Tariffs were a topic of political debate within the United States (U.S.) throughout much of the 2024 presidential election. Our largest trading partner by far, the U.S. received 72.3% of Canada’s overall exports of goods and services in 2023. Billions of dollars’ worth of goods cross the border every day, and decades of free trade agreements (FTAs) between the U.S. and Canada have tightly integrated our supply chains in key industries, including automotive and advanced manufacturing.
Understandably, businesses want to stay up to date on potential impacts.
Export Development Canada (EDC) is committed to supporting Canadian companies and equipping you with the tools you need to succeed in the North American market.
Tariffs are an unavoidable reality for companies that engage in international trade. Understanding how tariffs and other trade barriers work can help you shape your export strategy for any market and manage risk when planning international expansion. Here’s a quick primer on tariffs to help you get started.
What are tariffs?
Tariffs are taxes that governments put on goods coming in from another country. Just as you pay sales tax when you buy something at a store, you may have to pay tariffs or duties on items you import into Canada. If you export goods outside Canada, your international customers may have to pay tariffs on the goods they buy from you.
How do tariffs work? Why do governments use them?
There are a few reasons governments choose to put tariffs on imported goods:
1. Tariffs generate revenue. Governments collect tariffs as they would income or sales tax. The money collected is put in the treasury and rolled into the state’s overall budget.
2. Tariffs can protect domestic industries. Officials may put a tariff on specific goods from outside the country if they feel a free flow of goods is hurting their regional or domestic producers. In this case, the government’s goal is to help domestic companies compete by making imported goods more expensive. The tariffs may also work as a deterrent for countries that are considering dumping surplus goods, which can undermine local pricing and put domestic companies out of business.
3. Tariffs may be deployed as a diplomatic tool. Governments sometimes limit or ban the import or export of goods and services from another country to influence behaviour in non-economic matters such as human rights, treaty violations, or war. A recent example is the package of economic sanctions that Canada imposed on Russia for its destructive war against Ukraine. Rather than ban trade outright, governments may choose to impose high tariffs as an indirect trade sanction. The tariffs limit the offending country’s competitiveness by making their export goods prohibitively expensive, ultimately hurting its economy.
Who pays the tariff?
Buyers are usually responsible for paying tariffs. Tariffs are a tax on imported goods, paid by the person or company that imported them. Many importers pass these costs down to consumers by charging higher prices.
While tariffs are collected by the government that imposes them, tariffs aren’t paid by one government to another.
How do tariffs impact my business?
Tariffs imposed on Canadian goods make your products more expensive for buyers in the market where the tariffs are in force. Conversely, tariffs can also make the goods you import into your supply chain, or sell domestically, more expensive.
Here’s how tariffs can influence your price competitiveness:
1. Importers: Canadian-imposed tariffs can drive up the cost of making your product. For example, if you import aluminum wire for your jewelry business and this input is subject to a new 10% tariff, you’ll pay more for the material. To compensate, you’ll either have to charge more for the finished items or accept a lower profit.
2. Exporters: Tariffs are a trade barrier that make it harder to compete in international markets by raising prices for your goods or services. It’s important to know if the goods you’re shipping abroad will be subject to tariffs (also called duties) in the destination country. If your goods are subject to a tariff and your competitors’ goods aren’t, you may find it challenging to succeed in that market. Customers may look elsewhere if your goods are more expensive because they’re subject to a tariff.
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How do I know if I’ll have to pay tariffs?
Canadian exporters can use the Canada Tariff Finder to get tariff information for specific products and countries where Canada has an FTA.
The Government of Canada has additional online tools to search for tariffs by product and country.
But not all trade is between two countries. The emergence of global supply chains over the past few decades means many products contain inputs from several countries. Goods may cross borders multiple times before they reach the final buyer. Knowing if you or your buyer will be subject to tariffs can be complicated if your business is part of such a supply chain. For this, you need to understand rules of origin.
How do rules of origin impact tariffs?
Origin is a product’s economic nationality, or where it’s from. Determining origin isn’t always easy. Does a product originate in the country where it’s manufactured? Or, is the originating country where materials were grown or sourced? What about modern products that are made of up components from all corners of the globe?
Rules of origin answer these questions. These international trade rules determine the source country of a product or service destined for export, which affects whether it’s subject to tariffs. Rules of origin are negotiated as part of every FTA. When no FTA’s in place, the World Trade Organization (WTO) rules apply.
All internationally traded goods must have their origin declared when they go through customs at the point of import. The Harmonized System (HS) classification facilitates this process and plays a central role in determining the origin of goods.
HS classification is an international customs system that assigns a unique six-digit HS code to each group of products, including food and raw materials, components of products and manufactured goods.
Knowing the HS code for goods you’re importing or exporting is the first step in determining if tariffs will apply. You also need to look at the specific rules of origin for your exports in your target market.
These online resources can help you get started:
- Canadian Export Classification: Look up the HS code for your goods.
- Rules of origin facilitator: Search for information on tariffs, trade agreements and rules of origin.
- Canadian Society of Customs Brokers (CSCB): Partner with a customs broker or freight forwarder to determine the correct code for your goods. It can be complex in some cases.
- Export Help Hub: EDC’s provides expert answers to the most frequently asked trade-related questions. Create a free MyEDC account to read more about rules of origin or ask a question of your own.
How can I avoid tariffs?
Canada has 15 FTAs in place that reduce or eliminate tariffs and provide Canadian companies with preferential access to markets around the world. These agreements also simplify the process of setting up operations abroad and provide better predictability, protection and transparency in foreign markets.
FTAs also reduce border-crossing delays, expedite product delivery and minimize regulatory red tape. Additionally, they foster commitments to broader goals, like environmental protection and human rights, while reducing risks associated with exporting such as potential litigation and classification issues.
Despite these benefits, FTAs don’t eliminate all tariffs on all goods. Even with preferential access to the market, your products or services may be subject to duties.
How can market diversification protect my business?
The only constant in international trade is change. It’s difficult to anticipate every economic and geopolitical shift that could lead to new tariffs in your export market. Relying on a single export market leaves your business vulnerable to disruptions that are outside your control.
Diversifying your exports by selling into several different markets at the same time helps you manage risk while opening the door to new opportunities. Canadian companies can leverage our growing list of FTAs to expand globally in North America, the Indo-Pacific, Europe, Latin America and beyond. Even when conditions are stable, market diversification is a smart play that can strengthen your business.
Support for Canadian exporters
Trade Commissioner Service
The Trade Commissioner Service (TCS) helps Canadian businesses grow with confidence by connecting you with our funding and support programs, international opportunities, and a network of trade commissioners in more than 160 cities worldwide.
Export Development Canada (EDC)
EDC is part of the Government of Canada’s trade ecosystem of experts available to help you save time, learn more about your target markets and identify the capital you need to grow.
EDC also offers:
- A full suite of credit insurance products to lower your risk for doing business abroad
- Help with getting access to working capital
- Expertise to enable you to learn more about international markets
- Connections to international companies in need of your products and services
Learn more about how EDC’s financial and knowledge solutions can help you understand the opportunities in your target market and make exporting less risky. To contact an EDC export advisor, visit our Export Help Hub.
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