Tariffs… what are they?

This morning at breakfast, Rosie asked me to explain tariffs. So here is what I told her.

As an example, a lumber mill in Nova Scotia sells 100 boards for $500 to a Home Depot in Portland, Maine.

Meanwhile a lumber mill in Bangor sells the same 100 boards for $500 to Home Depot in Portland, Maine.

The Canadian mill can compete and sell the Canadian lumber.

If the U.S.A. invokes a 25% tariff on the Canadian lumber… when the Canadian load of lumber crosses the border into the U.S.A., Home Depot will be required to pay the 25% tariff ($125) making the cost to Home Depot $625. Now the Canadian lumber is not competitive.

The Canadian mill does not pay the tariff, Home Depot pays the tariff. Home Depot will now choose to purchase the U.S. lumber and not the Canadian lumber.

Now that the Canadian competition is diminished, the U.S. mill can raise their prices as well.

The only option for Canadian businesses is to lower their prices by 25% in order to compete. I don’t know of any business that can lower their prices by 25% and survive.

The current proposal is to put a 25% tariff on all Canadian exports to the USA. Although the current exchange rate favors Canadian products, the 25% tariff will be insurmountable for many Canadian businesses.

Over 75% of Canadian exports go to the U.S.A. The main exports by value are:

1. Energy products (crude oil, gas)
2. Automotive products (vehicles and parts)
3. Machinery and equipment
4. Minerals and metals (gold, aluminum)
5. Agricultural products (wheat, beef)
6. Chemicals and plastics
7. Wood and paper products
8. Fish and seafood
9. Technology products

This discussion does not take into consideration the exchange rates for Canadian funds.