Tariffs are taxes placed on imported or exported goods. Governments use tariffs for several reasons, such as protecting local industries, generating revenue, or responding to international trade disputes. While tariffs can help domestic companies compete against foreign imports, they can also increase inflation, drive up costs, affecting everything from raw materials to retail prices.
For Canadians, the potential U.S. tariffs on key exports could mean higher costs, job losses, and supply chain disruptions. Understanding how tariffs work and how they impact the economy is crucial for businesses and consumers alike.
Key Takeaways
- Tariffs are taxes on imports that make foreign goods more expensive, affecting businesses and consumers.
- Governments use tariffs to protect local industries, generate revenue, and influence trade policies.
- Potential U.S. tariffs on Canadian goods could raise costs, lead to job losses, and slow economic growth.
What are tariffs?
A tariff is a tax levied on imported or exported goods, typically collected at the border when the product enters a country. These taxes make imported products more expensive, which can help national businesses compete by making their goods relatively cheaper. However, tariffs also have downsides, such as increasing costs for companies that rely on imported materials and making everyday goods more expensive for consumers.
Governments impose tariffs for a variety of reasons, but they mainly fall into three categories:
- Protective tariffs – Designed to shield domestic industries from foreign competition by making imported goods more expensive.
- Revenue tariffs – Used to generate income for the government, though this is less common in modern economies.
- Retaliatory tariffs – Imposed in response to tariffs or trade barriers from another country, often escalating into trade disputes.
Types of tariffs:
There are three types of tariffs:
- Ad valorem tariffs – A percentage-based tax applied to the value of the imported product. For example, a 10% tariff on a $2,000 laptop means the importer must pay an additional $200.
- Specific tariffs – A fixed fee per unit of an imported product, such as a $10 tariff on every imported pair of shoes.
- Compound tariffs – A combination of both, where a product is taxed based on both value and quantity.
Some tariffs are temporary, introduced during trade disputes or economic crises, while others remain in place for decades and shape long-term trade relationships.
Who has the power to impose tariffs?
In Canada, the federal government controls tariff policies, with key roles played by:
- The Department of Finance Canada, which sets and adjusts tariff rates.
- The Canada Border Services Agency (CBSA), which enforces tariff collection.
- Parliament, which can review and approve tariff-related trade agreements.
Tariffs are influenced by:
- Trade agreements – Canada negotiates deals like CUSMA (formerly NAFTA), setting tariff policies with trade partners.
- Economic protection – Tariffs may be introduced to protect struggling domestic industries.
- Retaliation – If another country imposes tariffs on Canadian goods, the government may respond with its own.
While tariffs are controlled at the national level, businesses and industry groups often lobby for or against them, depending on how they affect their sector.
Who pays tariffs?
Although importers are responsible for paying tariffs at the border, the cost is typically passed down to businesses and consumers. Here’s a more detailed look at who pays tariffs:
Businesses that rely on imported goods
Companies, mainly manufacturers, that import materials, such as steel or electronics, face higher costs. Some absorb the extra expense, but most raise prices to maintain profits.
Consumers buying affected products
If companies increase prices, consumers end up paying more for goods like appliances, furniture, and food. Products with high import reliance, such as vehicles and electronics, are especially vulnerable to price hikes.
Exporters facing retaliatory tariffs
Canadian goods subject to foreign tariffs become more expensive for buyers in those markets.
This can reduce demand and hurt industries like agriculture, forestry, and manufacturing.
Tariffs don't just affect businesses at the import/export level—they create a chain reaction that influences supply chains, retail pricing, and consumer purchasing power.
2025 update: New U.S. tariffs on Canadian goods
President Trump has recently introduced potential tariffs on Canadian exports, affecting industries such as manufacturing, agriculture, and natural resources. Major news outlets are expressing concern about the impact this will have on Canadians:
Canadian manufacturers face rising costs
As tariffs continue to impact key sectors, Canadian manufacturers are feeling the strain. CBC News reports that tariffs on aluminum and steel are hitting Canadian manufacturers hard, increasing production costs.
Companies that rely on these materials for construction, automotive manufacturing, and appliance production may struggle to stay competitive. Some businesses have already announced price increases, while others are considering job cuts.
Supply chain disruptions expected
The ripple effects of tariffs are not just felt in price hikes but also in supply chain disruptions. The Globe and Mail highlights how tariffs are causing delays and increased costs for businesses that rely on cross-border supply chains.
Companies are now looking for alternative suppliers, but switching sources is costly and time-consuming. These disruptions could lead to longer wait times for essential goods and a slowdown in production across multiple industries.
Potential inflation spike
Higher costs resulting from tariffs could lead to a broader economic impact, particularly in terms of inflation. The Financial Post warns that higher tariffs could drive inflation in Canada, increasing the cost of living. As businesses pass costs onto consumers, Canadians may see higher prices on food, electronics, and household goods. This could force the Bank of Canada to rethink its approach to interest rates, which could impact borrowing costs.
Job losses in key industries
Certain sectors are more vulnerable to the impact of tariffs, and job losses may be inevitable. CTV News predicts layoffs in manufacturing, agriculture, and resource-based industries. If exports to the U.S. decline due to higher prices, businesses may scale back operations. Some economists warn that if the job market weakens, consumer spending could drop, deepening the economic slowdown.
Strained trade relations
The effects of tariffs are economic and political, putting strain on international relations. Bloomberg Canada suggests that worsening trade tensions between Canada and the U.S. could discourage investment. If businesses feel uncertain about cross-border trade stability, they may reduce spending, affecting job creation and long-term economic growth.
What is a recession?
