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United States President Donald Trump’s tariff threats are not going away.
Before and after assuming office in his second term, Trump has threatened to levy blanket tariffs of 25 per cent on all goods entering the U.S. from Canada and Mexico, in addition to targeting Chinese exports.He’s given a variety of reasons to justify trade volleys against other nations, from claiming they will fund massive tax cuts in the U.S. to toughening up North American borders.But what exactly are tariffs, the trade tool that Trump has called “the most beautiful word … in the dictionary”? Here’s what you need to know about how tariffs work, how they affect economies and why governments use them.A tariff is a tax put on goods or services coming from another country.For example, the U.S. has previously imposed taxes on Canadian softwood lumber, steel and aluminum, which could be materials used by an American furniture maker or automotive companies.During that time, if that furniture maker wanted to import Canadian lumber, they would have to pay a tariff — expressed as a portion of a good’s sale price, like 10 or 25 per cent, or as a flat dollar fee — to bring it into the country.If an imported good was valued at $100 at the point of sale and faced a 25 per cent tariff upon entering the country, it would then cost $125 for the buyer, with that extra $25 going to the government. That makes importing the tariffed item more expensive for the business. They could choose to bake the higher cost of that tariffed input into the final price of the product they sell, or they could find alternatives to avoid importing the item in the first place.In floating his latest round of tariffs, Trump has pledged to create an External Revenue Service to collect the proceeds of the tax. “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” he said during his inauguration address on Jan. 20.
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But it is the business importing the tariffed goods that pays the tax, and they pay it directly to their own government that imposed the tariff.Mahmood Nanji, policy fellow at Western University’s Ivey School of Business, tells Global News that some businesses may negotiate agreements with suppliers so that the final price of a good bakes in the cost of duties associated with exporting.But he says it is the importer — the business inside the tariffing nation — who typically pays the cost of tariff.“While tariffs are collected by the government that imposes them, tariffs aren’t paid by one government to another,” says the Export Development Canada website.Nanji says that there are a few reasons why Trump, or any government, might want to impose a tariff. The first is to raise revenue. Proceeds from a tariff can be used to bolster a government’s coffers, or pay for new services or tax cuts.Trump pledged steep tax cuts during the 2024 campaign and said he would use tariffs to fund them.Tariffs can also protect a domestic industry from external rivals.If a U.S. business is turned off of getting softwood lumber from a Canadian supplier thanks to higher tariff costs, they may turn to another American business — if they can — for a similar product, thus boosting the domestic economy.Finally, tariffs can be wielded as a negotiation tactic to secure other concessions from a trading partner.Trump, for instance, has floated concerns about the flow of fentanyl through the northern border and criticized Canada’s failure to meet NATO spending commitments. Canada, the U.S. and Mexico are also set to renegotiate the CUSMA trade deal in 2026, with Nanji pointing to tariffs as an opening salvo in those renewed trade talks.“I suspect that he’s using tariffs as leverage to get a better deal,” he says.Trump has said the proposed tariffs have “nothing to do” with renegotiating CUSMA.RBC economists Frances Donald and Nathen Janzen penned a guide on how tariffs impact industries and consumers.Before tariffs are actually applied, the fear of trade restrictions could see buyers in the tariffing nation stock up on goods that would cost more before the deadline. That could actually see a temporary boost in trade activity before tariffs come to pass, Donald and Janzen write.
But once they’re in place, demand for tariffed goods dwindles because it costs more for the importing business.Some may continue to buy from the tariffed country if they can absorb the higher prices, potentially by passing those costs onto consumers, while others may try to find a supplier in their own country who can provide the same goods.At the end of the day, businesses who have their products tariffed are likely to take a sales hit. In a vacuum, that hurts the economy of the country facing tariffs.Economists have warned that a tariff war between Canada and the U.S. would hurt economies on both sides of the border and likely result in a recession north of the border. Job losses would be expected, particularly in industries relying the most on trade to the U.S.Donald and Janzen point out that some of the most vulnerable sectors are those with highly-integrated supply chains such as the automotive industry, where parts can cross the Canada-U.S. border multiple times and can therefore face tariffs again and again. Threats of tariffs have also weakened the Canadian dollar in recent months, as investors pour money into the U.S. instead.The impact of tariffs can be dampened by fiscal stimulus from the affected nation, which may respond in kind with retaliatory tariffs.Retaliatory tariffs would apply the same situation described above, but in reverse.In the Canada-U.S. case, Canadian businesses would pay duties on affected goods brought north of the border, the government would get a boost in revenues, and consumers could end up paying more.Prime Minister Justin Trudeau has said that “dollar-for-dollar matching tariffs” are among the options on the table to respond if the U.S. imposes tariffs as threatened.Nanji says that the “dollar-for-dollar” aspect of retaliatory tariffs can be difficult to crunch the numbers on, depending on the manner in which the original tariffs are implemented. But, for example, if the U.S. were to impose tariffs worth up to $100 billion on Canadian goods in a given timeframe, Canada would respond in kind with tariffs on U.S. goods or services that also would look to generate $100 billion.Canada’s economy is nearly a tenth of the size of the U.S., resulting in an outsized impact in the case of dollar-for-dollar tariffs.One of Trump’s other critiques of the Canada-U.S. trade relationship is that Canada runs a trade surplus with the States. This means Canada exports more of its goods and services to the U.S. over a given period than it imports. Trump has said this amounts to the U.S. “subsidizing” Canada, but Nanji says this is not the same thing.With the relative size of Canada’s economy and the U.S.’s “insatiable appetite” for Canadian natural resources, a trade surplus is almost inevitable, he explains.If Canadian energy were removed from the equation, however, the U.S. would already have a trade surplus with Canada, and already runs one when it comes to services, Nanji says.“When we think of a subsidy, it’s usually the transfer of funds from one government to another government. There is no $100-billion or $200-billion cheque that the U.S. government sends to Ottawa each year,” he says.“Anybody who tries to equate that is really trying to equate something which is a false equivalency.”
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