When Life Gives you Lemons…

…wait, is there a tariff on lemons?

“When life gives you lemons, make lemonade.”

— Elbert Hubbard

A call for optimism. I find that difficult. Not because I’m a pessimist, but because I’m a realist. When things are good, I’m happy and when they’re not I’m sad (well, angry usually). However, in this case I’m going to look on the bright side, take Hubbard’s advice, and try to make lemonade.

The lemons in this case are the inexplicable tariffs that Trump has levied on Canada (and Mexico and…well the list keeps growing). The lemonade is that I “get” to write another column on tariffs. If we’re lucky, by the time you read this article the tariff threat will have ended (update: since I started writing this Trump has paused the tariffs. We’re now in that impossible scenario of being half pregnant). Still, a little knowledge is a good thing…or is it a dangerous thing? Regardless, I’m going to provide a little knowledge, and I’ll let you decide if it should be used for good or evil.

In my last article I wrote about how tit-for-tat tariffs is not a good strategy for Canada. Prior to that I thought Trump’s tariffs would benefit Canada by forcing the Canadian government to deal with drug smuggling and illegal immigrants. Like Trumps demands, I’m all over the map. I still believe blanket tariffs are dumb (sorry to be technical) because they hurt all sides so let’s take a look at how Trump’s strategy will hurt the American consumer.

But first…a lesson

I’m going to assume some of you are like me and say, “of course I understand tariffs,” before secretly googling it (A.I.ing it?) to be sure. So let’s do a quick overview of how tariffs work so we’re all on the same page.

There are three types of tariff:

1. Ad Valorem Tariff – A percentage of the product's value (e.g., 10% tariff on imported cars).

2. Specific Tariff – A fixed amount per unit (e.g., $5 per barrel of imported oil).

3. Compound Tariff – A combination of both (e.g., 5% of value + $2 per unit).

Trump’s tariffs are Ad Valorem, a 50% tariff will be applied to the value of any good shipped from Canada to the United States.

Let’s look at a real-world example to demonstrate. In 2018, the Trump administration accused China of unfair trade practices, including intellectual property theft, currency manipulation, and forced technology transfers. In response, the U.S. imposed tariffs on hundreds of billions of dollars' worth of Chinese goods, starting a full-scale trade war. In practice this meant:

• Step 1: A Country Imposes a Tariff

  • The U.S. imposes a 25% tariff on imported steel from China.

• Step 2: Importers Pay the Tariff

  • A U.S. company that buys Chinese steel had to pay 25% extra at customs.

  • If the steel originally cost $1,000 per ton, the company would have had to pay $1,250 per ton.

Who Pays?

Pretty simple so far, right? Firms importing foreign goods pay more. End of story. Except, no it’s not. There are a few scenarios:

1. There’s no alternative American product - Importing firm must continue to import but as costs have risen so too must prices. The end result is the consumer pays more.

2. There is an American alternative product - why wasn’t the importing firm buying American in the first place? Answer, because it was cheaper to import. The end result is prices rise, and the consumers pay more.

Just as we saw when we discussed corporate taxes in prior articles, businesses don’t absorb new costs, they pass them on to the consumer.

But wait, it gets worse…

As we’ve seen in the last few days, America’s trading partners don’t like having tariffs imposed on their goods and tend to retaliate with their own tariffs.

When we discussed effective strategies, we saw that Canada relies on US trade for 43% of its GDP while trade with Canada only amounts to 3.8% of trade. The danger to the US from matching Canadian tariffs is therefore minor.

However, Trump is not just threatening Canada, he’s threatened Mexico and China and is now threatening the EU. Here’s what that would look like:

Trump has also floated the idea of 10% tariffs on all imports from all countries to “reshore U.S. manufacturing and reduce reliance on foreign production. Global trade accounts for about 25% of U.S. GDP

It’s one thing to pick a fight with Canada, it’s quite another to pick a fight with the entire world. The typical winning strategy is “divide and conquer” not “piss everyone off so they unite against you.”

How much pain is “some pain?”

Trump has said that Americans could feel “some pain” from trade wars with…well everyone. The pain he refers to is inflation. As mentioned earlier, consumers almost always bear the brunt of tariffs as they cause inflation by:

1. Direct Price Increases – Tariffs make imported goods more expensive, raising consumer prices.

2. Higher Production Costs – Companies relying on imported materials (e.g., steel, semiconductors) face higher costs, which they pass on to consumers.

3. Supply Chain Disruptions – Tariffs can shift trade flows, causing shortages and price volatility.

4. Retaliatory Tariffs – If other countries impose tariffs on U.S. exports, U.S. producers lose markets, leading to lower supply and higher prices domestically.

The big question is how much? If it was easy to calculate we wouldn’t need debate whether tariffs are a good idea. We’d probably have a lot less economists as well. We can, however, estimate the impact on a simple scenario (or at least economists say they can and have a formula for it).

Don’t worry, there won’t be a test.

It’s much too complicated to look at all the various countries and tariffs and “share of imports in consumer spending) for this short paper but we can see the impact of Trumps put “10% tariffs on all imports from all countries” idea. If the US were to do that inflation would rise by about 0.75%. However, it’s important to note that’s 0.75% added to CPI, the cost of tariffed goods, such as those listed in the table below, would rise by 10%.

If Trump focuses only on Canada, China, and Mexico Americans can expect price increase on, at a minimum, these items:

We don’t know what Trump’s plan is (does anyone?) so it’s impossible to determine how bad inflation would be if Trump follows through on one or more of the various tariff threats however former Treasury Secretary Larry Summers, who warned the Biden administration that massive spending would spark inflation, has stated that Trump’s tariffs, or “inflationary errors” as he calls them, “are at risk of exceeding those of the Biden administration.”

Conclusion

I would be remise if I didn’t point out that winners will emerge as a result of Trump’s trade wars. They just won’t be you…unless you happen to own a company that competes with foreign companies or are a bureaucrat that oversees all the new tariff paperwork that has to be processed. The US government might also win but that’s debatable. New tariffs might bring in money, but the cost to consumers, businesses, and exporters could be much higher, leading to inflation, job losses, and slower growth.

Historically, tariffs have a mixed effect, and if you squint just right some can be said to have helped the United States. I however can’t help thinking of the Smoot-Hawley Tariff Act of 1930 which sought to protect American industries by imposing steep tariffs on over 20,000 imported goods. Rather than helping Americans, it led to a collapse in global trade, worsening the Great Depression and fueled tensions that led to World War II.

Trump goal is not to repeat the errors of Herbert Hoover. What they are is anyone’s guess since he’s given several different justifications for them including a new one today. What I do know, is that a lot of Canadians feel betrayed. They shouldn’t. Nations aren’t friends no matter how friendly their history. Canadians would do well to remember what Henry Kissinger once said, “America has no permanent friends or enemies, only interests”

Trump would do well to remember it as well since he is sending a clear message to America’s allies that interests trump friendships. What’s good for the goose is good for the gander and Trump should be wary that he doesn’t drive his friends, however impermanent they may be, into the arms of his enemies.