A recession is a period of economic decline, often marked by two consecutive quarters of negative GDP growth. It signals a slowdown in overall economic activity, where businesses produce less, consumer confidence drops, and financial markets may experience instability. Recessions can be triggered by a variety of factors, including high inflation, rising interest rates, trade disruptions, or global economic downturns.
During a recession, businesses often cut costs by reducing production, laying off workers, or delaying expansion plans. As unemployment rises, households have less disposable income, leading to reduced consumer spending, which further weakens the economy. Industries that rely on discretionary spending, such as retail, travel, and entertainment, tend to be hit the hardest, while essential services and government-funded sectors may remain more stable.
While some recessions are short-lived, others lead to long-term financial hardship, especially if they are accompanied by high debt levels, housing market crashes, or global instability. Governments typically respond by lowering interest rates to encourage borrowing and investment, or by introducing stimulus programs such as tax cuts, direct payments to households, or infrastructure spending. However, the speed and effectiveness of recovery depend on the severity of the downturn, business confidence, and external economic conditions, meaning that some recessions take years to fully resolve.
How likely is a recession in Canada if the new tariffs are imposed?
Economists are warning that the new U.S. tariffs on Canadian goods could push the Canadian economy closer to a recession. When key industries like manufacturing, agriculture, and natural resources suffer, the effects ripple through the economy, affecting employment, consumer spending, and overall business investment. If economic growth slows significantly, Canada could enter a recession, leading to higher unemployment and financial hardship for many households.
Factors that increase recession risk:
- Higher prices for consumers – Increased costs on imported goods could contribute to inflation, making everyday essentials more expensive.
- Job losses in affected industries – Sectors directly impacted by tariffs may cut jobs, reducing household income and spending.
- Declining business investment – Companies facing uncertainty may delay expansion plans, slowing economic growth.
- Reduced exports to the U.S. – If Canadian goods become too expensive, demand in the U.S. could drop, affecting trade-dependent businesses.
- Higher interest rates limiting economic recovery – If inflation rises due to tariffs, the Bank of Canada may hesitate to lower interest rates, making borrowing more expensive.
If these factors combine, Canada could see a downturn in economic activity, increasing the likelihood of a recession.
How a recession could affect Canadians
1. Increased unemployment
Many businesses in manufacturing, agriculture, and resource extraction rely on exports to the U.S. If tariffs make Canadian goods more expensive, companies may experience declining sales and be forced to cut jobs.
- Fewer jobs in key sectors like auto manufacturing, forestry, and steel production.
- Increased reliance on government support programs like EI.
- Graduates and job seekers may struggle to find employment.
2. Lower wages and reduced hours
Even those who keep their jobs may see reduced income as companies try to cut costs by freezing wages or reducing work hours.
- More workers placed on part-time schedules.
- Fewer raises and promotions in affected industries.
- Less disposable income for Canadian families.
3. Rising cost of living
Tariffs on imported goods mean Canadians could pay more for everything from groceries to cars. If wages don’t keep up with inflation, households may struggle to afford necessities.
- Higher grocery bills, especially for imported foods.
- Increased costs for household goods, clothing, and electronics.
- More people are turning to discount retailers and food banks.
4. Decline in home values and real estate sales
If a recession leads to job losses and lower wages, fewer Canadians will be able to afford homes, slowing the housing market. This could affect homeowners looking to sell and reduce overall household wealth.
- Slower home sales, especially in major cities.
- Potential drop in home prices, reducing equity for homeowners.
- Tighter mortgage approval rules as banks become more cautious.
5. Higher borrowing costs and reduced access to credit
If inflation remains high due to rising costs, the Bank of Canada may hesitate to lower interest rates. This could make borrowing more expensive for businesses and individuals.
- Higher mortgage rates, increasing monthly payments for homeowners.
- More expensive car loans and credit card interest rates.
- Businesses facing difficulties securing loans for expansion or operations.
These combined effects could lead to economic hardship, making financial planning more difficult for many Canadians.
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What is a tariff in simple terms?
A tariff is a tax imposed by a government on imported or exported goods. It’s often used to raise the price of foreign products, making them less competitive compared to domestic goods. This can help protect local industries from foreign competition but can also lead to higher prices for consumers.
Are tariffs bad?
Tariffs have both positive and negative impacts. On one hand, they can protect domestic industries by making foreign goods more expensive, which can help create local jobs. On the other hand, they can raise costs for consumers and businesses that rely on imports, potentially leading to inflation and economic slowdowns.
Who benefits from a tariff?
Domestic producers are the primary beneficiaries of tariffs because the increased cost of imported goods makes their products more attractive to consumers. However, consumers and businesses that rely on imports may be negatively impacted by higher prices. In some cases, tariffs may also help a government strengthen its negotiation power in trade agreements.
How do tariffs affect everyday Canadians?
Tariffs can lead to higher prices on imported goods, which means Canadians may pay more for food, electronics, and household essentials. Businesses that rely on imports may pass these costs on to consumers, making it more expensive to maintain the same standard of living. If tariffs lead to job losses, some households may struggle financially.
Can tariffs lead to a recession in Canada?
Tariffs alone don’t cause recessions, but they can contribute to economic slowdowns by increasing costs, reducing exports, and leading to job losses. If tariffs are severe enough to impact major industries, they could push Canada toward a recession, especially if other economic factors are already putting pressure on growth.
How can Canadians prepare for a potential recession?
Canadians can prepare by building emergency savings, reducing unnecessary expenses, and paying down high-interest debt. Staying informed about economic trends can also help individuals and businesses make smart financial decisions.
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