Trump's 25% tariffs are here — So, what are tariffs and how can they impact your wallet and investment portfolio?

What is a tariff?

Tariffs are taxes imposed on imported goods and services. A tariff is paid by the importing business — so if a Canadian business owner imports a good from the US, the Canadian business owner would have to pay a tariff imposed by the Canadian government on US goods.

The most common form of tariff is ad valorem (Latin for, “according to value”). These tariffs are levied as a fixed percentage of the value of imports and are often used to raise revenue for government or to protect domestic industries.

For example, if a country imposed a 10% ad valorem tariff on imported cars, a $15,000 automobile imported into a country will have an import duty of $1,500.

Another form of tariff is a specific tariff, which sees a fixed tax added to certain items imported into a country.

For example, a nation may impose a $25 tariff on imported sweaters, but levy a $300 tariff on smartphones.

Another type of tariff is a quota tariff. This is when a government imposes a tariff-rate quota, which limits the quantity of a product that can be imported at a lower price. For example, if a tariff-rate quota was imposed on imported sugar that surpasses 50,000 kilograms, then anyone importing sugar above this threshold would have to pay a higher tariff on the import.

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Why are tariffs used?

Governments apply tariffs for several reasons, including protectionist tariffs that shield domestic producers from international competition. These are meant to help local industries thrive, while revenue-generating tariffs help bring money into government coffers.

Tariffs are also used as trade policy tools in disputes, allowing a country to retaliate against perceived unfair practices by another nation.

For example, on May 31, 2018, the US announced tariffs on imports of certain steel and aluminum products from Canada at the rates of 25% and 10%, respectively.

Deemed unjustified by the Canadian government, the nation levied retaliatory tariffs on imports of American steel and aluminum and would remain in place until trade-restrictive measures against Canadian steel and aluminum products were eliminated.

It didn’t stop at just aluminum and steel, in what can be viewed as an act of political defiance, Canada also imposed a 10% duty on yogurt imports, with most of this product coming from one plant in Wisconsin, which is also the home state of American politician Rand Paul.

Another example is when Donald Trump was first in office and announced a trade tariff on Canadian softwood lumber. The fallout of this tariff was higher construction costs for American builders and slower economic growth for Canadian lumber suppliers.

A tariff’s impact on Canadian consumers and investors

For consumers, tariffs can lead to higher prices on imported goods. If a tariff is imposed on a product coming from the USA, businesses may pass those added costs onto shoppers through price hikes.

Alternatively, companies may source from other countries or shift to domestic alternatives, which may not always be available at the same price or quality.

For investors, tariffs create uncertainty in markets. Companies that rely on cross-border trade — such as manufacturers, retailers and agricultural businesses — can see costs rise, potentially affecting profitability and stock performance.

On the other hand, Canadian companies in protected industries, such as dairy or steel, may benefit from reduced foreign competition.

Why are President Donald Trump's current tariffs a threat?

What makes the threat of Trump’s latest round of tariffs appear more of a threat to the financial wellbeing of Canadian investors and consumers is the high likelihood that these tariffs will only increase economic risk and uncertainty in an already-volatile national economy.

“This will be a material exacerbation of Canada’s already challenging stagflation, which is a fusion of inflation and economic growth problems,” Stephen Johnston, a private equity manager and director of Omnigence, a Canadian private equity firm, told Money.ca.

“We can expect an increase in inflationary pressures, such as loss of purchasing power from Canadian dollar weakness, and recessionary pressures like increasing current account deficit and GDP contraction,” he said.

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Bottom line

Tariffs are a significant factor in Canada-USA trade relations, affecting everything from grocery store prices to stock market trends. While they can protect domestic industries, they also have the potential to increase costs for consumers and complicate investment decisions.

With ongoing trade disputes and shifting economic policies, tariffs remain a key consideration for both policymakers and the public.

Sources

1. Government of Canada: Updated - Countermeasures in response to unjustified tariffs on Canadian steel and aluminum products

2. Associated Press: Canada is already examining tariffs on certain US items following Trump’s tariff threat, by Rob Gillies (Nov 27, 2024)