If the Trump administration follows through on its threat to impose 25-per-cent tariffs on Canadian goods, it will quickly be felt throughout the economy.
But the mechanics of how Trump’s tariffs work may not be clear to everyone.
Canadian Affairs spoke to numerous experts to paint a picture of what could be in store for Canadian consumers, businesses and workers in the days or months ahead.
How do tariffs actually work?
Tariffs are just another form of tax, says Peter Morrow, associate professor of economics at the University of Toronto.
If the US implemented a tariff, it would be applied at the border when Canadian goods crossed into the US, says John Ries, professor at the University of British Columbia’s Sauder School of Business.
The U.S. Customs and Border Protection would charge importers — the companies bringing Canadian goods across the border to sell — an amount equal to the tariff rate times the price of the good. For example, in the event of a 25-per-cent tariff, a company that imported $5,000 worth of goods would pay the border agency a $1,250 tariff.
Tariffs are designed to disincentivize American companies from buying Canadian goods by making those goods more expensive, says Ries. This creates an incentive for American companies to buy products from US suppliers instead, and for American consumers to buy US-made goods.
Retaliatory tariffs work the same way. If Canada were to impose retaliatory tariffs, Canadian companies that import US products to sell within Canada would incur the cost of Ottawa’s tariffs.
How do tariffs affect consumers?
Tariffs ultimately raise prices for consumers. Trump’s tariffs would raise the prices of Canadian goods for Americans.
“If you want to think about someone in Vermont buying maple syrup from Quebec, a tariff would make that good more expensive to that Vermont person,” said Morrow. “A retaliatory tariff would make, say, Florida orange juice more expensive to a Canadian consumer.”
Some companies could choose to absorb some of the cost of Trump’s tariffs, rather than passing it all down to the customer. But research shows that consumers usually pay the full cost of tariffs, which would mean a dramatic rise in prices.
“We have very good peer-reviewed research that [shows] that consumers of the importing country tend to pay 100 per cent of tariffs,” said Morrow. “There’s almost no evidence that sellers of the goods lower their prices.”
Consumers could expect to see the cost of goods increase fairly quickly, says Ries. Some US companies might also choose to stop importing goods from Canada, meaning consumers would see less variety and availability of products on the shelves.
How would Canadian businesses and workers be affected?
Canadian companies that sell goods to US companies would likely see a decrease in demand for their products. They would potentially need to downsize their operations, which could mean laying off workers or decreasing their pay, says Morrow.
Other companies might choose to relocate some or all of their operations to the US, says Colin Robertson, a former Canadian diplomat and vice president and fellow at the Canadian Global Affairs Institute, a research institute.
The Canadian Chamber of Commerce estimates that, in the event that both countries apply tariffs, Canada’s GDP would shrink by 2.6 per cent — about $78 billion — while US GDP would shrink by 1.6 per cent, or about US$467 billion. Oxford Economics, an international economic forecasting firm, predicts Canada would enter a recession.
If there is a prolonged trade war, Morrow estimates the job and economic losses could be on par with what Canada experienced during the 2008 financial crisis.
If tariffs are bad for consumers and businesses, why is the Trump administration considering them?
Tariffs promote more jobs in the US and are a source of revenue for the government, says Robertson. The threat of tariffs could also be used as leverage to get Canada to meet the US’ demands.
President Donald Trump has, for example, threatened to impose tariffs unless Canada curbs fentanyl trafficking and illegal migrants at the border.
“I think that we’re dealing with somebody who is a disrupter and will be always trying to find leverage for transactions that he thinks will benefit the United States and his objective,” said Robertson.
But both consumers and businesses lose when tariffs are enacted, says Ries. Tariffs introduce “inefficiency” into markets, because businesses can no longer source from the best producers and consumers end up paying higher prices for goods.
How would businesses respond?
How businesses respond depends on how long Trump’s tariffs are expected to last, says Ries. If companies assume the tariffs will last months or even years, businesses will have to start looking for other partners abroad.
Canadian companies may switch from importing products from American companies to companies in China or the European Union, said Stylianos Perrakis, professor of finance at Concordia University. However, making this switch can be cumbersome, particularly for small and mid-sized businesses.
But Canadian companies may have no choice but to respond, says Robertson.
“We’re playing defense. We’ve got to start playing offense like we play hockey — best hockey is when we take the puck to the other end,” said Robertson. “We’re playing right now just around our net.”
Canada needs to start bolstering its international trade agreements, says Robertson.
“This is a kind of wake-up call to Canada, which for the last decade has slipped behind the US in productivity and competitiveness, and frankly, it means the rest of the world says, ‘Well, I’m gonna invest in the US rather than Canada’,” said Robertson. “We have the capacity to … become world leaders when it comes to resources.”
Specific sectors could also negotiate on other policies, says Ries. For example, the Canadian automobile industry could compromise on what components of automobiles are made in Canada versus the US.
Are retaliatory tariffs the only way for Canada to respond?
No. Canada could instead impose a tax on energy exports heading into the US, says Ries. The US is heavily dependent on Canadian electricity and crude oil, with the majority of imports into the US being from Canada.
With this approach, “Canada collects the tax money,” said Ries. “So rather than taxing imports … coming in, which hurts Canadian consumers, tax exports going into the US,” said Ries.
How long could this trade war last?
Canada may need to be prepared to live with the threat of Trump’s tariffs for a long time.
“Just because tariffs do or don’t happen on Saturday doesn’t rule out … they can happen on Sunday,” said Morrow.
“I think this is going to be a long, hard slog over the next couple of years,” Morrow said. “With unexpected announcements and policies coming down the pipeline.”
Robertson agrees, pointing to the tactics Trump outlined in his book, The Art of the Deal.
“One of his aims is to divide and conquer and throw opponents off balance in order to get ‘W’s’, or wins,” said Robertson. “Who knows what he’ll want next?”
How will this affect Canadians and Americans returning from “day tripping” across the border with purchased tariffed goods?
I certainly enjoy read the Canadian affairs news. Thank you