What are tariffs and what do they mean for Canada?
“The greatest thing ever invented’’ is how Donald Trump described tariffs late last year. The president-elect has made tariffs both a key pillar of his economic plan and a bargaining tactic against allies and foes alike.
He has vowed to slap new charges on Canadian imports on Day 1 of his administration, upending one of the world’s largest trade relationships.
Here’s what you need to know about tariffs, how they work and what Trump’s threat means for Canada.
What is a tariff?
A tariff is a tax on an imported good. They can be both an important source of revenue for a government and a tool to protect domestic industries from foreign competitors.
“There are two kinds of tariffs,” explains Amitrajeet A. Batabyal, an economics professor at the Rochester Institute of Technology, in an article for The Conversation. “A ‘unit’ or specific tariff is a tax levied as a fixed charge for each unit of a good that is imported — for instance $300 per ton of imported steel. An ad valorem tariff is levied as a proportion of the value of imported goods. An example is a 20 percent tariff on imported automobiles. Both tariffs act in similar ways.”
The first major law passed in the U.S. was the Tariff Act of 1789. It was intended to raise money to pay government wages and fund the national debt. Tariffs were once the main source of funds for the U.S. government, but have steadily declined as a percentage of overall revenue.
U.S. protectionism has caused problems for Canada since Confederation, when U.S. tariffs were around 30 percent. Canada’s National Policy in 1879 was “a significant shift towards protectionism in support of politically influential Canadian manufacturers,” explains a Bank of Canada report on trade policy.
Canadian tariffs went from 14 percent in 1877 to 21 percent in 1880.
The 1988 Canada-U.S. Free Trade Agreement marked an end of protectionism between the two countries, eliminating tariffs.
Where does the money collected by tariffs go?
In the U.S., these import taxes are collected by the U.S. government and the money goes into the U.S. Treasury. It is estimated the U.S. will collect over $80 billion in tariffs and fees in the fiscal year ending in September 2024. (That’s a significant sum, but still small compared to $2.5 trillion the U.S. collects from income taxes.)
What would U.S. tariffs do to the Canadian economy?
Numerous reports produced by banks and economists all suggest that U.S. tariffs of 10 percent or higher on Canadian goods entering the U.S. would cause significant economic pain, potentially tipping the country into a recession.
The Canadian Chamber of Commerce, in a study by economist and PPF Fellow Trevor Tombe of the University of Calgary, found Trump’s policies could reduce Canada’s GDP by between 0.9 and one percent, resulting in $30 billion in economic costs.
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Tombe also examined the Canadian economy’s exposure to U.S. exports. “I estimate that approximately 2.4 million Canadian jobs are exposed to U.S. tariffs,” he says, writing in The Hub.
“That’s about one in seven jobs in Ontario and Alberta at the high end, to a low of one in 16 in Newfoundland and Labrador, with other provinces falling somewhere in between,” he writes. Tombe also breaks down income by province tied to exports to the U.S.
Would U.S. tariffs today also hurt Americans?
Tariffs are paid by importers (not foreign countries) and the costs are passed on to U.S. consumers, raising the price of many goods.
This inflationary effect would be felt more quickly and strongly than the benefits for domestic industries, which likely won’t be able to respond immediately to new demand.
Brett House, a professor at Columbia Business School and a PPF Fellow, explained the impact on a recent episode of PPF’s podcast, WONK:
“There is a broad consensus among economists that tariffs would be highly inflationary for the U.S. economy, that in most cases the incidence or the impact of those tariffs would be felt by U.S. businesses and consumers who would effectively pay them. They would not be absorbed by exporters sending their goods and services into the U.S. The knock-on effect of that is potentially serious for both households and businesses because it means the Fed is unlikely to be able to follow through on the policy rate cuts that it projected in its September meeting, where it brought in its first 50 basis point cut. And that ends up increasing the cost of borrowing for mortgage holders, for consumer debt and for businesses that are looking to invest. That ultimately is a countervailing impact on whatever twist or pivot in demand for U.S. produced goods and services that you might see as a result of that tariff coming in. The two are likely a wash and overall, a negative on growth.”
Has America been down this road before?
In response to the agricultural sector slipping toward depression in the 1920s, Republican President Herbert Hoover proposed tariffs on agricultural imports meant to help farmers.
Tariff revisions, however, soon spiralled into higher industrial tariffs across the economy, known as the Smoot-Hawley Tariff. It was “a disaster,” according to the U.S. Senate. (Read the Senate’s own explainer on the legislation, complete with pop culture reference to Ferris Bueller’s Day Off.) “Even before its enactment, U.S. trading partners began retaliating by raising their tariff rates, which froze international trade.”
It marked the end of an era of high tariffs in the U.S., and was followed by the 1934 Reciprocal Trade Agreements Act and a push towards trade liberalization.
In 1971, President Richard Nixon put in place a 10-percent tax on all imports. It was part of a series of economic policies, aimed at addressing an overvalued dollar (until then, the U.S. dollar was tied to the price of gold and was the global currency). The measures led to what’s known as the Nixon Shock.
Can a president unilaterally impose tariffs like Trump is proposing?
Under normal circumstances, imposing import duties requires the approval of Congress. (And the Republicans will control both the House and Senate under Trump.) But U.S. presidents can also enact tariffs without Congressional approval in the event of a “national emergency.” Trump has reportedly considered imposing tariffs on the grounds of a national economic emergency.
“I think the president has broad authority to impose tariffs for a variety of reasons, and there are a number of statutory bases to do so,” Kelly Ann Shaw, a trade attorney and former deputy assistant for international economic affairs under Trump, told CNN.
Were there tariffs during Trump’s first term?
Trump used tariffs and tariff threats liberally during his first term.
In 2018, amidst the NAFTA renegotiations, the U.S. imposed tariffs on steel (25 percent) and aluminum (10 percent) on Canada. Canada countered with its own tariffs on U.S. steel, aluminum and other products. They were lifted in 2019.
Trump threatened to put tariffs on goods from Mexico in 2019 if that country did not stem the flow of migrants into the U.S. But Mexico agreed to make changes, and the threat was never carried out.
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Trump also increased tariffs on China, which were continued under President Joe Biden. Research suggests they had little economic impact. He also imposed tariffs on solar-power equipment and washing machines, in an effort to help local manufacturers.
“Moms and dads shopping on a budget for a new washing machine will pay for this — not big companies,” said U.S. Senator Ben Sasse, a Republican from Nebraska, at the time.
Is Trump serious about imposing across-the-board tariffs?
Trump has repeatedly spoken about tariffs and has taken aim at Canada in particular. He has not cited specific goods or sectors, but mused about 25-percent tariffs on imports from Canada, starting on his first day in office, Jan. 20, 2025.
“I’m a big believer in tariffs,” he told NBC’s Meet the Press. “I think tariffs are the most beautiful word … It’s going to make us rich.”
Oil and gas are the biggest U.S. imports from Canada, and there would be very little appetite for higher energy prices in the U.S. But Alberta Premier Danielle Smith told reporters after a January meeting with Trump at Mar-a-Lago: “We need to be prepared that tariffs are coming. I haven’t seen any indication in any of the president’s public commentary or even in the comments that he had with me that he’s inclined to change his approach.”
If Trump does signal on Day 1 his intention to impose tariffs on Canada, it would take time (weeks or perhaps months) to implement them.