What is a Tariff?

There are very few countries that can produce everything they need on their own, so most countries work with one another, importing the goods they need and exporting the goods that other countries need. This is called trade.

A tariff is a tax that a government puts on specific goods imported into their country. They are often used as a tool to discourage certain goods from being imported. 

When a tariffed product crosses the border, the customs agency of the importing country charges the tariff, often as a percentage of the product’s value, to the importer. Contrary to popular belief, tariffs are not paid by the exporting country, but rather by the business or individual importing the product.

Why do Countries use Tariffs?

Tariffs are usually introduced for one of the following three main reasons:

• To Raise Revenue - Like all taxes, revenue from tariffs is received by the government. Historically, tariffs were a significant source of income for governments. For example, tariffs were the main source of income for the Government of Canada from 1867 until the national income tax was introduced in 1917.

• To Protect or Strengthen Domestic Industry - Tariffs make importing products from other countries more expensive, which can encourage the purchase of domestically produced goods because they are cheaper in comparison. Countries that apply tariffs sometimes do so in the hope that manufacturers will relocate their production facilities from a foreign nation back to their home country in an effort to avoid tariffs. In turn, this will also create more jobs.

• For Diplomatic Reasons - Tariffs are sometimes applied as sanctions or penalties during times of global tension. For example, Canada introduced a tariff of 35% on most products made in Russia and Belarus in response to Russia’s 2022 invasion of Ukraine. Tariffs can also be used to put pressure on another country during trade negotiations to get a better outcome.

How Could Tariffs affect me?

• Rising Prices - US tariffs on Canadian exports won’t impact Canadians directly; however when a country imposes tariffs on another, there are often retaliatory tariffs applied in response. This will raise the cost of all tariffed goods and services imported into Canada from the United States.

• Lower Dollar - Americans will import less from Canada as tariffs make Canadian goods more expensive. This can lead to Canada having fewer exports and less global demand for Canadian currency. These changes can weaken the value of the Canadian dollar compared to the currencies of other countries. When this happens, it becomes more expensive for Canadians to purchase any imported goods.

• Economic Slowdown - The application of tariffs on Canadian goods can have negative effects on the Canadian economy. The Canadian Chamber of Commerce estimates that the 25% tariff on Canadian goods imposed by the United States could shrink the overall size of Canada’s economy by 2.6%. This could put as many as 500,000 jobs at risk, and on average, would cost the typical Canadian family an extra $1,900 per year.

How can you Protect Yourself from Tariffs?

• Adjust Your Budget and Follow it Closely - Evaluate your spending habits and identify areas where you can cut back. First, figure out your essential spending. This is costs for necessities like housing, food and insurance. Then, determine your non-essential spending like dining out, entertainment and subscription services. This is where the majority of your reductions should be found. Once your budget is built, stick to it closely.

• Build an Emergency Fund - In times of financial and economic uncertainty an emergency fund can provide you with an important safety net. Most experts advise having between 3-6 months of living expenses saved in case of an emergency. This can also be a good time to look into savings account options, such as a TFSA or a HISA.

• Substitute Lower Cost Alternatives - When dealing with rising prices, you can buy in bulk, purchase second-hand or gently used goods, or select generic store brands as a way to reduce the total cost of higher-priced items. 

• Shop Locally - One of the best decisions you can make is to buy Nova Scotian and Canadian made goods whenever possible. This will help you avoid the impact of tariffs and will support Canadian-owned businesses, which has a positive impact on your community.

• Spread out foreign currency purchases - If you are concerned about a potential decrease to the Canadian dollar (CAD) because you have an upcoming trip to the United States and will need to purchase American currency (USD), you can try a strategy called “dollar-cost averaging”. This is where you spread out your purchase over time to decrease the impact of economic changes. For example, if you know you will need $2,000 USD for your trip, you could purchase smaller amounts of USD every two weeks until you reach your goal. This helps protect you from big changes in the exchange rate between CAD and USD because you’re not purchasing the full amount on a single date.

Not sure where to start? CUA’s Financial Advisors have the expertise to address your questions and concerns while considering your personal financial circumstances. You can book an appointment online or connect with us at 902.492.6500 or info@cua.com.