Making sense of tariffs: Key terms you need to know

As tariff terms pop up in political speeches, financial predictions, and even the cost of everyday goods, grasping the fundamentals has become essential — not just for economists, but for everyone. It might sound like financial jargon, but tariffs affect what you buy, how much it costs, and how businesses run behind the scenes.

A tariff is a tax that a government charges on goods imported from another country — like steel, electronics, clothing or produce. Think of it as a toll at the border: when a product enters a country, the government applies a fee, often as a percentage of the item’s value (ad valorem tariff) or a flat fee per unit (specific tariff). The importing country imposes and collects the tariff, not the country exporting the goods.

Governments may use tariffs to protect domestic industries by making imports more expensive, raise revenue or gain leverage in trade wars.

Most countries impose tariffs in some form. Tariffs can be applied selectively — depending on the type of product, the country of origin, or specific trade agreements. Nations like Canada and the U.S. tend to keep tariffs relatively low on most goods, while developing countries often rely on higher tariffs to protect emerging industries or generate government revenue. 

Tariffs have ripple effects: higher prices, slower supply chains and fewer choices for consumers and businesses. Tariffs can shape what’s available, how fast it arrives and how much it costs. They can also impact exchange rates, employment, gross domestic product (GDP) and inflation.

Though tariffs are collected by the government, the government doesn’t pay them. If the U.S. imposes a tariff on goods imported into the country, U.S. importers pay the tariff — and to offset the cost, they may raise prices for customers. For example, a $200 imported product facing a 25% tariff may now cost $250 — and that extra $50 often lands on the buyer.

Tariffs can also drive up the cost of Canadian-made products. If a Canadian company imports parts or materials to make its goods, and those are hit with tariffs, the company may have to charge more — or accept smaller profits. In the end, tariffs can hurt both Canadian businesses and the consumers who buy their products.

To learn more, check out Understanding tariffs and how they can affect your finances.

Trade jargon often makes simple concepts seem overly complicated. This guide cuts through the clutter, breaking down the most common buzzwords with clear explanations and practical, real-world examples.

A supply chain is the network of people, processes and parts involved in getting a product from where it’s made to where it’s sold. That includes everything from raw materials and factories to shipping routes and store shelves.

Take a car, for instance. The journey begins with iron ore extracted from the earth, which is transformed into steel for the car's frame. Meanwhile, other components — such as the engine, tires, battery, and seats — are sourced from various suppliers. These parts converge at a factory, where the car is assembled. Once complete, it’s shipped to a dealership and eventually sold, finding its way to the customer’s driveway.

Tariffs can disrupt this delicate system. When the cost of importing materials rises, companies may pay more to make their products or face delays as they search for new suppliers.  That can lead to slower delivery times, limited options and rising prices.

Since higher tariffs increase costs for companies, those costs often get passed on to consumers. So that same car might cost more to build — and have a higher price tag.

Let’s look at this example from the Bank of Canada illustrating the process of making a car, which sees parts and components of vehicles crossing the Canada and U.S. border several times. If these components are taxed each time, it would amplify the increase in production costs and increase the prices paid by consumers on both sides of the border.

Tariffs on intermediate goods amplify the impacts of tariffs on production costs and prices

Imported goods are products made in one country and brought into another to be sold — like electronics, food, cars or clothing. The person or company bringing the product into the country is the importer; the one shipping it from abroad is the exporter.

Tariffs are applied to these goods by customs of the importing country at the border. Retailers may pass those costs on to consumers through higher prices. In countries like Canada, which import many everyday items, tariffs can affect both what’s available and how much you ultimately pay. 

A trade barrier is any rule, policy or tax that restricts international trade. Tariffs are one type of trade barrier, but others include import quotas, licensing rules and product standards that restrict or block certain goods. The goal is usually to safeguard a nation’s home economy to ensure domestic industries do not face full competition from firms in other countries.

