What are tariffs?
Tariffs are a tax that governments put on goods coming in from another country. Just as you pay sales tax when you buy something at the store, you may have to pay tariffs or duty on items you bring into Canada from elsewhere.
On the flip side, if you sell items outside Canada, your customers may have to pay tariffs on the goods they buy from you.
What is the purpose of tariffs?
There are a few reasons governments choose to put tariffs on imported goods:
1. Tariffs are a source of revenue. Governments collect tariffs as they would income or sales tax. The money collected is put in the treasury and rolled into the state’s overall budget.
2. Tariffs can be used to protect domestic industries. Officials may put a tariff on goods from outside the country if they feel a free-flow of goods is hurting their regional or domestic producers. The idea is to make imported goods more expensive than those produced regionally. The tariffs may also work as a deterrent for countries who are considering dumping surplus goods. Dumping can undermine local pricing and put Canadian companies out of business.
3. Tariffs can be used as a punitive measure. Governments will sometimes impose sanctions on another country as a diplomatic tool. A government may choose to ban exports to a market or imports from the country to influence their behavior in matters like human rights, war or trade-related issues. Rather than an all-out ban, tariffs can also be a trade sanction method, with the intent of making the offending country’s export goods prohibitively expensive.
How can tariffs impact your business?
Tariffs are something that should be accounted for when you’re doing international business, whether you’re buying or selling outside Canada.
The presence or absence of tariffs can influence your price competitiveness.
1. If you pay tariffs on components of the products you make and sell, you may have to increase the price of your product to reflect higher input cost.
Example: Canadian-imposed tariffs can affect the cost of your inputs Canada is implementing tariffs on a number of goods coming from the U.S., starting in July. One of the items on the list, which will be subject to a 10% tariff, is 760519, Aluminum Wire. If you’re buying aluminum wire from the U.S. for your jewellery-making business, you will now pay 10% more for those materials. This drives up the cost of making your product.
2. Buyers are usually responsible for paying tariffs. You need to be aware if the goods you’re shipping abroad will be subject to duties in the destination country. If you’re paying tariffs and your competitors aren’t, your success in that market could be impacted.
Example: Tariffs imposed by other countries on Canadian goods may make your products more expensive for buyers. The U.S. has put a 10% tariff on Canadian aluminum. That means buyers in the U.S. will have to pay a 10% surtax on aluminum they buy from Canada. The assumption here is that U.S. manufacturers will prefer to buy local materials because Canadian aluminum will be too expensive.
Not all trade is between two countries
The emergence of global and regional supply chains over the past few decades means many products contain inputs from several countries. Goods may cross borders multiple times before they reach the final buyer.
Tariffs can start to get tricky if your business is in the middle of a regional or global supply chain. You may purchase an item from France, for example, that’s tariff-free under Canada’s free trade agreement with the European Union. But what if your French distributor bought the goods from Vietnam and didn’t substantially change the item before forwarding it to you, in Canada? Or what if the bulk of the components are from China and haven’t been altered enough to be considered a French product? Rules of origin can start to make tariff identification muddy.
How do I know if I will pay tariffs?
Determine the Harmonized Sales Code (HS Code) of the product
All goods, including food and raw materials, components of products and manufactured goods have an international HS Code associated with them. You can look up HS codes here for goods you’re purchasing from outside Canada, or items you’re shipping abroad. If you do not already know the code, you can use a keyword search as a starting point. However, it is a best practice to confirm the correct code with a customs broker, since determining the correct code can be quite complex in some cases.
What kinds of things affect tariffs?
Removal of tariffs are often one of the first things addressed in Free Trade Agreements. Countries that want to improve the flow of goods look at where it would advantage businesses to reduce costs of trade. Canada has 14 free trade agreements in place. The North American Free Trade Agreement (NAFTA), which was first implemented in 1994 is a trilateral agreement with Canada, Mexico and the U.S.
In more recent years, Canada has worked to remove tariff barriers with several countries. In March, Canada signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with 10 countries bordering on the Pacific Ocean, including Japan and Singapore. Last September, the Comprehensive Economic and Trade Agreement with the European Union (EU) was signed giving Canada tariff-free access to many goods on the other side of the Atlantic. Once fully implemented, nearly 94% of EU tariffs on Canadian agri-food products should be eliminated. This will make Canadian products more competitively priced than those entering the EU from countries that do not have a free trade agreement in place.