A customer shops in the produce section at a grocery store in Toronto on Feb. 2, 2024.Cole Burston/The Canadian Press
For shoppers and many businesses, tariffs largely faded into irrelevance when the North American Free Trade Agreement came into effect in 1994, eliminating most levies on trade among Canada, the United States and Mexico. That era appears to be over.
The White House on Saturday imposed 25-per-cent tariffs on goods from Canada and Mexico, as well as a 10-per-cent levy on Canadian energy, beginning Tuesday. Canada hit back Saturday night, with Prime Minister Justin Trudeau announcing 25-per-cent tariffs on $155-billion worth of American imports, starting with $30-billion on Tuesday and $125-billion worth of goods 21 days later.
The tariffs are expected to percolate through supply chains that have been integrating across North America for decades, adding layers of levies as products move back and forth across the border.
The economic effects of tariffs for a trade-dependent country such as Canada are well-known. Significant and widespread duties would harm economic growth while driving up costs for both businesses and consumers.
But tariffs also promise to hit Canadians in unexpected ways, raising the price of even locally made or locally grown products, squeezing cash flow for smaller businesses and, in some cases, sending Canadian suppliers scrambling to pay the U.S. government for levies that usually apply to American importers.
“Every time physical goods cross the border, there’s always the risk that they will attract tariffs,” Joy Nott, partner for trade and customs at consultancy KPMG Canada, told The Globe and Mail, speaking before the U.S. and Canada’s tariff announcements.
How tariffs are calculated
At first glance, calculating the cost of a tariff might seem simple. If tariffs worked like sales taxes, a Trump-style levy on something that cost $100 would add another $25.
But just because a good is crossing the border into the U.S. from Canada doesn’t make it a “Canadian good” in the eyes of the laws and conventions that govern international trade.
How tariffs could pile up:
The journey of a crankshaft
A crankshaft, the metal backbone of a combustion engine, might travel between Canada and the U.S. six times as it moves along the North American supply chain. At each of those border crossings, a U.S. tariff or Canadian counter tariff could add a layer of tax. While businesses would pay the levies, much of the added cost from trade tariffs often trickles down to consumers.
Hit by Canadian
counter-tariffs
Hit by U.S. tariffs
1
CANADA
The metal casting happens in Mexico
U.S.
MEXICO
2
CANADA
The crankshaft travels to Canada where it is re-finished
U.S.
MEXICO
3
CANADA
It then travels to the U.S. to be further finished
U.S.
MEXICO
CANADA
4
U.S.
In Canada it’s incorporated in a truck's engine
MEXICO
CANADA
5
U.S.
MEXICO
Then it travels to a truck assembly plant in the U.S.
CANADA
6
U.S.
MEXICO
In Canada it is painted and the trims are added
CANADA
7
U.S.
MEXICO
Then it goes back to the U.S. to be sold to consumer
MURAT YÜKSELIR /
THE GLOBE AND MAIL, SOURCE: APMA
How tariffs could pile up:
The journey of a crankshaft
A crankshaft, the metal backbone of a combustion engine, might travel between Canada and the U.S. six times as it moves along the North American supply chain. At each of those border crossings, a U.S. tariff or Canadian counter tariff could add a layer of tax. While businesses would pay the levies, much of the added cost from trade tariffs often trickles down to consumers.
Hit by Canadian counter-tariffs
Hit by U.S. tariffs
1
CANADA
The metal casting happens in Mexico
U.S.
MEXICO
2
CANADA
The crankshaft travels to Canada where it is re-finished
U.S.
MEXICO
3
CANADA
It then travels to the U.S. to be further finished
U.S.
MEXICO
CANADA
4
U.S.
In Canada it’s incorporated in a truck's engine
MEXICO
CANADA
5
U.S.
MEXICO
Then it travels to a truck assembly plant in the U.S.
CANADA
6
U.S.
MEXICO
In Canada it is painted and the trims are added
CANADA
7
U.S.
