Understanding How Tariffs Affect Prices: A Simple Example

By Robert Muehlen | BusinessBear

With ongoing trade tensions, it's likely that the USA will apply a tariff on Canadian products, and in response, Canada is planning to impose a reciprocal tariff on American imports. This can directly affect the prices consumers pay for everyday goods. Let’s explore how import tariffs influence product pricing, retail margins, and business costs, using an easy-to-follow example of American potato chips imported into Canada.

How Tariffs Work and Their Purpose

A tariff is a tax imposed by a government on imported goods to make foreign products more expensive and encourage consumers to buy locally produced alternatives. Governments use tariffs to protect domestic industries, create jobs, and generate revenue. However, tariffs can also lead to higher prices for consumers and trade disputes between countries. In free trade agreements (FTAs), such as the United States-Mexico-Canada Agreement (USMCA), tariffs on certain goods are eliminated, allowing products to move freely across borders without additional costs.

Example using potato chips imported from USA and sold in a supermarket

We’ll take a base price of $2 and go through each step of the pricing process, including the tariff, importer’s margin, and retailer’s markup. By the end, you’ll see how trade regulations and import taxes impact final consumer pricing and business operations.

For this example, we are just considering a simple calculation of costs, there are other external costs we should consider in real life, but this example is just to give an idea on how tariffs realy affect prices to the final consumer.

Step 1: Starting Price

Imagine an American manufacturer sells a bag of potato chips for $2.00 USD to a Canadian importer.

Step 2: Applying the Tariff

A tariff is a tax imposed on imported goods. (The importer is the one who has to pay the tariff directly to the Canada Revenue Agencie (CRA) at the time the goods enter the Canadian border).

In this case, let’s assume Canada places a 25% import tariff on American potato chips.

• Tariff calculation: $2.00 × 25% = $0.50 (This amount is payed to the CRA by the importer)

• New cost after tariff: $2.00 + $0.50 = $2.50

  
  

Step 3: Importer’s Margin

The importer, who brings the chips into Canada, applies a 30% margin to cover logistics, taxes, and profit.

• Importer’s price calculation: $2.50 × 1.30 = $3.25

  
  

Step 4: Retailer’s Markup

Once the retailer (a grocery store) purchases the chips from the importer, they also add a markup to maintain their profit margins. Let’s assume the retailer applies a 30% markup.

• Final retail price calculation: $3.25 × 1.30 = $4.23

• 
  

Comparing Prices: With and Without Tariff

To see the impact of the import tariff, let’s calculate the final price without the tariff:

1. Without the 25% tariff, the base price remains $2.00.

2. The importer applies a 30% margin: $2.00 × 1.30 = $2.60.

3. The retailer applies a 30% markup: $2.60 × 1.30 = $3.38.

   
   

Final Prices:

• With the 25% tariff: $4.23 per bag

• Without the tariff: $3.38 per bag

• 
  

Real Price Increase Due to Tariff

To understand the true impact on business pricing, let’s calculate the percentage increase:

• Price increase calculation: ($4.23 - $3.38) / $3.38 × 100% = 25.15%

  
  

Conclusion: How Tariffs Affect Businesses & Consumers

The 25% import tariff increases the final price by $0.85 per bag, leading to a 25.15% overall price increase for Canadian consumers. While tariffs are designed to protect domestic industries, they also raise costs for importers, retailers, and consumers. Understanding these trade policies and optimizing business costs can help companies remain competitive.

So, Are Tariffs Good or Bad?

The impact of tariffs depends on perspective. For local manufacturers, tariffs can be beneficial because they reduce competition from foreign products, allowing domestic businesses to grow. However, for importers, retailers, and consumers, tariffs often mean higher costs, which can lead to inflation and reduced purchasing power. In some cases, tariffs trigger trade wars, where countries continuously impose taxes on each other's goods, further disrupting international commerce. The key question is whether the benefits of protecting local industries outweigh the drawbacks of higher consumer prices and strained trade relationships.

In my point of view, tariffs actually only benefit goverments to increase their tax collections, reducing the competitiveness of the countries industries.

How BusinessBear Can Help

At BusinessBear, we specialize in import cost optimization, pricing strategies, and process efficiency to minimize the impact of trade tariffs and import taxes on your business. Whether you need better supplier options, pricing analysis, or cost-cutting strategies, our expertise can help you maintain profitability despite changing trade regulations.

Contact BusinessBear today to ensure your business stays competitive in a global market!

Contact us at: www.BusinessBear.ca