What is a tariff?

A tariff is a tax on imports from another country. It can increase the prices consumers and businesses pay for that good.

Traditionally, tariffs have been used to favour domestic companies by making imports more expensive. Tariffs can have wide-ranging effects on what people buy and which goods are traded between countries. They can also affect government revenues, exchange rates, employment levels, economic activity and inflation.

Who pays a tariff

A tariff is paid by the company or individual who imports a good. Often, some of the extra costs from a tariff are passed along to consumers in the form of higher prices, but consumers usually do not bear all a tariff’s costs. Importers and their suppliers often absorb some of the extra costs of the tariff, which reduces their profit margins. Tariffs mean consumers have less money to spend on other things and businesses have less money to invest, which slows economic growth.

How a tariff affects the prices you pay

Tariffs can be applied to all kinds of goods and can affect their prices in several ways. Tariffs can be imposed on products that consumers buy directly, such as apples, clothing or vehicles. Tariffing these products could drive up their prices, but tariffs can also be placed on intermediate goods—the components used to make those products. Higher prices for components can also push up the prices you pay.

What if you wanted to buy a car? Consider the case of how a vehicle is made and how tariffs can affect the final price:

• A tariff on steel or aluminum would increase the costs of producing vehicle parts such as the battery, muffler or transmission.
• Many vehicle parts cross borders multiple times during the manufacturing process. So, a single part could be tariffed more than once.
• An additional tariff could be charged on the finished vehicle if it is shipped across the border. Each tariff increases the cost of building the vehicle, and that cost is often passed along to the buyer in the form of higher prices.

Upward and downward pressure on inflation

Tariffs increase the cost of imported goods, leading to higher prices for consumers. Higher costs for businesses can lead to higher prices for consumers, putting upward pressure on inflation. But tariffs also reduce the demand for a tariffed country’s exports. This can slow down economic activity in that country, putting downward pressure on inflation. At the same time, countries facing tariffs may retaliate by putting tariffs on the other country’s exports, raising prices and putting upward pressure on inflation. Because tariffs can put both upward and downward pressure on inflation, they can be challenging for monetary policy and the work of central banks.

The policy interest rate that we announce eight times per year is the main tool we use to keep inflation around 2%. Increasing the rate helps bring inflation down, while decreasing the rate helps stimulate demand. Adjusting the policy rate can’t offset all the economic impacts of tariffs. The Bank of Canada’s aim is to ensure that tariff-related price increases don’t lead to ongoing high inflation.

When a tariff is imposed, it can cause a one-time increase in consumer prices if the cost of the tariff is built into the price of the tariffed product. Prices can then stabilize at the higher level. But when prices rise, people might start to believe they will keep going up. And because expectations about inflation affect the decisions consumers make about buying and the decisions businesses make about pricing, hiring and investing, expected inflation can lead to actual inflation.

The Bank of Canada’s job is to ensure that inflation expectations remain at or around our 2% target for inflation for the medium- and long-term. We explain our actions to the public to earn their trust and anchor their expectations. We are committed to keeping inflation at or around the 2% target, and the longer we are successful at doing that, the more confidence the public will have that we will continue to do so in the future.