Key questions as tariff threat looms #CanadaFinance

TORONTO — U.S. President Donald Trump has said he will impose a 25 per cent tariff on Canadian goods as early as Saturday. Here’s a look at some of the key questions as the clock ticks down.

What is a tariff?

Tariffs are a tax on imported goods. Like other taxes, they’re generally used by government 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.

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.

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 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 are expected to lead to about a billion dollars in revenue for Canada over five years.

If the U.S. imposes tariffs, it 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.

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 cost.

The Bank of Canada has released some potential price forecasts including a fairly severe scenario of the U.S. imposing 25 per cent tariffs on all imported goods and its trading partners responding 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.

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