What is a tariff and how does it work for Canadians?

Tariffs sneak a “fee” in “free” trade. Find out what a tariff is and how it could affect your portfolio.

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A tariff is a tax on imported goods that governments use to regulate trade. Tariffs can affect prices, economic policies and investment decisions, making them a key factor in global commerce.

Wise takeaways

  • Tariffs are fees on imported goods that governments use to regulate trade and generate revenue.
  • They can disrupt global supply chains and impact corporate profits, particularly for businesses reliant on imported materials.
  • Tariffs often lead to higher prices for businesses and consumers, as companies pass on added costs.
  • Markets and investors react to tariff changes, with global portfolios facing heightened risk from trade disputes.
  • Tariffs can protect domestic industries by making foreign goods less competitive, but they may also trigger retaliatory trade measures.

What is a tariff?

The simplest way to think of tariffs is as an extra fee on imported goods. Governments charge and collect these costs from foreign companies importing their products. Tariffs can be applied to goods ranging from raw materials and components to finished consumer goods, and the money from these tariffs goes to the importing country’s government. 

The purpose of tariffs is usually to protect and promote domestic industries by making imported goods more expensive and less competitive. Since tariffs increase the price of imports, this translates to higher prices on foreign goods for customers. In this respect, domestic producers have an advantage since they don’t have to pay the extra tariff charges and pass those prices on to the consumer.

Key context

Tariffs have played a critical role in shaping both the American and Canadian economies, particularly during their early stages of development. In the U.S., tariffs were introduced in the late 18th century to promote domestic manufacturing and generate revenue. Historical data indicates that the U.S. government collected between 50% and 90% of its income from tariffs from their inception until 19131.

In Canada, tariffs were central to the National Policy of the late 1800s—a nation-building economic strategy meant to protect Canadian manufacturers from less expensive American imports. These tariffs helped stimulate industrial growth in central Canada and funded significant infrastructure projects, such as the Canadian Pacific Railway. Over time, both countries moved towards freer trade, with Canada entering agreements like NAFTA and, more recently, CUSMA.

Nevertheless, tariffs continue to emerge in contemporary trade disputes—especially in industries like steel, lumber, and dairy—reminding investors and consumers that protectionism has not vanished. Countries still impose tariffs to influence consumer behaviour, support domestic companies, or retaliate against foreign nations.


How do tariffs work?

When a product is brought into a country with a tariff, the company receiving it (the importer) pays a tax on the shipment. This tax increases the total cost of the goods, which can make them more expensive for businesses and consumers.

There are a few different ways governments could calculate this fee:

  • Ad valorem tariffs: These tariffs are based on a percentage of the price of each imported item. For example, if a product costs $100 and has a 10% ad valorem tariff, the importer would pay an additional $10 in tax for each unit they bring into the country.
  • Specific tariffs: These tariffs use a fixed fee based on some measurable attribute, such as weight or quantity. For instance, a specific tariff might impose $2 per kilogram on a particular commodity.
  • Compound tariffs: These tariffs combine a percentage rate and a flat import fee. So, if a product is subject to a 10% ad valorem tariff plus a $2 per kilogram charge, an importer would need to pay both fees based on the item’s value and weight.

Who pays for tariffs?

The business that brings a product with a tariff into the country (the importer) is responsible for paying tariffs. However, these businesses are often forced to raise the price of these products to make a profit, which results in the consumer being affected by tariffs, too. 

Tariff examples

In 2017, the U.S. imposed 20% tariffs on Canadian softwood lumber, citing unfair subsidies. The effects were severe: Canadian lumber companies struggled, U.S. homebuilding costs rose, and lumber prices jumped in North America. The National Association of Home Builders estimated these tariffs added over $9,000 to the cost of a new single-family home in the U.S. Canadian investors faced volatility in lumber stocks, impacting construction and real estate. Consumers saw how targeted tariffs on raw materials can raise prices and disrupt industries on both sides of the border.

In another example, when President Donald Trump placed a 30-50% tariff on imported washing machines in 2018, retail washing machine prices rose approximately 12% that year. American consumers collectively paid about $1.5 billion more for washing machines while the tariffs were in effect2.

So, while businesses that import foreign products actually pay tariffs, consumers also feel the effects on their wallets.

Are tariffs good for the economy?

Although only importers directly pay tariffs, these fees have profound trickle effects on the prices of goods and services. Economists point out that consumers end up paying tariffs indirectly due to the overall increase in prices3. Any company that relies on goods from foreign nations often raises consumer prices to remain profitable.

Therefore, businesses that depend on foreign materials or sell products overseas tend to be the most sensitive to tariffs, which often results in poorer earnings reports and weaker share price performance. Investors holding stocks in these industries typically notice extra volatility in their portfolio as the market adjusts to the “new normal” after tariffs are introduced. 

What do economists say about tariffs?

The International Monetary Fund (IMF) notes that trade tensions and tariffs can lead to a decrease in global economic growth, which could hurt a broad array of sectors. Specifically, the IMF estimates that increased trade restrictions take roughly $7.4 trillion out of the global economic output in the long term4.

A 2019 study from the University of Calgary’s School of Public Policy examined tariffs and trade barriers' effects on Canada’s economy amid U.S. trade tensions and NAFTA renegotiation.

It found that protectionist measures, like tariffs, harm Canadian productivity by shielding domestic industries from competition, leading to complacency and slow adoption of new technologies.

