There’s one word that’s making plenty of headlines lately: tariffs.
U.S. President Donald Trump has threatened to impose a 25% tariff on Canadian exports, a threat he made long before he was sworn into office on January 20.
If imposed, the tariffs could have a major impact on Canada: the country is economically tied to the United States, with $1.9 billion in daily goods and services exported to the southern neighbour. That amounts to more than 20% of gross domestic product (GDP).
In response to the tariff threats, the Canadian government is reportedly preparing retaliatory tariffs, among other measures.
So, what exactly are tariffs and how might they affect Canadians and the local economy? TD Stories sat down with TD Economist Andrew Hencic to find out.
What is a tariff?
Andrew Hencic: In the simplest terms, a tariff is just a sales tax on foreign goods. So, if you are a company or a person who is importing something, or buying something from abroad, a tariff means you’re going to have to pay another tax when that item crosses the border into your home country.
Why do governments impose tariffs?
There's a variety of reasons why a government might impose tariffs, but typically governments have imposed them to either protect a domestic industry that is of some strategic value, or to offset trading partner subsidies.
For example, if a country wanted to boost domestic manufacturing of light bulbs, it could place a tariff on imported light bulbs. The objective would be to make the foreign one more expensive so that folks would be more inclined to buy the domestic one.
Trump is saying he will impose a 25% tariff on Canadian exports. Are we expecting these tariffs to be applied to all exports, or only certain ones?
What Trump ultimately implements is highly uncertain. TD Economics’ baseline assumption is that Canada avoids blanket tariffs and instead faces temporary sector-specific tariff threats as leverage for broader negotiations. However, TD Economists agree Canada must also prepare for a worst-case scenario: a blanket 25% tariff with Canadian retaliation.
What impact could these tariffs have on Americans?
It ultimately depends on what is tariffed, but in the simplest terms, it will raise the price of Canadian goods to U.S. consumers and businesses.
Now, it’s important to note that the impact of the tariffs is going to hinge on the decisions that businesses make. First, they're going to need to decide if they are willing and able to pass on the increased costs to their customers. Do importers raise their prices and pass on the full cost of the tariff to the consumer? Or do they let their profit margin shrink a little bit, eat some of the extra cost, and pass on a smaller portion of the increased cost to the consumer?
For industries where domestic alternatives exist, tariffs could push up the demand (and price) for those things. When alternatives don’t exist, it could come down to a decision of whether you pay the tax, or just don’t buy the good.
What about Canada? How could 25% tariffs on exports impact the Canadian economy?
It depends on whether the tariff is a blanket tariff and applies to all exports, or if it gets applied to certain sectors or products, such as energy and automotive vehicles and parts. The impact will also depend on the size of the tariff that is imposed, so if Trump does go ahead with 25%, there will be a disruption to trade.
Generally speaking, products in some of our sectors will be less competitive for our major market, the U.S. So, either prices will need to fall so they're more attractive to U.S. consumers, Canada will need to find alternative markets to sell to, or firms will sell less.
Ultimately, a large tariff across our industries would act as a drag on economic growth and likely impact employment at large. An estimated 46,000 companies in Canada depend on exporting to the U.S., supporting around 2 million jobs. That makes up nearly 10% of total employment.
What Canadian sectors/goods would feel the tariffs the most?
If it is a blanket 25% tariff, the energy and auto sectors are likely to feel the brunt of the impacts given their high reliance on the U.S. market. Autos depend the most on cross-border trade, and energy because it's our biggest export. After energy and auto, consumer goods would be the next biggest sector.
Could 25% tariffs hurt the average Canadian? How could it impact them?
Depending on the size of the tariff that is imposed, yes. Like I said, if we’re hit with 25% tariffs across the board, there will be a disruption to trade.
All provinces have exposure to U.S. tariffs, but Ontario tops the list in terms of total dollars as its diversified industries are deeply integrated with U.S. supply chains. Moreover, nearly a million jobs in the province are tied to U.S. trade.
Alberta is another key province given its reliance on the energy sector. Canadian oil may receive a “carve out” from tariffs, but still, there are more than 300,000 jobs in Alberta tied to exports.
The Canadian government has said it is preparing retaliatory tariffs on U.S. imports, depending on what the Trump administration does. What impact could retaliatory tariffs have on Canadians?
Retaliatory tariffs mean we’re raising the cost of imported goods, and consumers and businesses in Canada would bear the ultimate cost of those added taxes. So, what could that mean? Canadians will have to start making choices: Can they source an item from elsewhere? Are there domestic alternatives? Do they still want to buy the U.S. import? Do they live with the fact that they now must pay more for it, or do they purchase less or none of it at all?
Is there a chance Canada avoids all this?
We certainly hope so, but at the same time, it is prudent that we be prepared for the worst. Canada has a long and very prosperous history with the U.S. This relationship is special and clearly mutually beneficial, so we hope that that can continue.
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