U.S. President Donald Trump has said he will impose 25-per-cent tariffs on goods from Canada and Mexico starting Saturday – levies that threaten to deliver massive economic shocks to two of the United States’ biggest trading partners.
Mr. Trump first issued the threat in November, pairing it with his rhetoric that Canada should be the 51st state on his Truth Social platform.
White House press secretary Karoline Leavitt said on Friday (January 31) that the U.S. will impose 25% tariffs on Canada and Mexico, along with a 10% tariff on China on February 1, but she declined to say whether there will be exemptions.
Reuters
Prime Minister Justin Trudeau has said Canada’s response to this 25-per-cent tariff will be “forceful but reasonable,” and that federal and provincial governments were working on removing internal trade barriers to soften any economic blow on Canadians.
What are tariffs?
A tariff is a fee, similar to a tax, that a government charges to a domestic importer for bringing foreign goods into the country’s market. Tariffs are usually placed on certain categories of products, such as dairy or aluminum, to protect a domestic industry.
That’s because a tariff makes it more expensive for foreign players to compete. And, it can make foreign products less attractive than domestic ones, since domestic importers may have to pass on the extra costs of the tariffs to consumers by raising prices.
Tariffs are usually expressed as a percentage of a product’s value. So, for example, if the U.S. were to impose a 25-per-cent tariff on steel, an American importer that wants to bring in $1-million worth of steel into the U.S., will have to pay $250,000 to the U.S. government.
The importer may ask the Canadian steel producer to lower their prices and absorb some of the tariff, but a significant portion of the tariff would be passed on to steel-consuming industries, such as manufacturers of power tools, who could in turn raise their retail prices, ultimately passing on the burden of the tariff to consumers.
President Donald Trump’s favorite economic tool is the tariff. In his first day in office, he said he planned to slap a 25% tariff on imports from Canada and Mexico — and more are probably coming.
The Associated Press
Why do governments use tariffs?
Governments will use tariffs for a variety of reasons. But usually they are imposed to protect a domestic industry “that is of some strategic value” or, if a foreign trading partner subsidizes its own industry (for example, dairy), a government might tariff it to offset those subsidies, TD Bank economist Andrew Hencic said in a Q&A.
“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,” he said.
The money earned from tariffs goes into the government’s coffers to be used for budgetary items. Mr. Trump has said he will use tariffs to make up for the taxes he plans to cut.
Taxes vs. tariffs: how are they different?
All tariffs are taxes but not all taxes are tariffs.
A tax is a payment that is mandatory to any level of government, whether it be municipal, provincial or national. Governments charge citizens and businesses taxes to pay for government services, goods and other budgetary items. Income can be taxed, and things you buy can be too.
A tariff is a tax that the government imposes on goods and services coming in from another country. Tariffs are considered trade barriers, which economists argue ultimately hurt a country’s economy.
What is an export tariff?
An export tariff is when your own government levies a tax on goods and services leaving your country. Export tariffs can be used as a retaliatory measure in a trade war, to protect domestic industries or to control commodity prices.
Why do economists say tariffs are bad?
Tariffs are considered bad for consumers and companies because they drive up prices of goods and services, such as the cost of food. These directly affect people, which may encourage foreign governments to impose retaliatory tariffs, starting a trade war. When the government imposes tariffs, typically a business will pass the cost on to the customer.
Free trade agreements, such as NAFTA and USMCA, mean that supply chains in North America are highly integrated. The auto sector demonstrates this, as car components cross the U.S.-Canada border multiple times before they make it to car dealership lots. If tariffs are imposed, the end product would be more expensive, and retaliatory tariffs could exacerbate that further.
Desjardins gives the trickle-down example of how this could play out: Assume the U.S. imposes a 25-per-cent tariff on all Canadian goods. An American company that typically purchases a $100 part from a Canadian manufacturer would need to pay only that price. With the tariff now in place, the American company needs to pay $100 for the part and pay an additional $25 to the U.S. government.
The American company likely doesn’t want to use its own profits to pay the $25 levy, so it might raise the price of the final product by $25.
It could also try to search for other suppliers that can sell the part for cheaper. If the American company finds another supplier, the Canadian manufacturer will either lose a client or be forced to match or beat the price of the new supplier.
If the American company cannot find another supplier, it’s likely to try to negotiate a cheaper price with the Canadian company. This could affect the Canadian manufacturer’s profit margin, so to protect that, the Canadian company might cut worker pay or hours, possibly lay off workers, or invest in technology that could replace workers.
Why is Trump imposing 25-per-cent tariffs on Canada?
Mr. Trump has said that he intends to impose 25-per-cent tariffs across all goods and services coming from Canada (and Mexico) until both countries tighten security on their respective borders and stem the flow of drugs, particularly fentanyl, into the U.S. He has also cited imbalances in trade between the United States and these two countries. While he initially threatened to impose these tariffs on Day 1 of his presidency, Trump revised that timeline to Feb. 1, though he says levies on oil and gas will start later “around” Feb. 18.