Governments may use trade barriers to protect local industries, control the flow of goods or respond to foreign trade policies. They can also be used to advance political agendas. Regardless of the reason for a trade barrier, these measures can limit consumer choice and drive up prices.

For example, if a country puts strict limits on foreign maple syrup imports, it may help local maple syrup producers stay competitive. On the flip side, shoppers could face fewer product options and higher prices as a result.

A retaliatory tariff is a tax imposed by one country in direct response to a tariff from another — usually to push back during a trade dispute. It creates pressure by making the other country’s goods more expensive and less competitive. The message? If you tax us, we’ll tax you back.

For example, if Country A places a tariff on lumber from Country B, Country B might respond by taxing steel from Country A. The primary goal isn’t to raise revenue — it’s to send a political and economic warning.

A reciprocal tariff is when two countries agree to match or lower each other’s tariff rates to promote fair trade. The basic idea: “If you charge us 10%, we’ll charge you 10% — or let’s both reduce our tariffs together.”

These tariffs may be negotiated through trade talks or formal agreements, and aim to ensure fairness, especially if one country feels its exports are at a disadvantage. For example, if Country A lowers tariffs on cars from Country B, it may ask Country B to do the same in return.

While it sounds cooperative, reciprocal tariffs can also be used as leverage — with one country threatening to raise its tariffs unless the other lowers theirs.

An ad valorem tariff is calculated as a percentage of an imported good’s declared value — not necessarily the sale price. For example, a 25% tariff on a second-hand designer bag valued at $5,000 would add $1,250 in tax. The higher the item’s value, the more you pay in tariffs.

This type of tariff is often used for imported goods like electronics, vehicles or luxury items, and can apply to both new and used products. 

A specific tariff (or duty rates) is a fixed fee charged on each unit of an imported good, no matter its value. For example, a tariff of $2 per shirt means the importer pays $2 for every shirt, whether it costs $10 or $100.

A free trade agreement (FTA) is a deal between foreign countries to reduce or eliminate trade barriers — like tariffs, import quotas and customs rules — so goods and services can move more freely across borders. By lowering these barriers, FTAs can help businesses compete more fairly in international markets, reduce consumer costs and act as a buffer when global tariffs rise.

Many FTAs also address non-tariff barriers, such as product standards, licensing rules and investment regulations. For Canadian companies, this can mean better access to foreign markets, a more level playing field with local competitors, and simpler processes. Common standards can eliminate the need to adjust labeling or meet other regulatory requirements when selling to different consumer markets.

Canada is part of several FTAs, including the Canada-United States-Mexico Agreement (CUSMA), also known as the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2020.

The World Trade Organization (WTO) is the only international organization that deals with trade rules between member nations. It manages the global system of trade rules, helps developing countries strengthen their ability to trade, and provides a space for members to negotiate and resolve disputes. It aims to use trade to raise living standards, create better jobs and support sustainable development.

When disagreements arise — like over tariffs — the WTO offers a neutral forum to settle them. By helping countries follow consistent rules, the organization plays a key role in making global trade fair, predictable and stable.

Supply and demand explain how prices are set in the market. It’s about how much of something is available (supply) and how much people want to buy (demand).

When a product is in high demand but there isn’t much supply, prices may go up. When there’s lots of supply but not enough demand, prices may drop. The equilibrium price is the point where the amount producers want to sell matches what consumers are willing to buy.

For example, during COVID-19, demand for hand sanitizer soared, but supply couldn’t keep up — so prices spiked.

Tariffs can shift this balance, too. If imported goods become more expensive, consumers may turn to local options. But if local supply can’t keep up, prices may still climb.

Recent tariff-related headlines have caused a great deal of uncertainty — but we’re here to help you navigate the current economic environment.

We can review your financial plan, taking into account your priorities, personal circumstances and comfort level to ensure you’re on track to reach your goals.

A chat with a Scotia advisor can go a long way toward financial peace of mind.