What exactly is a tariff?

A customer shops in the produce section at a grocery store In Toronto, Feb. 2, 2024. (Cole Burston / THE CANADIAN PRESS)

Tariffs have become a major point of concern in Canada following a series of threats spanning months from U.S. President Donald Trump.

What is a tariff?

A tariff is a tax on imported or exported goods.

For companies importing products into the U.S., they will be required to pay a tax on those products.

Conversely, if Canada were to apply tariffs on goods imported into Canada, Canadian businesses that import from the U.S. would pay a tax on those imports, likely making products from the U.S. more expensive for Canadian consumers.

Why do governments use tariffs?

There are several reasons governments may put tariffs in place according to EDC, but generally tariffs accomplish three things.

1) Governments use them to generate revenue similar to an income or sales tax where the money can be used in a nation’s treasury and rolled into its budget

2) Tariffs can be used to protect domestic industries, if a country decides free trade from an outside nation is hurting domestic producers

3) Tariffs could be used as a diplomatic tool, to limit or ban imports or exports on goods and services from another country in an attempt to influence behaviour

How would consumers be impacted

As the threat of tariffs looms, experts believe consumers in both countries will face price increases.

A 25 per cent tariff could cost the average household around $1,900 on an annual basis, said the Canadian Chamber of Commerce.

Cars and parts could get more expensive for U.S. consumers if tariffs are enacted, along with gas and food and alcoholic beverages.

Last year motor vehicles were the second largest good imported by the U.S. from Canada, coming in at US$34 billion.

The U.S. also imported US$97 billion in oil and gas from Canada last year.

How would tariffs affect the Canadian economy?

3 impacts

• GDP – A 25 per cent tariff could reduce Canada’s gross domestic product (GDP) by 2.6 per cent
• A 2.6 per cent reduction in GDP would equate to around $78 billion
• Recession – One scenario presented in the Bank of Canada’s latest review of monetary policy shows a 2.5 per cent drop in GDP during the first year of a 25 per cent tariff followed by a 1.5 per cent drop the next year. Bank of Canada Governor Tiff Macklem characterized a hit to GDP of that size as a recession