Tariffs 101: What you need to know

The potential introduction of tariffs on Canadian goods by the U.S. government has created uncertainty and questions. This insight explains the fundamentals of tariffs and what they could mean for Canadian business.

What are tariffs?

Tariffs are taxes imposed by a government on foreign goods entering their territory. Tariffs are synonymous with customs duties. They are used to regulate trade, protect domestic industries, and generate revenue. By increasing the cost of imported goods, tariffs can make domestic products more competitive.

How do tariffs work?

Mechanism

Customs duties are typically calculated as a percentage of the value of the imported goods (ad valorem) or as a fixed amount per unit (specific). Specific tariff rates, more commonly referred to as duty rates, are imposed on specific commodities. More than one duty rate could apply to the same product, cumulative or compounded. Customs authorities collect these tariffs at the point of entry.

Tariffs payable when importing goods into a country’s customs territory are determined using the importing country’s customs rules. These are globally harmonized by the World Trade Organization (WTO).

To determine the applicable tariff rate for any imported goods, key information that importers must accurately declare includes:

• The customs value of the goods based on specialized accounting methods
• The customs classification of the goods based on a specialized classification and coding system
• The quantity of the goods
• The customs origin of the goods

Impact on prices

Tariffs increase the cost of imported goods, which can lead to higher prices for buyers.

Increased prices due to tariff costs can reduce demand for imported goods and shift consumption towards domestic or more competitive foreign goods. It can also require price adjustments for pre-negotiated prices in business-to-business sales, where the tariff burden may fall on the seller or the buyer, per existing contractual terms.

How can tariffs impact my business?

Tariffs can have a range of impacts on your business.

Export sales

Tariff costs can affect your top line and the competitiveness of your products.

Your business's exports may face competition from similar foreign products with different tariff costs and domestic products without import tariffs. Adjusting prices to cover tariff costs is challenging due to supply and demand dynamics.

Import purchases

If you import goods, tariffs will impact your bottom line.

• Direct tariff costs: These affect your pricing to consumers. Recovering tariff costs is essential to protect your profit margin.
• Indirect tariff costs: These include the costs of inputs you purchase and the upstream tariff costs from your suppliers. Changes in these costs can affect your production costs.
• Capital goods tariffs: These are tariffs on vehicles, machinery, tools, and equipment used in your business operations.

Cross-border movements of capital goods

If your business needs to regularly move capital goods such as machinery, tools, vehicles, and equipment across borders to operate, tariffs can have an impact on your business even when you have no import sales and no export purchases.

Under existing free trade agreements, capital goods do not face tariffs because they are only in the country temporarily. If a tariff is introduced, you may need to adjust your operations to apply for temporary importations.

If new tariffs are introduced, do a cost-benefit analysis of deploying temporary importation programs.

Who pays the tariff?

The importer directly bears tariff costs. They are held directly liable by customs regulations for the payment of the tariff to customs authorities. Following the declaration, the importer receives an assessment of duties and taxes, which is normally paid immediately on release or within a prescribed timeline following importation. In Canada, tariffs are due within approximately a month.

However, the importer typically passes these tariff costs on to their customers. As a result, the increased costs are reflected in the prices at each stage of the supply chain (importer to wholesaler, wholesaler to retailer, retailer to consumer). Ultimately, consumers bear the burden of the increased tariff costs.

What should business leaders do?

Business leaders need to prepare their business and be agile. Start by reviewing the volume and dollar value of what you export to and import from any country, so you get an understanding of current tariff costs and potential impacts of new tariffs. This can help you scenario plan to manage tariff cost risks. You can also evaluate opportunities to improve tariff cost efficiencies.

You should also review a list of suppliers and buyers, including revenue amounts. Identifying customer locations can help to guide strategic decisions respecting tariff costs.

As global supply chains change, you may be able to find new buyers for your product, or new suppliers for your business inputs. Stay informed about ongoing developments and explore opportunities to grow your business.

Connect with an advisor

Your MNP advisor is here to support you through uncertainty. To learn more about how your business can remain resilient, connect with your local advisor.