What are tariffs and how do they affect international trade?

A tariff is a tax applied to imported goods. While tariffs are often used to protect domestic industries or generate government revenue, they can also affect pricing, supply chains and export opportunities. Here’s what Canadian exporters need to know about tariffs.

International trade depends on the movement of goods across borders, but those goods don’t always move freely. Governments may apply tariffs to imported products, affecting pricing, competitiveness, supply chains and market access.

With ongoing trade uncertainty and evolving tariff policies in major markets, such as the United States, understanding tariffs has become a critical business capability for Canadian exporters. Whether you’re expanding into a new market, negotiating with international buyers or reviewing your supply chain strategy, tariffs can directly impact profitability and growth.

By understanding how tariffs work, how they’re calculated and how trade agreements may reduce costs, Canadian businesses can make more informed decisions and strengthen their international competitiveness. Export Development Canada (EDC) continues to provide resources and tariff support to help Canadian exporters navigate trade disruptions and pursue growth opportunities.

What is a tariff?

A tariff is a type of tax that governments put on goods entering from another country. 

Unlike income taxes or sales taxes, tariffs are specifically designed as trade policy tools. Governments use tariffs to generate revenue, protect domestic industries or respond to trade disputes.

Tariffs are typically applied when goods cross an international border and are generally collected by customs authorities before products are released into the destination market.

“Think of a Canadian food processor that ships packaged snacks to a foreign distributor. If their destination country charges a tariff when the goods arrive at customs, it becomes part of the cost of selling in that market,” says Emiliano Introcaso, an advisor and Certified International Trade Professional (CITP) at EDC.

Who pays the tariff?

Tariffs are taxes levied on imported goods. While tariffs are collected by the government that imposes them, tariffs aren’t paid by one government to another. 

The importer of record (IOR) pays the tariff to the customs agency when goods cross a border. The IOR can be the buyer, seller, or a designated agent such as a customs broker. 

“Responsibility for covering the tariff cost depends on the agreement between the buyer and seller,” says Introcaso. “Often, the buyer (importer) pays the tariff, but the seller may agree to pay to simplify the cross-border transaction, or make their pricing more competitive," he says.

No matter who pays the tariff, many companies pass the cost down to consumers by charging higher prices.

Why are tariffs used?

Governments typically use tariffs for several reasons.

Generate government revenue

Tariffs create an additional source of revenue for governments through the collection of customs duties. The money is put into the treasury and rolled into the nation’s overall budget.

Protect domestic industries

Tariffs can make imported products more expensive, helping domestic businesses compete against foreign suppliers. Tariffs may also deter foreign countries from dumping, which is selling exported goods at a price below their normal value, which can undermine local pricing and put domestic companies out of business.

Support trade policy objectives

Governments may use tariffs to respond to trade disputes, encourage domestic production or address concerns related to market access and economic security.

Advance foreign policy objectives

Governments sometimes use tariffs as a diplomatic tool. Rather than impose trade sanctions, governments may place high tariffs on the import of goods and services to influence another country’s behaviour in non-economic matters such as human rights, treaty violations or war.

Can tariffs be avoided?

Tariffs can’t always be avoided. If your export market applies a tariff to your product, it’s important to follow the rules for paying the required duties. Non-compliance can lead to fines, shipment delays, seizure of goods or legal action, especially if goods are misclassified, undervalued or missing proper documentation.

With the right planning, exporters can reduce the impact of tariffs on their business. Here are some tactics to explore:

Plan around tariff effective dates and customs clearance

There’s often a delay between a tariff’s announcement and its effective date. Many companies will move shipments forward to beat the tariffs in the short term, but there’s a catch—your goods must clear customs before the tariff effective date to avoid the duties.

“Think of it this way: An exporter ships industrial parts 20 days before a new tariff is scheduled to start. The shipment leaves before the tariff goes into effect, so it may seem like the tariff shouldn’t apply. But if the goods clear customs two days after the new tariff begins, the importer may still have to pay it because the clearance date, not the shipping date, is what usually determines whether the tariff applies” Introcaso says.

Reduce tariff exposure through supply chain planning

Exporters may be able to reduce tariff exposure by reviewing where products are made, where inputs are sourced and how goods enter the destination market. This doesn’t mean making sudden changes only to avoid a tariff; it means comparing the full cost, compliance risk and long-term business value of different supply chain options.

A proactive approach can help companies manage ongoing trade uncertainty, says David Weiner, EDC’s regional vice-president in the United States. “Exporters can’t control when trade rules change, but they can control how prepared they are when those changes reach the border. The companies that manage tariffs best are usually the ones that treat customs planning as part of their growth strategy, not as a last-minute paperwork exercise,” he says.

Use Canada’s free trade agreements to diversify

Canada has 15 free trade agreements (FTAs) that reduce or eliminate tariffs and give Canadian companies preferential access to global markets. FTAs can also improve predictability, protection and transparency, while reducing border delays and regulatory barriers.

However, FTAs don’t eliminate all tariffs on all goods. Even with preferential access, some products or services may still be subject to duties.

Do tariffs affect Canadian exporters?

Even when Canadian exporters don’t directly pay tariffs, tariffs can significantly affect business operations and profitability. Tariffs may:

• Increase the final cost of products sold abroad
• Reduce competitiveness in international markets
• Influence buyer purchasing decisions
• Disrupt existing supply chains
• Affect working capital requirements
• Create new compliance obligations
• Accelerate the need for market diversification

Tariffs reduce competitiveness

Tariffs are a trade barrier that make it harder to compete in international markets by raising prices for your goods or services. Tariffs increase a product’s landed cost—the total cost of getting it from the supplier to its destination market.

