InsightsTariffs 101: What They Are and Why They Matter
April 03, 2025 • 4 MIN READ
In a world of increasingly complex global trade, tariffs have become a recurring headline. Whether you’re reading about trade disputes between major economies or wondering why certain products suddenly cost more, tariffs are often at the center of the story. This article provides a straightforward overview of what tariffs are, why they exist, how they function, and their impact on both businesses and consumers.
What Are Tariffs?
Tariffs are taxes imposed by a government on imported goods. These taxes are typically calculated as a percentage of the value of the goods being imported. For example, a 10% tariff on $10,000 worth of imported machinery would result in an additional $1,000 cost for the importer.
There are two main types of tariffs:
- Ad Valorem Tariffs: These are calculated as a percentage of the good’s value (e.g., 10% of the product price).
- Specific Tariffs: These are fixed fees based on a specific quantity (e.g., $0.50 per kilogram of apples).
Some governments also implement compound tariffs, which combine both types.
Why Do Countries Use Tariffs?
Tariffs serve several purposes:
- Protecting Domestic Industries: By making imported goods more expensive, tariffs can encourage consumers to buy local alternatives, supporting domestic manufacturers and preserving jobs.
- Generating Government Revenue: Especially in developing nations, tariffs can be a significant source of income.
- Correcting Trade Imbalances: Tariffs can reduce the volume of imports, thereby narrowing trade deficits.
- Political Strategy and Leverage: Tariffs are sometimes used as tools in geopolitical negotiations or to retaliate against unfair trade practices.
How Tariffs Work in Practice
When goods cross a border, customs officials assess whether any tariffs apply. If so, the importer must pay these duties before the goods are released for sale or distribution. This additional cost often gets passed along the supply chain, eventually affecting the final price consumers pay.
According to Export Development Canada, businesses that rely on imported raw materials may face higher production costs, which can reduce competitiveness both at home and abroad. In turn, consumers may notice price increases on everything from groceries to electronics.
Tariffs and Trade Agreements
Many countries enter into free trade agreements to reduce or eliminate tariffs between member nations. For example, agreements like the USMCA (United States-Mexico-Canada Agreement) are designed to facilitate smoother trade flows by eliminating or reducing barriers like tariffs.
However, even within trade blocs, not all goods are treated equally. Rules of origin, quotas, and product classifications can still result in duties for certain items.
Business Strategies in a Tariff Environment
Tariffs can introduce uncertainty into the business environment. Companies might respond in a variety of ways:
- Diversifying Suppliers: To mitigate risk, businesses may shift supply chains to countries not affected by tariffs.
- Rethinking Pricing Models: Companies may absorb some of the additional cost or pass it on to consumers.
- Investing in Local Production: High tariffs can make foreign goods less competitive, creating an incentive to manufacture domestically.
As outlined by Oxford Economics, while some industries benefit from protectionist measures, others suffer from increased costs and reduced market access.
Current Tariff Climate (April 2025)
Trade policy is once again dominating global headlines. In early 2025, the United States implemented significant tariffs on Canadian imports: a 25% tax on most goods and a 10% tariff on energy products. This move, aimed at reducing the U.S. trade deficit and addressing national security concerns, marked a dramatic shift in North American trade dynamics.
In response, Canada imposed retaliatory tariffs on nearly $30 billion worth of U.S. products, including consumer goods, metals, and agricultural products. The result has been a tangible impact on supply chains and prices in both countries. Canadian retailers are increasingly sourcing local alternatives, while American exporters are feeling the sting of reduced access to one of their largest markets.
Ongoing negotiations between leaders have yet to yield a resolution, and businesses are adapting to what may be a prolonged period of uncertainty.
Final Thoughts
Tariffs are far more than economic jargon or abstract policy tools. They shape the way goods are made, bought, and sold in today’s economy. Understanding how they function helps make sense of broader economic trends, from inflation and supply chain bottlenecks to trade disputes and shifting global alliances.
While the current environment may be challenging, it also serves as a powerful reminder of how interconnected global markets truly are—and how decisions made in government offices can ripple through economies worldwide.
