2024-11-23 13:00:00
Every Saturday, one of our journalists answers, along with experts, one of your questions on the economy, finances, markets, etc.
One of the hot issues raised during the US elections was the rate of inflation and the rising cost of living. What is the impact of import taxes on inflation? Isn’t it logical to think that these taxes will have a direct effect on the price of goods, and therefore also on the inflation rate and purchasing power?
Jocelyn Jeffrey, Quebec
Yes, you are right, there is a direct link between tariffs imposed on imports, the inflation rate and purchasing power. If the U.S. government imposes tariffs on all products imported into the United States, those products will cost more and help fuel inflation, explains Jean-François Perreault, chief economist at Scotiabank. And not just in the United States.
The president-elect has managed to make people believe that it is exporters who will pay the tariffs imposed on products, but that is not true, he says.
A producer of a good hit by a tariff can choose to reduce its prices to maintain its market share, the importer can reduce its profit margin to absorb part of the tariffs, but these possibilities are rare and limited. Ultimately, the consumer will pay more than before for products subject to a tariff. Its purchasing power will decrease.
Even if the United States were the only country to impose tariffs, Canadian consumers would still be indirectly affected.
They would pay more, for example, to buy products imported from the United States whose imported components or inputs are subject to tariffs, specifies Jean-François Perreault.
The most likely is that the United States’ tariff attack on products from Canada and elsewhere will be followed by a response from the countries affected by the tariffs. No country will let this happen without saying anything. “From a political point of view, it is extremely difficult not to respond to tariffs with tariffs,” says the chief economist of Scotiabank.
The widespread tariff war that is likely to ensue would multiply the number of consumer products whose prices would be adjusted upwards to take tariffs into account. Let’s think of fruits and vegetables, which we import in large quantities in winter, but also of all consumer goods that are not produced in Canada.
Scenarios
Tariffs therefore have the effect of fueling inflation. By how much? Difficult to say because it is not yet known whether the next Trump administration will follow through in whole or in part on its threat to impose tariffs of 10% on all products imported into the United States and 60% on those from China.
It is impossible to evaluate with precision, says Jean-François Perreault, but we can create scenarios.
The country’s inflation rate could rise by 1.7%, under a scenario in which Canada would not be exempt from American tariffs, the economist calculated. This resurgence of inflation would force the Bank of Canada to increase its interest rates to combat it, which would have the effect of slowing down the Canadian economy.
A recession could be the conclusion of this chain of events caused by tariffs and inflation, an inseparable duo.
Consult our section “Demystifying the economy”
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What are the potential inflationary effects of U.S. import tariffs on both American and Canadian consumers?
**Interview with Jean-François Perreault, Chief Economist at Scotiabank**
*Date: November 23, 2024*
**Editor:** Thank you for joining us today, Jean-François. Many of our readers are concerned about the implications of import tariffs on inflation and purchasing power. Could you explain the direct effects of these tariffs?
**Jean-François Perreault:** Certainly! The main outcome of imposing tariffs on imports is that it raises the cost of goods. When the U.S. government applies these tariffs, it primarily affects the price that consumers pay in stores. This is because, ultimately, the costs incurred by importers are generally passed down to the consumer, thereby increasing inflation.
**Editor:** So if tariffs are put in place, who really bears the cost?
**Jean-François Perreault:** It’s a common misconception that exporters bear the brunt of the tariffs. In reality, it’s the American consumers who end up paying more. The rationale is that producers or importers might try to absorb some of the costs, but these instances are rare.
**Editor:** You mentioned that even Canadian consumers could feel the pinch from U.S. tariffs. How does that work?
**Jean-François Perreault:** Yes, even if only the U.S. imposes tariffs, Canada can be indirectly affected. For example, products imported from the U.S. that have their components subject to tariffs will see their prices rise as well. This means Canadians will pay higher prices for various goods, even if they aren’t sourced directly from U.S. manufacturers.
**Editor:** Considering the potential for retaliatory tariffs, what could that mean for consumers in terms of price increases?
**Jean-François Perreault:** If the U.S. imposes tariffs, it’s highly likely that affected countries will respond in kind. This could escalate into a tariff war, leading to more widespread price hikes on consumer products, including essential goods like fruits and vegetables that we import during winter months.
**Editor:** Can you give us an estimate of how much tariffs might fuel inflation?
**Jean-François Perreault:** That’s challenging to predict with precision right now, especially since we don’t know how the administration will move forward with the tariff discussion. However, even a conservative scenario could indicate significant increases in prices across a variety of sectors.
**Editor:** Thank you, Jean-François, for illuminating this complex issue. It seems the implications of tariffs extend far beyond borders and directly affect consumers’ day-to-day lives.
**Jean-François Perreault:** It’s my pleasure! Understanding the interconnectedness of our global economy is crucial as we navigate these changes.