“Higher landed costs may make Canadian products more expensive compared to competitors from countries with lower tariff exposure in your target market,” Introcaso says.

Tariffs lower profit margins

Importers may seek price concessions from exporters to offset tariff costs.

“A foreign buyer facing new import duties may ask you to discount future orders to make up for the tariff. As the exporter, this can reduce your profit margin, even if sales volumes remain the same,” Weiner says.

Tariffs create longer sales cycles

Customers often require additional analysis and approvals before proceeding with purchases affected by tariffs.

“An example of this dynamic is a distributor that delays placing an order for Canadian technology equipment while its finance and customs teams confirm the tariff impact and total landed cost,” Introcaso says.

Tariffs cause supply chain disruptions

Tariffs don’t just affect finished goods. Today’s supply chains are global, and many products contain inputs from several countries. Raw materials, parts, ingredients and manufactured goods may cross borders multiple times before they reach the final buyer. Supply chain disruptions from new or increased tariffs can have a significant impact on trade.

“Tariffs can force Canadian businesses that are part of international supply chains to adjust sourcing strategies, manufacturing locations or distribution networks to stay competitive. For example, a Canadian manufacturer that relies on imported parts may need to find alternate suppliers if tariffs increase the cost of these inputs,” Introcaso says.

Exporters with agile supply chains may be able to pivot toward markets that have a free trade agreement with Canada and lower tariff exposure.

Tariffs accelerate market diversification plans

A company that depends heavily on a market that levies tariffs may start looking for customers in countries that have an FTA with Canada.

“For example, a Canadian specialty food company selling mostly to the United States may start pursuing buyers in Europe and Asia so that a tariff change in one market does not disrupt its entire export plan,” Introcaso says.

Determining whether tariffs apply begins with understanding product classification.

1. Identify your HS Code

Products traded internationally are classified using a Harmonized System (HS) code, a six-digit classification number used to identify applicable duties and taxes.

Your product’s HS code helps determine:

• Applicable tariff rates
• Regulatory requirements
• Trade agreement eligibility
• Customs documentation requirements

2. Verify country-specific tariff rules and rates

Tariff rates vary by country, product category and trade agreement coverage.

“In today’s trade environment, understanding tariffs is not just about compliance—it’s about protecting growth opportunities and strengthening long-term resilience. Finding markets where your company has a competitive advantage and Canada enjoys preferential access can set you up for sustainable growth,” Introcaso says.

Canadian exporters can research tariff rates using the Canada Tariff Finder, which helps businesses identify tariffs applicable to specific products and export markets.

3. Confirm product origin

Rules of origin are international trade rules that determine the source country of a product or service destined for export. Origin determines whether a product or service qualifies for preferential tariff treatment under a trade agreement. Rules of origin are negotiated as part of every FTA. When no FTA is in place, the World Trade Organization (WTO) rules apply.

Understanding origin requirements is particularly important for businesses that source components from multiple countries. Proper planning can significantly reduce tariff exposure and improve profitability. EDC published a guide to rules of origin for Canadian exporters that explains these rules in detail.

A customs broker can help you select the correct HS codes and ensure you’re meeting all rules of origin and import/export requirements to reduce your tariff exposure. EDC’s InList can connect you with vetted trade service providers.

When a product enters a foreign country, local customs authorities determine:

1. What the product is
2. Where the product originated
3. Which tariff classification applies
4. Whether a trade agreement provides preferential treatment

Based on these factors, the applicable tariff is calculated and paid according to the importing country’s requirements.

Trade disruptions can create uncertainty, but exporters don’t have to navigate them alone.

EDC offers tariff support designed to help Canadian businesses:

• Manage international trade risks
• Access working capital
• Protect foreign receivables
• Expand into new markets
• Diversify export destinations
• Manage foreign exchange exposure

Businesses affected by trade uncertainty may also benefit from EDC’s Trade Impact Program, which gives eligible Canadian exporters and their suppliers access to expanded financing, working capital support, trade credit insurance and foreign exchange solutions. EDC has allocated $5 billion in additional capacity to help businesses navigate tariffs, trade uncertainty and changing market conditions.

Frequently asked questions

What is the difference between a tariff and a customs duty?

A tariff is a government-imposed tax on imported goods. Customs duties are the charges collected during the import process. The terms are often used interchangeably, but tariff rates depend on factors such as product classification, origin and applicable trade agreements.

What’s the difference between a tariff and a quota?

A tariff is a tax on imported goods, while a quota is a limit on how much of a product can be imported. A tariff makes imported goods more expensive; a quota restricts the quantity that can enter a market.

For example, if a country applies a 10% tariff on imported Canadian maple syrup, the importer pays an extra 10% when the product enters that market. If the country applies a quota instead, it may only allow a certain volume of Canadian maple syrup to be imported each year, even if buyers want more.

How do tariffs affect Canadian exporters?

Tariffs can increase the landed cost of products in foreign markets, reducing competitiveness and creating pricing pressure. They may also affect supply chains, customer demand and export profitability.

How can exporters reduce tariff costs?

Exporters may reduce tariff exposure by using applicable trade agreements, verifying rules of origin compliance, optimizing supply chains and pursuing market diversification strategies.

How can I determine the tariff rate for my product?

You must identify the correct HS code and review applicable tariff schedules for the destination market. The Canada Tariff Finder for Canadian exporters and importers provide a starting point for researching tariff rates by product and country.

How can EDC help businesses affected by tariffs?

EDC provides financing, insurance, market intelligence and risk management solutions designed to help Canadian companies manage trade uncertainty, protect cash flow and pursue international growth opportunities.