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Let’s talk about how tariffs work to impact the economy — without any political considerations — just considering the potential economic consequences of tariffs, and how they impact the trade relationships between countries.

In early February, the headlines revolved around potential tariffs that the United States would charge on goods imported from Canada and Mexico, two countries on our border with whom we already have extensive two-way trade. After some last-minute diplomacy, President Donald Trump set aside plans to impose tariffs on Canada and Mexico, although he left open the possibility that they could be imposed in the near future. Meanwhile, Trump imposed a new 10% tariff on goods imported from China and scrapped the "de minimis" exception that allowed packages worth less than $800 to enter the U.S. without duties.

Basically, a tariff is a tax at the border on imported goods. Tariffs are already collected by U.S. customs on a variety of imported products. Customs brokers collect the tariffs from the U.S. companies that purchase the goods. That raises the costs of the goods to the ultimate consumer — unless the company absorbs the cost of tariffs, which cuts into their profits and growth and job creation.

So, if a U.S. company imports Canadian lumber or plywood to sell to homebuilders, a 25% tariff would significantly increase the cost of homebuilding in the United States — raising the ultimate price of the home or remodeling job. These higher prices lead to inflation. If customers can’t or won’t pay the higher home prices, it leads to a slowdown in homebuilding and remodeling projects, impacting jobs.

Tariffs could compel homebuilders to turn to U.S. domestic lumber companies for their supplies. But those prices would move higher, as well, since free market prices will rise to nearly match the cost of imported wood. That’s what happened when tariffs were put on imported washers and dryers. Domestic manufacturers increased prices too.

But higher prices on imports are only one side of the tariff story. What happens if the country on which the tariffs are placed decides to “get even” — by putting tariffs on the goods they import from the United States?

In 2023, the United States imported approximately $426 billion worth of goods from Canada. In the same year, Canada was our largest export market, worth $352 billion. Canada bought $53 billion worth of vehicles from the United States, $38 billion of machinery and nuclear reactor equipment, and $24 billion worth of agricultural products.

If Canada were to retaliate with its own tariffs, raising prices on its imports, it will hurt manufacturers in the United States who export to Canada.

Let’s take a simple case. In 2023, Canada imported $262 million worth of distilled spirits such as Kentucky bourbon from the United States. Suppose, because of retaliatory tariffs, the price of Kentucky bourbon goes up in Canada — and Canadians stop drinking as much Kentucky bourbon. Workers in the U.S. may lose their jobs. The effect ripples through both economies, distorting prices and slowing production and impacting jobs.

Now, consider the situation with Mexico and the impact of a 25% tariff. Notable U.S. imports from Mexico include finished vehicles, auto parts, electronics, appliances, agricultural products and beer. Last year, the United States imported $6.4 billion worth of beer from Mexico, about 84% of all imported beer. If Trump's tariff were put in place, Modelo and Corona would become 25% more expensive, unless distributors absorbed some of the costs!

Of the $3.2 billion worth of tomatoes the U.S. imported in 2022, 86% came from Mexico. We imported 2.8 billion pounds of avocados from Mexico in 2023 (think of guacamole that you eat with your beer), and plenty of other fresh vegetables. So, tariffs on Mexican imports would raise the price of fresh vegetables in winter for American consumers.

And if Mexico were to retaliate by putting tariffs on U.S. exports to Mexico? In 2023, the U.S. exported $51 billion of refined petroleum products and natural gas, $45 billion of machinery, nuclear reactors and $51 billion of electronics, as well as $28 billion of cars and parts. As those goods would rise in price in Mexico as the tariff would undercut demand. And U.S. manufacturers/exporters would suffer.

Bottom line: It’s not just the initial tariffs that distort markets and raise prices for those who must ultimately pay the higher costs. The tariffs can trigger responses that impact not only the prices of imports but the demand for our exports, which also impacts the American economy and jobs.

The world has once before faced a dramatic round of retaliatory tariffs, initially intended to protect domestic economies. The results were disastrous. If you remember the history of the Great Depression in the 1930s, it is widely attributed to the Smoot-Hawley Tariff Act, which turned a financial and banking crisis at home into a global trade war and worldwide depression.

This time around, the consequences of tariffs could be strategic as well as economic. The United States gets 60% of its crude oil imports from Canada — despite the fact that the U.S. is now the world’s largest oil producer — because the majority of U.S refineries need Canada’s heavier form of crude oil to turn into gasoline. Tariffs on oil imported from Canada could significantly impact our domestic gasoline prices at the pump — again hitting consumers and causing inflation.

Luckily, we seem to have avoided a trade war with our immediate neighbors ... for now. Economists on both sides of the political spectrum argue against the temptation to believe that tariffs punish our trading partners. In the end, they wind up hurting Americans. And that’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2025 Terry Savage. Distributed by Tribune Content Agency, LLC.