearment. When used properly, gamification can be a very productive loyalty mechanic to keep members connected to the brand, even if many of the game mechanics and nudges are not transactionally focused.

Increased Cost of Rewards

If retaliatory tariffs are imposed by Canadian and Mexican governments, products sourced from the U.S. will become more expensive. If such products make up significant redemption volume in a Canadian or Mexican loyalty program, this will impact their program’s P&L. This could lead to a reduction in demand for such products and stifle redemptions, resulting in lower levels of member loyalty program satisfaction.

Program operators should be proactively identifying reward items which may be impacted and have a plan of action. Loyalty operators should be exploring sourcing such alternatives locally or from jurisdictions which are tariff free or have lower tariffs. Unfortunately, this cannot be accomplished overnight and often requires long lead times to plan and source. However, inaction is not an option for loyalty operators that wish to maintain a viable loyalty value exchange with their members.

Shift in Redemption Mix

As we have seen from the COVID-19 pandemic, when countries endure economic downturns that result in inflation and higher unemployment, people tend to shift their focus towards reducing their everyday costs of living. During the pandemic people were hurt economically and severely so all loyalty operators experienced a run on the points bank for cashback, discounts, and high frequency retail gift cards. Loyalty members were craving ways to simply save money on their everyday expenses to help make ends meet. While it is not expected that tariffs will lead to such an acute shift in rewards portfolio redemptions, there will be a rise in demand for cash and near cash rewards. Loyalty operators will need to ensure that they have sufficient supply of these reward options and make it easy for members to redeem in an unencumbered experience.

Reduced Availability of Rewards

The imposition of trade restrictions could also affect the availability of certain products or services that are popular in loyalty rewards program portfolios. Trade wars often lead to supply chain disruptions as tariffs increase and trade routes are slowed or stopped. If loyalty operators face supply chain disruptions, members may be less satisfied with the rewards they can redeem through the operator’s loyalty program. This could lead to member dissatisfaction and impact member retention negatively with the loyalty operator’s brand.

Loyalty operators need to ensure that they have an unimpeded supply of high-in-demand rewards, especially during seasonal peak periods. Reward outages erode member trust and result in dissatisfaction and lead to program disengagement.

Modifying to Changing Market Conditions

In the face of a trade war, U.S., Canadian and Mexican loyalty operators may need to innovate to maintain loyalty member engagement. Loyalty programs could evolve by offering more flexible rewards, such as domestic-focused incentives or digital products that do not rely on cross-border supply chains. Loyalty Operators might focus on loyalty rewards that support local businesses or emphasize community-based engagement, which could be attractive to members during times of economic uncertainty.

Cross-Border Loyalty Programs Challenge

Many US-based loyalty programs, particularly in verticals such as retail, travel, and hospitality, offer cross-border benefits with Canadian companies. Trade wars could disrupt these programs, as cross-border shipping costs, international payment systems, or reward redemption processes may become more challenging and/or costly. If the simplicity of cross-border transactions is hindered, the value of these loyalty programs may come into question for American and Canadian members, resulting in a reduction in program satisfaction and erosion of participation by some members.

Partnership Re-evaluations

U.S. companies might look to seek out alternative loyalty partnerships to reduce reliance on Canadian-based suppliers or services. This could mean finding new, local partners for reward offerings or adjusting the structure of rewards to be more relevant to current economic conditions. These changes might affect how attractive the loyalty program is to members, but it also presents an opportunity for innovation.

Price Gouging and Consumer Sentiment

For customer loyalty operators in North America, the trade conflict could lead to a member backlash if loyalty operators are seen as profiting from the trade war. This could lead to reduced brand loyalty. We witnessed this during the pandemic when there were many claims of retailer price gouging. Loyalty operators need to communicate transparently and disclose how they are adapting to the trade war to engender trust. Those that do not may lose consumer advocacy if they are seen as taking advantage of the situation.

Points Liability Management

The increased costs of fulfilling rewards, supply chain disruptions, currency fluctuations, and changes in consumer behavior would all contribute to a higher and more unpredictable points liability for loyalty operators. Loyalty programs would need to adapt by recalibrating their redemption policies, adjusting the number of points required for rewards, and closely monitoring shifting member engagement to maintain effective liability management and maintain the integrity of the long-term financial viability of their programs.

In conclusion, while the incoming US administration talks of imposing tariffs on Canada, Mexico, and China, it remains to be seen what will actually transpire. Loyalty operators across North America need to forecast several different scenarios and be concerned about the duration of a trade war on the efficacy of their loyalty programs.

Organizations will need to be proactive, nimble and willing to pivot to maintain the worth and reliability of their program’s value exchange between members and their brands. Companies should be planning for the worst-case scenario but simultaneously hope for the best possible outcome.

About the Author

Richard Schenker is a highly accomplished customer engagement thought leader, loyalty practitioner and partnership curator who has designed, renovated, and managed some of the world’s leading customer loyalty programs. He has an impeccable track record of success at enriching transactional and emotional relationships between iconic brands and their customers, across multiple business sectors.

Richard has spent the first half of his career in senior loyalty roles with several renowned brands and the remainder of his career in leadership roles with leading loyalty agencies. Currently he is the Founder & Chief Customer Engagement Officer of Loyal Strategy Consulting, a consulting firm focused on enriching customer loyalty for leading brands. Richard can be reached at: rschenker@loyalstrategyconsulting.com