What Exactly is a Tariff?

There has been much discussion about Canadians potentially paying a 25% tariff on goods going to the US. That statement, however, does not fully align with how tariffs actually function. I took a closer look and will try to clarify what these tariffs mean for Canadians and Americans alike.

The Trump tariffs, which ultimately add revenue to the United States Treasury, are paid solely by entities within the United States. No Canadian individual or company pays these tariffs directly. When the U.S. imposes a tariff on Canadian goods, such as maple syrup, payment is made at the border by the American buyer, not the Canadian supplier.

Consider a shipment of maple syrup manufactured in Canada and delivered to the U.S. for AMERICAN SYRUP CO (ASC). At the border crossing, an American ASC representative pays the tariff directly to an American customs agent. That money goes straight into the U.S. treasury. This process means the added cost is absorbed by the American importer and subsequently passed on to American consumers through higher prices.

For instance, if a bottle of maple syrup was initially priced at $20, a 25% tariff on the imported syrup could increase the price by $5. The result is a retail price of $25, reflecting the tariff’s impact. The tariff itself remains invisible to the average American buyer, as it is embedded in the product’s final price.

President Trump’s rationale assumes that Canadian manufacturers would reduce their prices by an equivalent percentage to remain competitive in the U.S. market. While theoretically possible for a very brief period and at lower tariff rates, such price reductions are not sustainable in the long term. Canadian companies face their own production costs and economic constraints, making significant price cuts impractical.

It is important to understand that tariffs have never been paid directly by foreign countries. Instead, they function like taxes, collecting money from American importers. The notion that tariffs generate wealth from foreign nations is misleading. They primarily serve as a way to extract additional revenue from within the United States, much like any other tax mechanism.

The broader implications for Canadians are more indirect. Higher prices on Canadian goods in the U.S. market could lead to reduced demand from American buyers. In extreme cases, U.S. companies might choose to produce their own goods domestically, gradually reducing reliance on Canadian imports. While this shift is not immediate, it could impact trade between the two nations over time.

The concept of tariffs is complex, but one thing remains certain: they affect both nations. The ripple effect of higher prices and reduced cross-border trade is something neither Canada nor the U.S. benefits from in the long run. Unfortunately a similar result happens when the tariffs are created by Canada. Either way, the consumers on both sides of the border will be the ones paying the price for these executive decisions.