A trade war between Canada and its largest trading partner has begun, with tariffs imposed by U.S. President Donald Trump now in effect and Prime Minister Justin Trudeau responding with a package of retaliatory tariffs.
Stocks are tumbling, businesses are warning of impending layoffs and further measures from both countries are likely in the coming days.
What does this all mean for you? Here's a look at some of the key questions.
What is a tariff?
Tariffs are a tax on imported goods. Like other taxes, they’re generally used by governments to help meet policy objectives and raise revenue.
The main goal of tariffs is usually to help boost and protect domestic producers by raising costs for importers. The trade-off is that those costs are often passed on to consumers.
Free-trade agreements generally either lower or remove tariffs between the member countries. But sometimes it doesn’t work out that way.
The president's executive order hitting Canada and Mexico with 25 per cent across-the-board tariffs, with a lower 10 per cent levy on Canadian energy, took effect at just after midnight.
Trudeau on Tuesday said Canada is immediately introducing 25 per cent retaliatory tariffs on $30 billion worth of American products, and will expand them to cover another $125 billion in U.S. goods in 21 days. It also plans to file claims through the existing free trade agreement between Canada, the U.S. and Mexico, as well as with the World Trade Organization.
What are the immediate and long-term effects of tariffs?
The impact of tariffs can vary widely depending on how high they are, how broadly they’re applied, and how long they’re in place.
U.S. tariffs will likely lead to a drop in Canadian goods heading there because they’ll be less competitive. Over the long term, Canadian exporters could find other markets, but the sheer size of the U.S. economy means it would be a daunting task to completely replace it as an export market.
Canada's retaliatory tariffs will increase the cost of goods coming in from the U.S. In the same manner, they will likely lead to Canadian companies importing less from the U.S., instead turning to international or domestic suppliers to avoid the duties.
If a tariff is high enough, it can swiftly deter imports for products in the category. For example, the 100 per cent tariffs Canada has put on electric vehicles from China seems to have stopped Tesla’s practice of selling vehicles from the country in Canada.
Meanwhile, the 25 per cent tariff Canada imposed on Chinese steel and aluminum is projected by the Parliamentary Budget Officer to cut imports of those products from China by nearly half. The metal tariffs themselves are expected to lead to about a billion dollars in revenue for Canada over five years.
How fast could we see prices on store shelves affected?
The effect on prices also depends on the nature of the tariffs imposed, and crucially, how much of the cost companies pass on to consumers. There will likely be a lag on price increases, though, as companies might initially absorb some of the added costs.
The Bank of Canada has released some potential price forecasts including a scenario where the U.S. imposes 25 per cent tariffs on all imported goods and its trading partners respond in kind on U.S. products.
Under such conditions, the bank figures tariffs would have a minimal effect on prices in the first year. In year two, inflation rises by an extra 0.5-percentage points, while year three sees a one-percentage-point increase added from tariffs.
In the illustrative scenario, a faster pass-through on prices to consumers could see inflation jump 0.8-percentage points in the first year, while a slow passing on of costs could actually lead to a slight fall in prices.
What do tariffs mean for the economy?
The U.S. imposing tariffs could start a damaging cycle of higher costs leading to lower demand, which in turn would slow the economy and create higher unemployment, further eroding demand and economic health.
The snowballing factors would pressure the Canadian dollar and cause business investment to decline, which in turn leads to further job losses and wider drags on the economy.
Under the Bank of Canada’s mutual 25 per cent tariff scenario, it sees Canada’s export volumes declining sharply because of less demand from the U.S., while the global GDP slowdown would also mean lower commodity prices to further reduce demand for Canadian exports.
GDP would take a 2.4 per cent hit in year one of the tariffs under the central bank’s main scenario, followed by a 1.5 per cent impact in year two and then no effect in year three.
Quebec Premier François Legault has said up to 160,000 jobs in Quebec could be lost if 25 per cent tariffs are maintained across the economy.
What are some of the sectors that could be hardest-hit by tariffs?
Export-oriented businesses will be most affected, of course, but the toll will depend on how hard it would be for U.S. buyers to find alternatives, and how much buffer those buyers have to shoulder the added costs.
Heavily integrated industries like the automotive sector will be particularly disrupted because parts often cross the border several times before a vehicle is completed.
S&P Global said sectors that process resources would likely be most affected, meaning industries like paper and plastic production as well as machinery and chemical manufacturing.
Industries that often export raw commodities, such as oil and gas and mining, would be less affected because U.S. producers add value to those resources by processing them, so there’s a wider margin to absorb the cost of tariffs.
S&P Global said paper products and printing could see between a nine and 15 per cent decline in output, while metals would see something in the range of three to six per cent.