What is a trade deficit?
When the value of a country’s net imports of goods and services are higher than their exports, they are said to have a trade deficit. For instance, in 2023, Canada exported US$482-billion worth of goods and services to the United States and imported US$441-billion, leaving a relatively slim trade deficit of US$41-billion, according to U.S. data.
That’s only about 5 per cent of America’s total trade deficit in 2023, which was dominated by imbalances with China, Mexico and other countries.
Foreign Affairs Minister Mélanie Joly says preventing U.S. tariffs on Canadian goods is her top priority, though Ottawa is ready to respond if they are put in place. She says Canada is making a public case against tariffs but will keep negotiations private. (Jan. 27, 2025)
The Canadian Press
Mr. Trump started his second presidential term with an executive order tasking his administration to investigate America’s “large and persistent” annual trade deficits and to come up with potential remedies including tariffs.
It’s a familiar refrain for Mr. Trump, who over the past decade has consistently described trade as a zero-sum game. If a country imports more than it exports, as the United States has done every year since 1976, it must be getting ripped off, the U.S. President argues.
Which goods does Trump intend to impose tariffs on?
The President has threatened to impose blanket tariffs on all Canadian goods and services, but recently said that he is weighing whether to levy a tax on imports of Canadian oil.
Canada is the top foreign supplier of oil to the United States, representing about 60 per cent of its imports, and hitting a record of 4.3 million barrels a day last year. Refineries in the U.S. Midwest region are major buyers, with many having tailored their operations to processing the heavier and more sulphur-rich crude that is produced in Alberta’s oil sands.
Analysts have warned that tariffs could prompt Canadian companies to cut back on shipments and could also mean a jump in pump prices for U.S. motorists.
What has been the political response in Canada?
Soon after Mr. Trump made his tariff threats public on Truth Social in November, Prime Minister Justin Trudeau went to Mar-a-Lago to dissuade Trump from imposing import levies on Canadian goods.
Since then, cabinet ministers Mélanie Joly and Dominic LeBlanc, and Alberta Premier Danielle Smith have gone to Mar-a-Lago, to try to negotiate, and possibly deter the President from imposing crippling tariffs, especially on energy exports.
As the threat of 25 per cent tariffs looms over Canada, Alberta Premier Danielle Smith has told Ottawa it should appoint a “border czar” to work collaboratively with the United States. (Jan. 29, 2025)
The Canadian Press
The federal government is planning a multibillion-dollar, pandemic-style bailout for workers and businesses if Mr. Trump follows through on his tariff threats, two sources told The Globe and Mail.
The sources said some of the measures, such as waiving the one-week waiting period for employment insurance benefits, do not require parliamentary approval. But the bulk of potential spending on new programs to help laid-off workers and businesses affected by tariffs will require legislative approval, which could not take place until Parliament resumes sitting on March 24.
The government expects U.S. tariffs could lead to mass layoffs and drive up the cost of goods for consumers. Canadian companies will likely respond not only by cutting jobs but by curtailing production. Businesses would lose money and some would have to close. The sources said the emergency measures would help Canadians pay for rent and groceries and allow businesses to pay bills and meet payroll.
Prime Minister Justin Trudeau says Canada is ready to deliver a “purposeful, forceful but reasonable immediate” response if U.S. President Donald Trump imposes tariffs on Canadian imports. (Jan. 31, 2025)
The Canadian Press
Ontario Premier Doug Ford has said the tariffs could cost Ontario 500,000 jobs.
Many Canadian leaders have called for a concerted “Team Canada” approach in responding to tariffs. Mr. Trudeau has said he supported “dollar-for-dollar matching tariffs.” Canada’s first round of retaliatory tariffs would cover $37-billion of U.S. imports. These would be the least painful countertariffs because they would cause the least economic damage to Canadians, officials said. Depending on how hefty initial U.S. tariffs on Canada are, Ottawa would then move to tariffs covering another $110-billion or so of American goods.
How has the Canadian business community responded to the tariff threats?
The Canadian Chamber of Commerce’s Business Data Lab recently estimated that if Mr. Trump proceeds with his pledged tariffs and Canada counters with retaliatory tariffs, Canada’s annual economic output, or gross domestic product would shrink by 2.6 per cent or $78-billion, costing Canadians approximately $1,900 per person annually.
It also estimated that the United States’ annual GDP would shrink by 1.6 per cent or US$467-billion, costing Americans approximately US$1,300 per person annually.
With reports from Robert Fife, Steven Chase, Mark Rendell, Carrie Tait, Jeff Jones, Jeff Gray, Emma Graney and Justine Hunter.