MEXICO
Then it goes back to the U.S. to be sold to consumer
MURAT YÜKSELIR /
THE GLOBE AND MAIL,
SOURCE: APMA
How tariffs could pile up: The journey of a crankshaft
A crankshaft, the metal backbone of a combustion engine, might travel between Canada and the U.S. six times as it moves along the North American supply chain. At each of those border crossings, a U.S. tariff or Canadian counter tariff could add a layer of tax. While businesses would pay the levies, much of the added cost from trade tariffs often trickles down to consumers.
Legend
4
Hit by U.S. tariffs
Hit by Canadian counter-tariffs
2
6
In Canada it’s incorporated in a truck's engine
The crankshaft travels to Canada where it is re-finished
In Canada it is painted and the trims are added
7
CANADA
Then it goes back to the U.S. to be sold to consumer
U.S.
1
5
MEXICO
3
Then it travels to a truck assembly plant in the U.S.
The metal casting happens in Mexico
It then travels to the U.S. to be further finished
MURAT YÜKSELIR /
THE GLOBE AND MAIL,
SOURCE: APMA
The world of tariffs is one of intricate rules and excruciating granularity. The complexity in part stems from the need to address this basic question: Where, exactly, is a product from? Does it originate in the country that supplies the raw materials? The jurisdiction where manufacturing takes place? And what happens when production is spread all over the world?
To help sort out this question, most countries rely on what’s known as the Harmonized System (HS), which is a standardized way to identify internationally traded products. Anything from aluminum alloys through a head of cabbage to a washing machine is assigned a six-digit HS code.
Then there are what’s known as “rules of origin,” a set of agreed-upon criteria used to determine where the product formally originated.
The default set of rules was developed by the World Trade Organization, but whenever countries have a free-trade agreement, that accord usually comes with its own rules that supersede the WTO’s. For Canada and the U.S., the current rule book comes from the Canada-United States-Mexico Agreement (CUSMA), which replaced NAFTA in 2020.
Rules of origin are informed by concepts such as that of “significant transformation,” Ms. Nott said. For example, a bike put together in Canada from parts made entirely in China might still be classified as a Chinese product because a simple assembly might not meet the bar to give it “Canadian identity,” she said.
On the other hand, a cake made with foreign ingredients would be a different matter, she added.
“Once you mix them all together and bake a cake, you no longer have flour and eggs and milk and whatever. You have a cake. You have a completely different article of commerce – that’s substantial transformation,” Ms. Nott said.
The cake will likely be deemed to originate wherever it was baked.
Match your HS code with the appropriate rule of origin and you’ll figure out the corresponding tariff treatment for that item under a particular trade arrangement, Ms. Nott said.
Under CUSMA, most products attract a 0-per-cent tariff.
How tariffs are collected: From blueberries to auto parts
U.S. tariffs and countertariffs could quickly wedge layers of taxes into North American supply chains, but it isn’t just imports and complex products that are vulnerable to tariffs.
For example, even a product as simple and local as a clamshell of fresh blueberries grown and sold in British Columbia could get caught in the tariff crossfire.
One tariff issue that’s keeping the province’s blueberry growers on the edge of their seats has to do with new bushes, Paul Pryce, executive director of the BC Blueberry Council, said before the tariff announcements.
Issues with diseases, pests and aging bushes mean that about a third of the province’s blueberry acreage is in need of replanting, he said. The problem is that the nurseries that produce a lot of the blueberry plants are in Oregon.
Many B.C. growers are expecting shipments of the younger bushes in March or April. The concern is that broad-based Canadian countertariffs would significantly drive up the cost of those U.S. plants, Mr. Pryce said. Money from a government program meant to help growers with the costs of replanting likely wouldn’t be enough to help them absorb the financial shock, he added.
“Just getting the plants in the ground for us to have those blueberries, that’s really become an open-ended question because of the threat of tariffs,” he said.
