A tariff is a tax on imports. If the U.S. imposes a 25% tariff on all imports, it raises the cost of those goods for American buyers by 25%. As a result, American businesses and consumers will face higher prices. The more dependent they are on imports—what economists call inelastic demand—the greater their economic burden. Canadian exporters will also suffer, as Americans will buy fewer Canadian goods. The more reliant Canada’s exports are on the U.S. market, the more significant the impact will be. While the U.S. government benefits from tariff revenues, tariffs also create economic inefficiencies, and the overall losses to consumers and businesses exceed the government's gains, resulting in a deadweight loss.
If Americans attempt to produce import substitutes domestically, they will likely struggle to do so efficiently. If domestic production were already cost-effective, there would have been little need for imports in the first place.
From a political standpoint, imposing tariffs is a risky move for the U.S. government. The Republican Party traditionally favors lower taxes, and tariffs are essentially taxes on goods. As Warren Buffett put it, “Over time, they are a tax on goods. I mean, the Tooth Fairy doesn’t pay ’em!” (CNBC, March 2, 2025).
Two key lessons emerge from Trump’s tariff policies during his first term:
He used tariffs as a negotiating tool, but ultimately, the overall tariff rate on U.S. imports increased by only 1%.
Several scholarly studies have shown that American businesses and consumers bore most of the cost of these tariffs, rather than foreign exporters.
Given this history, it is reasonable to assume that the U.S. government will struggle to sustain high tariffs for long. As a transactional leader, Donald Trump is likely to eventually remove the tariffs and declare victory.
The most effective economic response for Canada is not to retaliate with its own tariffs. This approach has multiple benefits:
Minimizing economic distortions – Restraint avoids adding further inefficiencies beyond those created by U.S. tariffs.
Increasing political pressure within the U.S. – American businesses and policymakers will push harder to reverse tariff policies.
Sending a strong message to the American public – Canada can position itself as a friend and responsible trade partner, while highlighting the flaws in U.S. trade policies.
Mr. Trump’s second term has less than four years remaining, but Canada and the U.S. have been neighbors for centuries and will remain so in the foreseeable future. Therefore, Canada’s response should be strategic and mindful of the long-term neighborly and synergistic relationship with the U.S.
In the meantime, Canada should take this as an opportunity to reduce internal trade barriers and diversify its foreign markets beyond the U.S.
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