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If you haven't thought about tariffs since learning about them in secondary school, recent world news might have you scrambling to recall exactly what you learned all those years ago. Tariffs have been around for hundreds of years, and Canada has weathered trade wars with the United States before, dating as far back as the late 19th century.
The recent increased focus on tariffs was initiated when U.S. President Donald Trump signed an executive order on February 1 which would place a 25% tariff on goods from Canada and Mexico, with a special carve out for a lesser 10% import tax on Canadian energy, as well as a 10% tariff on imports from China. The White House later announced an additional 25% tariff on Canadian steel and aluminum, which would result in a 50% total tariff on the metals. Canada, in turn, announced retaliatory tariffs of 25% on $155 billion (or $US 106 billion) of U.S. imports.
But just a few days later on February 3, President Trump and Prime Minister Justin Trudeau agreed to a 30-day pause on their respective tariffs, before any of these new tariffs came into effect.
Managing your personal finances can be overwhelming enough without factoring in international trade policy, but it is all connected. That is why it is important to understand the basic ins and outs of tariffs — and the impact they could have on you.
A tariff is a tax that a government imposes on goods and services imported from another country. In this case, the U.S. would charge a tariff on imports brought into the U.S. from Canada, and Canada would, in return, impose its own tariff on imports from the U.S.
But are tariffs good or bad? That depends on your perspective. Tariffs, in theory, promote an increase in domestic production that can provide more jobs in certain sectors and would result in better employment opportunities for some. However, economists generally agree that this potential boost in employment is usually not large enough to make up for the overall lost economic benefits of free trade.
So, why would one country impose tariffs on another country? There are a number of reasons, including but not limited to:
- Generating revenue: The government that imposed the tariffs collects all the money generated by them.
- Supporting domestic companies: Local goods may become more appealing to customers when prices on foreign alternatives rise.
- Diplomatic leverage: Tariffs can be used as a diplomatic tool, waged by one nation against another to force a desired foreign policy, or as retaliation.
To understand how tariffs work, you need to know the difference between exports and imports. Exports are goods one country sells to another country, while imports are goods brought into that country from another country. For example, Canada exports steel and aluminum to the U.S., and the U.S. imports steel and aluminum from Canada.
Tariffs are placed on imports — in this case, a 25% tariff across-the board on products brought into the U.S. from Canada (except for energy resources, which were subject to a lower 10% tariff) and brought from the U.S. into Canada. These tariffs are then enforced at the border by customs agencies.
As for who ultimately foots the bill for the tariffs? It depends.
Though tariffs are collected by the government, the government does not pay them. If the U.S. imposes a tariff on goods imported into the country, U.S. importers would pay the tariff on imports and then, to offset the new costs, they may choose to raise the price of the products for customers. Long story short: Tariffs can make imported goods more expensive for the buyer.
Let’s look at an illustrative example of how tariffs could affect the export of maple syrup to the U.S.:
A tariff war — also known as a customs war or trade war — is an economic conflict between two countries that begins when one country levies tariffs on imports from another country. In retaliation, the latter country imposes its own tariffs on imports from that trade partner which can lead to a series of escalating tit-for-tat trade barriers between the two countries.
Generally speaking, the best-case scenario is that a tariff war ends when the two governments are able to come to an agreement and lift their respective tariffs.
It might be reassuring to know that this isn't the first time the U.S. and Canada have entered a tariff war. It's not even the first time that President Trump has imposed tariffs on Canada.
As recently as Trump's first administration, the U.S. president put a 25% tariff on Canadian steel and a 10% tariff on aluminum in 2018. Canada is the biggest supplier of steel and aluminum to the U.S. and responded with retaliatory tariffs on more than $16 billion of exports from the U.S. Later that year, the Canada-United States-Mexico Agreement (CUSMA) was signed, and in 2019, the tariffs were lifted.
Despite the recent friction, Canada and the U.S. have a long and prosperous trading relationship. In fact, Canada, Mexico and China are the U.S.'s largest trading partners — supplying almost half of all U.S. imports (Figure 1) — while the majority of Canadian goods are exported to the U.S. (Figure 2), as noted in this report by Scotia Wealth Management1.
Figure 1:
Figure 2:
Essentially, our two economies are interconnected, and when one country's economy is affected, the other will likely feel those waves. In general, the imposition of tariffs at any level could slow economic growth in both economies, whether Canada retaliates or not. So, a trade war would benefit neither Canada nor the U.S.
As the Bank of Canada explains2, "Tariffs affect spending, trade flows, government revenue, exchange rates, employment, gross domestic product (GDP) and inflation. They could substantially disrupt supply chains in Canada, the United States and elsewhere around the world."
U.S. tariffs on Canadian imports could cause less demand for those goods, which could slow economic growth in Canada and could result in layoffs and increased unemployment rates. And for the U.S., those tariffs could lead to higher consumer prices in the U.S. and cause the inflation rate to rise.
While the GDP and international supply chains might not feel like everyday concerns for you, the impact of tariffs will likely be felt in that dreaded I-word: Inflation. Prices could increase in both countries, meaning an increase to the overall cost of living. According to the Canadian Chamber of Commerce3, a 25% tariff could shrink Canada’s GDP by 2.6%, costing Canadian households an average of $1,900 on an annual basis.
The full effects of these tariffs on the economy and financial market will only become clear with time, ultimately depending on what tariffs are imposed and for how long. But in general, tariffs can introduce a layer of uncertainty. So, what do you do? You focus on what you can control, and that's your financial well-being.
In a general sense, well-being is the state of being comfortable, healthy or happy, which can seem like an uphill battle when things around you seem unstable. Take the time to gain a clear understanding of where you stand financially. Developing a plan that allows you to feel confident in the present can help you handle unexpected challenges in the future. Regularly reviewing your finances and financial plan with the help of your Scotia advisor, sticking to a reasonable budget and paying down your debt can all help contribute that sense of overall wellness and security.
Looking after your financial well-being reduces added stress if we find ourselves in a period of market volatility. Even the savviest investors can benefit from the following timeless investing principles:
- Stay invested: There are always reasons not to invest. Tuning out the noise, focusing on the long-term, and remaining invested despite negative news headlines can help keep investors stay on track to reach their long-term investing goals.
- Diversify: A diversified, actively managed portfolio can help mitigate risks and capture investment opportunities as they arise. Scotia Portfolio Solutions make investing easy by diversifying across a variety of investments spanning different management styles, asset classes, geographies, industries and company sizes in one convenient solution.
- Invest often: Establish and maintain a disciplined approach to investing with a Pre-Authorized Contribution (PAC). Regular contributions take the uncertainty out of "when" to invest by making investing automatic, helping to build wealth gradually over time. If you have any questions, reach out to a Scotia advisor.
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