Canadian consumers are bracing for higher prices and a potential economic downturn after the United States rolled out its latest round of tariffs.

Despite escaping U.S. President Donald Trump’s latest onslaught of reciprocal tariffs on countries around the world, Canada isn’t out of the woods by any means, Tu Ngyuen, an economist at consultant RSM Canada LLP, said.

“Economic uncertainty remains firmly entrenched, and more tariff announcements could be in the picture in the upcoming months,” he said in a recent note.

Canadians are already grappling with unpredictable and often unclear economic threats, but here’s how the tariffs that are currently in place could affect consumer pocketbooks.

What tariffs are currently in place?

The U.S. has imposed 25 per cent tariffs on Canadian goods that aren’t compliant under the Canada-United States-Mexico Agreement (CUSMA), with a 10 per cent carveout for energy and potash, due to what the Trump administration claims are concerns about border security and fentanyl.

In the event that these tariffs are lifted, Canada will still face 12 per cent tariffs on non-CUSMA-compliant products due to Trump’s latest reciprocal tariff order. Other countries face reciprocal tariffs ranging from a minimum of 10 per cent to as high as 50 per cent. There are also 25 per cent tariffs against Canadian steel, aluminum and vehicles.

“It’s estimated that around 40 per cent of the dollar value of goods travelling across the border are declared as CUSMA-compliant, although more firms may make the effort to become compliant,” Toronto-Dominion Bank economists said in a note, adding that 80 per cent to 90 per cent of the value of exports is expected to become CUSMA-compliant in the near future.

“As it stands, the effective tariff on Canada is now around 10 per cent, up from less than two per cent before President Trump came into office,” the economists said.

Canada has matched Trump’s tariffs with 25 per cent tariffs on American imports as well, including on vehicles that are not compliant with CUSMA.

The first round of tariffs was focused on $30-billion worth of U.S. imports and was less likely to hurt Canadian consumers, but the tariffs on an additional $125-billion worth of goods are scheduled to follow.

Who pays the tariffs?

Tariffs are first paid by the importer, which means the 25 per cent tariff imposed on a Canadian product is paid by the company importing it from Canada into the U.S., with the revenue going toward the U.S. government, and vice versa for goods imported into Canada.

The importer can choose to either absorb the higher costs or pass some or all of the costs onto consumers. It’s less typical for the exporter to lower the price of their goods.

Michael McAdoo, a partner and director at Boston Consulting Group in Montreal, said different products have varying price elasticity and margins, which can impact how the importer manages the higher fees.

For example, a French luxury handbag could cost $400 to make and retail for $2,000 in the U.S. The 20 per cent reciprocal tariff the U.S. has imposed on France means the handbag now costs an extra $80 for the U.S. importer, which could end up just absorbing the higher costs since there’s a massive margin that gives them more cushioning.

On the other hand, an industrial product with a lower margin — say, something that costs $90 to manufacture, but retails for $100 — would be much more hurt by a 20 per cent tariff, since that takes the cost up to $108. In this scenario, the importer is more likely to pass on the higher price or find another way to reduce their costs.

However, McAdoo warned that some companies may also use tariffs as a pretext to raise their prices higher than the value of the tariff as well.

How will tariffs affect consumers?

Canadian tariffs on American imports mean consumers will shell out more money to pay for goods that they can’t substitute with cheaper products that are domestically produced or come from other countries.

But the cost to American consumers will be “significantly more devastating,” David Soberman, the Canadian national chair in strategic marketing at the Rotman School of Management, said. The U.S. has levied a barrage of tariffs on trading partners across the globe, while Canada is only paying more for American goods.

U.S. tariffs on Canadian imports won’t directly affect Canadians’ pocketbooks, but the fees become more complicated for finished goods that require parts or materials from Canada, are assembled in the U.S. and are then sold back to Canada.

For example, Soberman pointed to U.S. automobiles, which often require parts from Canada and move back and forth across the border, getting tariffed each time.

“(Economists fear) this is going to result in general increases in prices for everybody,” he said. “Even though we do produce a lot of finished goods here … most of our exports are things like lumber, oil and gas, potash and aluminum. These are typically raw materials that go into making other products that are then transformed and then sold back to consumers in both countries.”

Inflation in Canada is expected to eclipse the three per cent mark over the summer, according to economists at TD.

McAdoo suggested that the reciprocal trade tariffs on other countries could potentially benefit Canada if some exporters seeking a market with a similar consumer profile, but not charging tariffs choose to send more of their products here instead of to the U.S.

However, Soberman said the tariffs on goods from other countries could potentially reduce their demand and therefore their production, causing these countries to raise the price of their goods being sent to Canada as well.

What are the other indirect effects?

“The predictions now are fairly dire that if tariffs stay in place, they are going to drive the global economy into a recession because everyone is going to be hit really hard,” Hampson said.

Soberman said companies could start laying off employees, pointing to the recent pause at a Stellantis NV assembly plant in Windsor, Ont., and that will impact people’s incomes.

“Of course, when a factory closes, what also happens is that all the ancillary businesses that supply that factory also suffer,” he said, adding that spending within the local community may be reduced as well. “The ripple effects of these things are pretty significant.”

Soberman said the U.S. employment rate is less likely to take a hit since many American companies primarily supply American consumers.

Investors on both sides of the border are also feeling the pain, with stock markets around the world plunging due to growth fears.

“The big Canadian pension funds invest heavily in U.S. equity markets, so their valuations are going to be affected,” said Hampson, adding that while Canadian investors with American stocks will undoubtedly take a hit, Canadian stocks are also sliding.

The S&P/TSX composite index dropped more than 3.8 per cent on Thursday, its biggest intraday drop since January 2022. However, it still outperformed the S&P 500, which plummeted to its lowest level since August.

• Email: slouis@postmedia.com

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