A similar issue faces growers who import seeds from the U.S., he said. And then there are inputs such as fertilizers, pest-control products, farming and nursery equipment: Each has their own supply chain that could be affected by the levies, he noted.
By both volume and value of goods produced, the food supply chain is one of the largest supply networks with significant vulnerability to the tariffs, Ms. Nott said. Another major soft spot, as many Canadians are acutely aware, is in the automotive sector.
The auto supply chain provides the quintessential example of how the trade war will likely quickly compound costs for businesses and customers.
To illustrate the point, Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, uses the example of the crankshaft, the combustion engine’s backbone, which translates the linear motion of the pistons into the rotating motion of the wheels.
The metal casting of a crankshaft often starts in Mexico, Mr. Volpe said, speaking with The Globe before details of the tariffs were released. Then the part travels to Canada for machining, a process that involves finessing and refining the piece of metal to the required measurements. The crankshaft then crosses the border into the U.S. for further finishing.
It then returns to Canada when it’s incorporated into the engine, only to travel back to the U.S. for assembly into a vehicle. The car or truck then reaches Canada once more where it is painted, and then makes a final trip to the U.S., where it’s sold to consumers.
“Profitability is only possible because we are 60 years into free trade in automotive,” Mr. Volpe said, referencing the Automotive Products Trade Agreement of 1965, better known as the Canada-U.S. Auto Pact, which accelerated the integration of the two countries’ car-manufacturing sectors well before NAFTA.
Who actually pays a tariff? Why some Canadian businesses may face a cash crunch
Whether it’s blueberries or cars, economists warn that the extra costs of tariffs usually trickle down to consumers in the end. But for some businesses, in addition to hitting profits, the rollout of the new levies could also create a cash crunch, experts say.
For many businesses that trade with the U.S., tariffs have mostly been a matter of filling out paperwork rather than paying up. But that’s about to change.
The question is whether smaller businesses in particular will be able to manage those payments from a cash-flow perspective, Corinne Pohlmann, executive vice-president of advocacy at the Canadian Federation of Independent Business, said before the tariff announcements.
There is often a significant time lag between when businesses import the inputs or products they need and when they’ll make their money back on them from manufacturing or selling, she said.
“That’s one of the concerns we’re kind of thinking about as we think about the impacts of tariffs,” Ms. Pohlmann said.
Jim McKinnon, president and chief executive officer of Willson International, a Mississauga-based customs brokerage and logistics solution company, sees a similar issue linked to goods crossing the border into the U.S.
Also speaking before details of the tariffs were made public, Mr. McKinnon said the concern for companies such as his, which helps businesses manage import and export goods by clearing shipments through customs, is being asked to advance significant amounts of cash on behalf of Canadian clients who will be hit by the Trump tariffs.
While tariffs are paid by importers, in the U.S. that doesn’t always mean American companies. Some Canadian suppliers are registered as importers of record in the U.S., Mr. McKinnon said.
The arrangement often makes sense because the Canadian supplier is more familiar with the production process and better able to substantiate country-of-origin documentation, Mr. McKinnon said.
Now, though, with the U.S. applying duties across the board and customs brokers wary of the risk of advancing hefty sums, those Canadian companies will have to pay tariffs directly to the U.S. government, something that, according to Mr. McKinnon, many aren’t set up for.
“We’re talking to our clients now about, ‘You really do need to get registered for a direct account with the U.S. government,’ ” he said.
While it’s too early to tell how pervasive and long-lasting the new tariffs will be, companies are having to consider scenarios they might never have contemplated before, Ms. Nott said.
“Things that are made in North America haven’t attracted tariffs since 1994.”
The re-emergence of significant trade barriers along the border, she said, would be a new reality.
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Editor’s note: This article has been updated to clarify a paraphrased statement from KPMG's Joy Nott, who said it's unlikely the White House would slap a 25-per-cent tax on everything that crosses the border from Canada. (Feb. 2, 2025) This article was further updated with changes that removed the paragraph involved in the earlier correction