This is a very simplified explanation. There are many factors and elements that can influence or impact the results. How I am explaining things is to give you some idea as to what could happen if tariffs are imposed on Canadian goods and products entering the United States.

Imagine that a Canadian company (Canuck Co) produces widgets. Typically, those widgets are sold to an American retailer (Acme Co) at a price of $10.00 US. The retailer sells to their US customers at a price of $20.00.

Then, a tariff of 25% is imposed by the US government. That tariff is paid for by the US importer and adds $2.50 to the cost of the imported widget.

The question is, does Acme still sell the widget for $20.00 and earn reduced profits, or do they price at $22.50 and pass on the tariff cost to their customers? If the price is higher, there will likely be fewer buyers than before. With lower demand Acme wouldn’t need as many widgets and would order fewer from Canuck Co.

Canuck Co would now have to make the decision how to adjust their production and price due to the lower demand or accept some of the tariff cost to remain competitive. Price for anything is a result of supply and demand. With lower demand, they could feel that they need to lower the price. The bigger question is, how much does Canuck Co lower the price of the widget? Do they lower it by the full amount of the tariff or less? If they lower the price, obviously they make less money than what they did before the tariff was imposed. Could that lead to employee layoffs or might they cut other costs?

The other thing to consider is, how unique is the widget? Can Acme get the widget from another company other than Canuck? Could they find a US company that also makes widgets to buy from? Maybe they need to import from a company in a country that does not have a tariff imposed on them? How quickly can a company within the US start to make the widget? Are there any replacement products that can be substituted for the widget? These are some of the factors that can impact the price for both Acme and Canuck.

The other thing for Canuck to take into consideration is, that if they lower their cost, when they get paid for the widget in US dollars, what they receive in Canadian dollars after the US dollars are exchanged. With the recent weakened value of the Canadian dollar, has some of the loss been recouped from the foreign currency exchange? That can help to lessen the impact of lowering the widget price by Canuck Co. When and if the Canadian dollar rises, Canuck’s profit margin will be reduced again.

As I mentioned at the beginning, this is a very simplified explanation of the impact of any tariff imposed by the US president.

Calculations have been done that state that the impact of the US president adding tariffs of 25% on goods from Canada, 25% from Mexico and 10% from China will increase the US inflation rate by approximately 2%. Is that ultimately good for the US economy?

Something to ponder.