How Canada’s Tariff Policy Affects Its Economy and Trade

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Canada is one of the world’s largest trading nations, with a total trade value of over $1.2 trillion in 2020. However, Canada also imposes tariffs on some of its imports, which are taxes that increase the price of foreign goods. What are the reasons and effects of Canada’s tariff policy? How does it impact its economy and trade relations with other countries? This article will explore these questions and more.

Tariffs are a form of protectionism

Tariffs are a form of protectionism, which means that they are designed to protect domestic industries from foreign competition. By making imported goods more expensive, tariffs can encourage consumers to buy local products instead, which can boost domestic production and employment. Tariffs can also generate revenue for the government, which can be used to fund public services or reduce debt.

However, tariffs also have negative consequences, both for the country that imposes them and for the global economy. For the country that imposes tariffs, they can increase the cost of living for consumers, who have to pay higher prices for imported goods or settle for lower-quality domestic alternatives. Tariffs can also reduce the efficiency and competitiveness of domestic industries, who may face less pressure to innovate or improve their products. Moreover, tariffs can trigger retaliation from other countries, who may impose their own tariffs on the country’s exports, which can reduce its access to foreign markets and hurt its export-oriented sectors.

Global economy

For the global economy, tariffs can distort trade patterns and reduce welfare. By creating artificial barriers to trade, tariffs can prevent countries from specializing in what they do best and exchanging goods and services according to their comparative advantage. This can lead to a loss of economic efficiency and a lower level of output and income for all countries involved. Tariffs can also create trade wars, which can escalate into political conflicts and damage international cooperation and stability.

Canada’s tariff policy

Canada’s tariff policy is influenced by several factors, such as its history, geography, politics, and international obligations. Historically, Canada has been a proponent of free trade, especially with its largest trading partner, the United States. Since 1989, Canada and the US have been part of the Canada-US Free Trade Agreement (CUSFTA), which eliminated most tariffs between them. In 1994, CUSFTA was expanded to include Mexico and became the North American Free Trade Agreement (NAFTA), which created one of the largest free trade areas in the world. In 2018, NAFTA was replaced by the Canada-US-Mexico Agreement (CUSMA), which maintained most of the tariff reductions but also introduced some new rules and provisions.

However, Canada also has tariffs on some imports from other countries, especially those that are not part of its free trade agreements. According to the World Bank, Canada’s average applied tariff rate was 3.1% in 2019, which was higher than the US (2%) but lower than the world average (6.8%). Canada’s tariff structure is based on the Harmonized System (HS) of product classification, which divides goods into 21 sections and 99 chapters. Each product has a specific tariff rate that depends on its origin and end-use. Some products have zero tariffs, while others have rates as high as 35%.

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Canada’s tariff policy is also subject to its commitments under the World Trade Organization (WTO), which is an international body that regulates trade rules and settles disputes among its 164 members. As a WTO member since 1995, Canada has agreed to abide by certain principles and obligations regarding its tariffs and trade policies. For example, Canada has to apply the same tariff rate to all WTO members (the most-favoured-nation principle), unless it has a preferential trade agreement with some of them (the regional trade agreement exception). Canada also has to limit its tariff rates to the levels that it has bound in its WTO schedule (the binding commitment), unless it faces exceptional circumstances that justify raising them temporarily (the safeguard measure).

Canada’s tariff policy is a complex and dynamic issue that affects its economy and trade in various ways. While tariffs can have some benefits for domestic industries and government revenue, they can also have negative impacts on consumers, efficiency, competitiveness, and international relations. Canada’s tariff policy is shaped by multiple factors, such as its history, geography, politics, and international obligations. As a trading nation that relies on open markets and rules-based trade, Canada faces the challenge of balancing its interests and values with those of its partners and competitors.

How Canada’s Tariffs Affect Its Trade Balance

Canada is one of the world’s largest trading nations, with a total export of 388.4 billion US$ and a total import of 404.9 billion US$ in 2022, according to the World Bank. However, Canada also had a negative trade balance of -16.5 billion US$ in the same year, meaning that it imported more than it exported. One of the factors that may affect Canada’s trade balance is its tariff policy, which is the tax imposed on imported goods.

Canada’s Tariff Rates and Trade Agreements

Canada’s tariff policy is based on the Harmonized Commodity Description and Coding System (HS codes), which is a standardized classification system for traded products. Canada applies different tariff rates depending on the origin and type of the product, as well as the trade agreements it has with other countries. According to the World Bank, Canada’s effectively applied tariff weighted average (customs duty) was 1.49% in 2022, while its most favored nation (MFN) weighted average tariff was 3.16%. The MFN tariff is the highest tariff that Canada can charge on imports from countries that do not have a preferential trade agreement with it.

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Canada has signed several free trade agreements (FTAs) with various countries and regions, such as the United States-Mexico-Canada Agreement (USMCA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Comprehensive Economic and Trade Agreement (CETA) with the European Union. These FTAs reduce or eliminate tariffs on most goods traded between the parties, creating more opportunities for trade and investment. According to the Canadian Customs Tariff files, Canada offers preferential tariff treatments for products coming from countries with which it has an FTA .

Canada’s Tariff Changes and Trade Growth

Canada’s tariff policy is not static, but changes over time in response to various economic and political factors. For example, in 2022, Canada imposed retaliatory tariffs on certain US products, such as steel, aluminum, and ketchup, after the US imposed tariffs on Canadian steel and aluminum exports. These tariffs were lifted in 2023 after both countries reached an agreement to end the trade dispute. Similarly, Canada reduced its tariffs on certain products from CPTPP and CETA partners after these FTAs entered into force in 2022 and 2021 respectively.

These tariff changes may have an impact on Canada’s trade growth, which is the percentage change in the value of exports or imports from one year to another. According to the World Bank, Canada’s trade growth was -7.87% in 2022, compared to a world growth of -3.91%. This means that Canada’s trade performance was worse than the global average in that year. However, this may not be solely due to tariffs, but also to other factors such as exchange rates, demand, supply, and competitiveness.

Canada’s tariff policy is an important tool for regulating its trade relations with other countries. By applying different tariff rates depending on the origin and type of the product, as well as the trade agreements it has with other countries, Canada aims to protect its domestic industries, promote its exports, and foster its economic development. However, Canada’s tariff policy also affects its trade balance and trade growth, which may vary depending on various economic and political factors. Therefore, Canada needs to balance its tariff policy with its trade objectives and interests.

References:

https://web.archive.org/web/20150413071656/http://www.uslumbercoalition.org/doc/dispute_history.pdf

https://pennstatelaw.psu.edu/_file/aglaw/Lumber_Trade.pdf

https://www2.gov.bc.ca/assets/gov/farming-natural-resources-and-industry/forestry/softwood-lumber/ar2_fr_initiation_notice_jan_2_2020.pdf

https://www2.gov.bc.ca/assets/gov/farming-natural-resources-and-industry/forestry/softwood-lumber/lumber_ar2_fr_initiation_notice_march_10_2020.pdf

https://web.archive.org/web/20120322125419/http://www.international.gc.ca/controls-controles/assets/pdfs/softwood/Response-Canada.pdf
https://wits.worldbank.org/CountryProfile/en/CAN
https://www.macrotrends.net/countries/CAN/canada/tariff-rates
https://www.statcan.gc.ca/en/blog/cs/tariff-impact

https://www.international.gc.ca/trade-commerce/index.aspx?lang=eng

https://www.worldbank.org/en/topic/trade/publication/tariff-rate-quotas

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