Supply chain disruptions from tariffs reduce competitiveness for Canadian exporters, particularly in manufacturing that relies on cross-border inputs, resulting in slower growth and less motivation to modernize, which can impede long-term investor returns. While tariffs may offer short-term protection, Canadian research shows they can hinder growth, innovation, and global competitiveness long term.

Research out of UC Davis suggests tariffs decrease economic productivity. According to research from UC Davis economic professor Christopher Meissner, U.S. industries became less efficient and less innovative when tariffs increased between 1870 and 1909. His findings show that for every 10% rise in tariff rates, the productivity of American businesses — meaning their ability to produce goods efficiently and competitively — declined by 25% to 35%5.

"Consumers are probably going to have to pay higher prices, and they may even have a lower range of choices at the store because some things just become too expensive to bother importing."

Christopher Meissner, professor of economics in the College of Letters and Science at UC Davis5

More recent data from the Federal Reserve Bank of New York found that tariffs imposed by the U.S. increased consumer and business costs6. JPMorgan also reports that tariffs are typically linked to higher odds of inflation, citing the 2018-2019 tariffs between the U.S. and China as a concrete example7.

Getty Images, Chuck Savage

Will tariffs affect my RRSP, TFSA or other investments?

While the type of account (RRSP or TFSA) itself doesn’t change how tariffs function, the investments within those accounts can feel the effects. If you hold Canadian or global equities — especially in sectors like manufacturing, technology, or natural resources — tariffs can destabilize those stocks. Trade tensions often lead to market volatility, supply chain disruptions, and weaker earnings for companies involved in global trade. This can negatively affect your returns, whether you're investing for retirement or short-term growth.

Diversified portfolios generally help cushion the impact, but if tariffs initiate a broader market dip or inflationary pressure, your RRSP or TFSA balance could suffer. Conversely, some sectors — such as domestic agriculture or energy — might benefit from protectionist policies.

Therefore, it’s less about whether tariffs affect your investments and more about how significantly and in which areas you’re exposed.

How do tariffs impact the S&P 500?

Higher tariffs may put a drag on the global economy, with historical data suggesting indexes like the Standard & Poor’s 500 aren’t as likely to post gains when tariffs are in force. For example, Goldman Sachs researchers discovered that for every 5% increase in U.S. tariff rates, the S&P 500’s earnings per share went down by about 1% to 2%9.

Historical data suggests a negative correlation between tariffs and the performance of stocks in the S&P 500. Since the S&P 500 contains 500 of the largest publicly traded companies in the U.S., many of these businesses have international exposure, which explains why investors fear tariffs will adversely impact their bottom line. Some investors who decide to sell may also fear the broader implications of tariffs — including reduced consumer spending and higher unemployment — and how these could adversely impact corporate earnings. The negative association of tariffs on the S&P 500 sometimes leads investors to look for safer alternatives to park funds during these periods.

Key context

Even talk of increasing tariffs tends to put investors in a “sell first, ask questions later” mentality. For example, during the U.S.-China trade war in 2018, the S&P 500 dipped by 4.38% for the year as talk of escalating tariffs increased10. However, following the Phase I trade deal in October 2019, the S&P 500 rebounded and posted a gain of 31.49% for the year. More recently, the S&P 500 fell 1.5% in one day in February 2025 after President Trump announced increased tariffs on countries like China and Canada11.

Examples of historic tariffs

To get a better understanding of how tariffs work and impact the economy, let’s take a closer look at a few real-world examples: 

The Smoot-Hawley Tariff Act (1930)

At the start of the Great Depression, the U.S. government imposed the Smoot-Hawley Tariff on thousands of different types of imported products to protect American farmers and businesses from foreign competition. However, this act triggered a wave of retaliatory tariffs from other nations and further exacerbated the sharp decline in international trade during the Great Depression12.

In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which granted the president the authority to negotiate tariff reductions with other countries13

While the extent of the Smoot-Hawley Tariff’s full impact remains a matter of debate, it significantly reduced global trade while in effect. 

US Steel Tariffs (2002)

To support local steel manufacturers, President George W. Bush imposed tariffs ranging from 8% to 30% on imported steel in 200214. However, similar to the Smoot-Hawley Tariff, later research suggests that the broader implications of these tariffs actually harmed the U.S. economy by raising steel prices, increasing costs for automotive and construction industries, among others, and leading to significant job losses in steel-consuming sectors.

Getty Images, mantosh

FAQs

  • What is a tariff in simple terms?

    +

    A tariff is a tax on goods brought into a country from elsewhere that makes these products or materials more expensive.

  • Are tariffs good or bad?

    +

    Historical research suggests both positive and negative effects of tariffs. While tariff fees might make domestic businesses more competitive, they can lead to higher overall prices and trade disputes.

  • How do you explain a tariff to a child?

    +

    Imagine your favorite toy costs more money when it comes from another country because the toy store has to pay extra money to bring it here. That extra money is called a tariff.

  • What is the difference between a tax and a tariff?

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    The term tax refers to a fee on goods or services. The term tariff refers specifically to a fee on goods coming from another country.

Eric Esposito Freelance Contributor

Eric Esposito is a freelance contributor on MoneyWise with an interest in financial markets, investing, and trading. In addition to MoneyWise, Eric’s work can be found on financial publications such as WallStreetZen and CoinDesk. When not researching the latest stock market trends, Eric enjoys biking, walking his dog, and spending time with family in Central Florida. Eric holds a BA in English from Quinnipiac University.

Tyler Wade Personal finance content strategist & writer

Tyler Wade has worked in personal finance for over 5 years writing for brands like Ratehub, Forbes, KOHO, and now Money.ca.

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