Understanding tariffs & their potential impact on Canadians

What are tariffs?

Tariffs are taxes or duties that a country applies to goods that are imported from another country. Tariffs may focus on a specific product or industry, or can be broadly applied across many different products, industries, or sectors of the economy.

There are a few reasons a government may choose to use tariffs. For example, tariffs may be applied to goods coming in from another country to deter imports in favour of domestic production.

Today, over 170 countries and customs territories around the world apply tariffs on various products entering their countries from abroad.¹

Who pays tariffs?

Companies importing goods subject to tariffs from other countries pay those tariffs to their own government. For example, if Canada were to apply a tariff on Mexican strawberries, a Canadian company importing strawberries from Mexico into Canada would pay the tariff to the Canadian government. Essentially, the tariff functions as an import duty.

Similarly, if the U.S. were to impose tariffs on all goods entering the U.S. from Canada, any U.S. company importing goods from Canada would be required to pay that tax to the U.S. government.

Businesses dependent on goods facing tariffs typically respond in one of three ways:

• They negotiate lower prices with international suppliers to offset the higher cost of tariffs;
• They absorb the higher cost of the goods, either by accepting lower profits or looking for cost cutting elsewhere in their business; or
• They pass the higher cost on to their customers, leading to price increases.

It's common that businesses pass along a portion (if not all) of the increased cost to customers, especially if the tariff is expected to stay in place for the long term.²

What are the impacts of tariffs?

There are several potential impacts of tariffs, both short-term and long-term, to the country applying the tariff and the country to which the tariff is applied.

If Canada imposes tariffs on Mexican strawberries, Mexican strawberries become more expensive in Canada. Compared to locally grown strawberries, the demand for Mexican strawberries may decrease, leading to increased demand for the locally grown ones. Over time, this could be harmful to Mexican strawberry growers if there is less demand for their product.

Conversely, it can be helpful to Canadian strawberry growers if there is an increased demand for their strawberries, which could lead to expansion.

What happens if the U.S. imposes tariffs on Canada?

If the U.S. imposes tariffs on Canada, the cost of Canadian goods in the U.S. increases. Price increases for Canadian goods can lead to lower demand for Canadian products in the U.S. Gradually, Canadian businesses that rely on exporting goods to the U.S. could be forced to slow production, leading to reduced revenue. Currently 76% of all Canadian exports go the U.S.³, therefore, U.S. tariffs imposed on Canada could have significant negative impacts on the Canadian economy over time.

Canada may also implement retaliatory tariffs on U.S. imports. This could lead to price increases for Canadian consumers.

How can I prepare for tariffs?

While there are many unknowns, including which countries and goods may be impacted by tariffs, and for how long, if you are concerned about the impacts of tariffs, you can prepare in the following ways:

Review your budget

If you're concerned that higher prices will impact your ability to spend within your means, review your budget. Adjustment options include:

• Substitute expenses: consider swapping items you buy with lower-cost alternatives where possible.
• Reduce expenses: consider reducing discretionary expenses
• Accelerate large purchases: If you're already planning on making a large purchase that could be impacted by tariffs, consider accelerating the purchase if possible.

Revisit your emergency fund

An emergency fund can help with unexpected expenses and can help prepare you in case prices rise. If you work in an industry that could be negatively impacted by tariffs and you are concerned about your job, an emergency fund could help you during a disruption to work. Your emergency fund should be equal to three to six months’ worth of total expenses and be liquid and accessible. If you do not have an emergency fund, speak to your financial advisor about establishing one.

Review your investment risk tolerance and portfolio

Discussions about tariffs could lead to market volatility. If this makes you feel uncomfortable, consider re-visiting your risk tolerance. Discuss this with your advisor to ensure your investment portfolio is suitable based on your ability to assume risk and your comfort with risk.

Remain focused on your long-term financial goals. Your investment portfolio was built to help you achieve your unique financial goals. Stay focused. Don’t allow short-term political policies to distract you, even when politics dominate news headlines.

Additional considerations for business owners

• Take a measured approach to the tariffs. While it's important to plan and take steps to prepare, take a measured approach to take into consideration the rapidly changing landscape.
• Understand and diversify your supply chain. If you rely on imports, look for opportunities to diversify your supplier base or to substitute inputs. This can provide more flexibility, reduce the probability of disruptions, and could reduce the impact of rising costs. You may also consider increasing inventories of durable goods prior to price increases taking effect.
• Know your pricing flexibility. If the goods you rely on become subject to tariffs, you may be able to negotiate lower prices from your suppliers. Alternatively, you might be able to pass along some of the increased costs to your customers. Their willingness to accept price increases is determined by several factors such as the availability of substitute products, whether your product is a necessity or luxury, and how much of their income is allocated to the product among other factors.
• Look for other areas to cut costs. Having a process for forecasting, budgeting, and tracking expenses can help you assess where expenses are going and potential ways to reduce them.

We can help

If you are concerned about how tariffs may impact you or your financial strategy, talk to an Edward Jones advisor today.