The concept of tariffs has resurfaced in recent discussions about international trade. However, a closer examination of economic principles, historical precedents, and the analysis provided by institutions like the Bank of Canada reveals that tariffs are generally a detrimental policy choice with significant negative consequences for economies and consumers.
Tariffs as Taxes on Consumers and Businesses
At their core, tariffs are taxes imposed by a government on imported goods. While they are levied on the importer, the economic burden ultimately falls on businesses and consumers. As I stated in the linked video, drawing on the Bank of Canada’s assessment, “tariffs on Canadian exports will be paid by the US company buying those goods, and those companies will, in turn, pass at least some of that cost onto the US consumer. The same applies to retaliatory tariffs”. This isn’t abstract theory; it translates to higher prices for goods and services, directly impacting household budgets.
The Pervasive Harm of Tariff Uncertainty
Beyond the direct costs of tariffs, the uncertainty surrounding their imposition and duration creates significant economic disruption. Governor Macklem of the Bank of Canada emphasized that “since President Trump began threatening to impose a wide range of tariffs on Canadian exports, uncertainty has increased sharply. … The uncertainty is already causing harm”. This unpredictability leads to a decline in consumer confidence in both Canada and the United States. Businesses react by delaying or cancelling investments and scaling back on hiring due to the unpredictable policy landscape. The Bank of Canada’s surveys indicate that Canadian households have become more worried about their jobs and financial security, leading them to reduce spending. Similarly, businesses have lowered their sales outlooks, particularly in trade-reliant sectors.
Sector-Specific Economic Pain
The impact of tariffs is not uniform across all sectors; it can severely affect specific industries and regions. For Alberta, a potential tariff on energy exports is a major concern, potentially leading to downward pressure on Canadian energy prices, reduced profitability for producers, decreased investment, and potential job losses. The Bank of Canada highlights that while new pipeline capacity aims to diversify markets, it cannot immediately replace US demand.
Similarly, tariffs on steel and aluminum will disrupt industries in Ontario and Quebec, leading to reduced output and increased prices due to the significant cross-border trade in these materials. The agricultural sector also faces substantial uncertainty, with potential tariffs and retaliatory measures impacting farmers on both sides of the border, as seen with China’s tariff on Canadian canola oil.
Monetary policy, as the Bank of Canada notes, cannot target specific industries or regions, underscoring the broad negative impact that tariffs inflict across the economy.
The Economic Consensus Against Tariffs
There is a strong consensus among economists that tariffs are self-defeating and negatively affect economic growth and welfare. While the intention behind tariffs might be to protect domestic industries, they often backfire by raising input costs for other domestic industries that rely on the now-tariffed goods. Furthermore, the near-inevitable retaliatory tariffs imposed by affected countries harm export markets, creating a lose-lose situation.
Basic economic analysis shows that import tariffs lead to higher prices and lower quantities, reducing consumer surplus. While domestic producers might see a temporary increase in surplus, this is outweighed by the losses to consumers and overall deadweight losses to the economy.
Historical Lessons: The Perils of Protectionism
History offers numerous examples of the damaging effects of widespread tariffs. The Smoot-Hawley Tariff Act during the Great Depression is a stark reminder of how tariffs can lead to a significant decline in global trade. While the exact extent of its impact on the Depression is debated, it undeniably contributed to a climate of protectionism and retaliation.
Historically, some nations, like the US and Britain, employed protectionist measures during their industrial development phases. However, the prevailing economic view is that free trade and the reduction of trade barriers have a positive effect on economic growth. The long history of tariffs shows a constant tension between protectionist pressures and the benefits of lower trade barriers.
The Bank of Canada’s Response to Tariff Uncertainty
In the face of tariff uncertainty, the Bank of Canada’s primary focus is on maintaining its 2% inflation target. While monetary policy cannot prevent the initial price increases caused by tariffs, its role is to prevent these increases from becoming ongoing generalized inflation. The Bank is closely monitoring how the costs of tariffs and uncertainty pass through to consumer prices and is using economic models and outreach to better understand the potential impacts. Given the high degree of uncertainty, the Bank is also adapting its policy decisions to be less forward-looking and more focused on mitigating risks across various potential economic outcomes.
Conclusion: Prioritizing Stable and Predictable Trade
In conclusion, the evidence from economic theory, historical experience, and the analysis of institutions like the Bank of Canada strongly suggests that tariffs are a poor policy instrument that inflicts significant economic harm. They act as taxes on consumers and businesses, create damaging uncertainty that stifles investment and hiring, negatively impact key sectors, and often lead to retaliatory measures that harm export markets. Rather than erecting trade barriers, the focus should be on fostering stable and predictable trade environments that benefit all involved.
## References
Bank of Canada. (2025, March 20). Navigating tariff uncertainty.
Tariff. (2024, November 20). In Wikipedia. Retrieved from https://en.wikipedia.org/wiki/Tariff
Macklem, T. (2025, March 20). Tariff uncertainty and monetary policy (Speech). Calgary Economic Development, Calgary, Alberta.